As a key city in the Greater Bay Area (GBA), Guangzhou’s office market has become increasingly attractive to large institutional investors, many of whom acquire value-add properties in traditional business districts. Traditional business districts, such as Yuexiu and Liwan, are home to the oldest batch of Grade A offices in Guangzhou and feature relatively low rents but high occupancy and stable tenant bases.  We have observed a few recent transactions of value-add properties, in the traditional business districts, such as:

• TopChain Group and Keppel Land acquired Westmin Plaza this year
• KaiLong acquired Yuexiu Neo Metropolis Building in 4Q18

Table 1: Market Indicator (3Q19)

Source: JLL Research

The GBA initiative has shone a spotlight on Guangzhou given the maturity of its economy, great connectivity to nearby cities and advanced industrial structures. Guangzhou’s office market, in particular, receives more interest from investors compared with other key cities in the GBA due to the presence of high-quality properties, attractive asking prices of properties, stable leasing demand, decent occupancy, as well as limited future supply.

Properties in mature districts with relatively old facilities but convenient transportation generally have greater potential for asset enhancement. Office properties located in Yuexiu and Liwan tick all the boxes aforementioned, hence making them highly sought after. Investors with intimate knowledge of local markets in Guangzhou generally carry out a series of asset enhancement activities in an attempt to achieve higher rental reversion in properties after acquisition:

• Physical renovation is may be applied to both exterior and interior of the properties, such as better façade designs, improved landscaping, sufficient parking space, a more spacious lobby and modernised amenities.
• Investors can address property management issues by hiring a more professional team or by utilising their local asset management expertise.
• The integration of new technologies into properties, like robotic assistance systems and cloud-based infrastructure, also plays an important role in property enhancement and seems to be the wave of the future.

After such asset enhancement activities, a credible destination is likely to be built up in the eyes of quality tenants, leading to tenant upgrade in the acquired property. Additionally, yield compression and higher capital values are also set to occur in the long term.

Moving forward, it is anticipated that more investors will turn to value-add properties in Guangzhou’s traditional business districts as an investment option to secure attractive returns. Therefore, the competition is likely to intensify when this type of property becomes available in the market. Value-add, however, is definitely not a panacea. It will be crucial for investors to carry out thorough due diligence and fully examine the target property in terms of financial, physical and legal perspectives. By doing so, investors will be able to identify true value-add investment opportunities.

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