APPD Market Report Article

Shenzhen

August 26, 2022

Silvia Zeng, Head of Research, South China

2.1%

RMB 869

Rents
Rising

Leasing market unfreezes with improving macroeconomic conditions

  • Since 1Q22, the Shenzhen government has been proposing measures to resume production and business activities and shore up consumption demand. Overall rental demand has rebounded, with the number of transactions returning to end-2021 levels, except for industries such as catering and fitness, which continued to languish due to COVID-19 control measures.
  • The noteworthy growth of the new energy vehicle industry since 2021 has increased leasing demand in shopping malls. Several foreign fuel car brands have also shown interest in entering mid-to-high end shopping centres to improve their brand image.

Overall vacancy rate sees a moderate increase in the quarter

  • For the second consecutive quarter, there were no new prime retail spaces that reached completion. Hence, the total stock of Shenzhen’s prime retail market held steady at around 6.4 million sqm, with one project downgraded.
  • The combination of social distancing requirements and business cycle fluctuations have resulted in declines for subsectors such as restaurants and fast fashion. As a result, shopping malls have faced difficulties in filling spaces surrendered by semi-anchor tenants with large floor space. Overall vacancy rate stood at 3.2%, with a moderate increase of 0.5 ppts q-o-q.

Lively market sentiment raises rents moderately

  • Retailers remain optimistic about Shenzhen’s long-run economic performance, showing willingness to enter the market. As a result, most landlords were able to maintain rents in the quarter. Landlords in some of the mid-to-high end projects in the core market have retained strong bargaining power with a successful branding strategy, leading to moderate growth in rents.
  • A mismatch in demand and supply led to a quiet investment market in 1H22. More cash-strapped developers have had to sell their assets to resolve liquidity issues, which restricted their bargaining power, giving rise to discounted assets. Investors have become more risk averse, focusing their interest mainly on quality assets. Hence, yield decompression was recorded in the market in 2Q22.

Outlook: Retailers favour Shenzhen with expansion plans

  • To restore the local real economy in 2H22, the government implemented financial subsidies and tax reductions in early July, which is expected to increase leasing demand. As a market with robust resilience, Shenzhen should continue to attract interest from international brands and potentially become one of the most targeted locations for their first store in the South China market.
  • Nine buildings, measured at around 830,000 sqm of space, are expected to enter the market in the second half of 2022. The large supply influx will likely add to citywide vacancy in the near future, hence vacancy rate is anticipated to climb by the end of 2022.

Note: Shenzhen Retail refers to Shenzhen's prime shopping mall market.

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