Leasing demand temporarily affected by COVID-19 resurgence

• The resurgence of COVID-19 in Shenzhen put the office leasing market on a week-long hold in March, which led to a postponement of observable occupier demand in the quarter. Hence, net absorption in 1Q22 registered 108,000 sqm, marking a drop of over 60%, both q-o-q and y-o-y.
• The Shenzhen government launched effective lockdown measures and post-pandemic stimulus policies to remedy the impact of the outbreak, which helped stabilise office demand.

Vacancy increases slightly in 1Q22 with one new completion

• Only one Grade A building was completed in the quarter, namely Qianhai Horoy Centre, with an office GFA of 172,000 sqm. This new addition brought the total Grade A office stock in Shenzhen to nearly 11 million sqm. Ongoing projects may face a one-to-two-quarter delay in construction due to the lockdown.
• The large magnitude of the newly completed Qianhai Horoy Centre drove the vacancy rate in Nanshan district up by 1.3 ppts; however, this was offset by the large take-up in Luohu as a result of the falling rents. Ultimately, the overall vacancy rate in Shenzhen remained mostly stable, with a 0.3-ppt increase q-o-q to 20.6% in 1Q22.

Overall rent remains stable with a slight increase in 1Q22

• Companies in the quarter have been executing their leasing plans designed in 2021. The demand from these tenants remained relatively stable despite the outbreak of COVID-19. As a result, the overall rent of Shenzhen’s Grade A offices increased marginally by 0.6% q-o-q to 195 RMB per sqm per month.
• Shenzhen’s office transactions in the quarter mainly came from end users on upcoming projects. Notably the developer, CR Land, completed four bulk sales. Among these sales, one major transaction with a GFA of over 26,000 sqm, transferred about 90% of the ownership of Runqi Technology Building to China Resources Cement Holdings.

Outlook: Weakening demand and oversupply to cast pressure on rents

• Due to the weakening economic growth, pandemic occurrences and uncertainties about the global market, companies will generally operate under a more cost-effective principle, which shall result in a slowdown in office demand. Therefore, the annual net absorption this year is expected to experience a drop from that of 2021.
• Shenzhen’s new supply pipeline is expected to deliver over 2 million sqm in the next 12 months, exacerbating rental price competitions. The combination of sustained oversupply and demand slowdown is anticipated to push the overall vacancy rate up by 3-4 ppts y-o-y and press the rental value downward by the end of 2022.