In 2021, Mainland China Tier 1 cities are expected to welcome a Grade A supply volume of 3.6 million sqm (NLA) – the highest ever annual total. To put this into perspective, the total Grade A stock of Seoul currently stands at just over 3.5 million sqm (NLA). Amid the vicissitudes of the pandemic, Asia Pacific’s real estate markets have seen severe impacts to construction with many projects facing delays or being shelved entirely. The weakening of project pipelines has also been impacted by firms and developers becoming increasingly reluctant to undertake major projects given the uncertain economic environment.

Figure 1: Asia Pacific Tier 1 Grade A completions (NLA) 2015-2021

Source: JLL, 1Q21
Note: Australia CBD markets are inclusive of all grades;
Shenzhen NLA calculated based on an efficiency ratio of 0.7.

In 2020, Mainland China observed a significant reduction in total Grade A completions compared to the pre-pandemic level of 2019. Yet, with the country generally having turned a corner due to the successful containment of COVID-19 as early as April 2020 – albeit with several setbacks due to resurgences in some cities – adverse impacts have been relatively transient. As normality resumed, project restarts could get underway rapidly and a recovery phase started to manifest.

China’s economy is set to grow by 8.9% in 2021 (Oxford Economics, June 2021) on the back of robust domestic consumption and corporate investment. Moreover, with the country’s vaccine rollout making good progress, restrictions are anticipated to lessen, and future COVID-19-related risks are likely to wane. The improvement in the situation has only added to boost this year’s vast supply delivery with a pick-up in construction. Concurrently, occupiers are expected to move forward with their decision making, and with increasing conviction, which will boost leasing activity. The new supply will provide a range of options for tenants and the pervasive flight-to-quality will likely remain. Despite net absorption expected to remain strong throughout the Tier 1 cities, near-term recoveries and rental performances will be idiosyncratic.

Beijing

With almost half a million sqm of Grade A space (NLA) to be completed, Beijing is expecting the lowest supply delivery out of the Tier 1 cities in 2021. Vacancy is expected to remain in double digits in the near term, but it should taper off slowly from 2022 onwards as demand starts to outpace supply.

Supporting policies for the CBD Free Trade Zone helped to stimulate a notable increase in demand from finance tenants. In addition, the IT sector is set to continue serving as the backbone of leasing demand, with IT giants and unicorns expected to benefit from a prominent position in the leasing market. Moreover, given the sector’s meteoric growth, TMT companies expanded outside of traditional tech-focused areas to various submarkets across the city.

Shanghai

Shanghai will welcome 1.2 million sqm (NLA) of new supply to the market in 2021. Cost-saving initiatives are likely to continue driving the recovery in leasing. That said, lingering business impacts from the pandemic may lead businesses to remain cost-sensitive, which combined with plentiful supply may lead rents to decrease further in 2021. Leasing recovery is likely to be driven by industries that benefitted from the pandemic or are supported by key policy initiatives, including TMT, finance, and healthcare companies. Furthermore, accelerated financial opening-up efforts and industry advancements will drive new office demand in the long term.

Guangzhou

Finance and TMT remained at the core of leasing demand in 2020, contributing to over half of all transactions. Proactive fiscal policies and prudent monetary policies will continue to be in place to support economic recovery. The financial sector is expected to remain active moving forward and with the maturity of fintech-related applications, fintech firms will likely expand steadily. The financial services sector in the Greater Bay Area (GBA) continues to open up and quite a number of banks in Guangzhou are expected to expand their footprints. In addition, Guangzhou’s current active sectors such as gaming and e-commerce will foster demand from related emerging industries, such as cloud computing, big data, A.I. and 5G.

With a total of 18 projects completing in 2021, supply will peak in 2021 and taper off slowly thereafter. The office leasing market will continue to recover over the next 12 months, but in terms of demand scale and rental affordability, state-owned enterprises and financial institutions will still take the lead in the market. The submarkets of Pazhou and GZIFT have an abundance of companies looking to set up their headquarters.

Shenzhen

New Grade A space will total 1.1 million sqm (NLA) over 2021, which will lead overall vacancy to trend higher to hover around 26-28% in the near term. The new supply will intensify competition among buildings in Shenzhen, especially in emerging submarkets. Additionally, cost-sensitive tenants have tended to review all possible options which is likely to push overall rent downwards in the near term.

On a more positive note, the market has been characterised by an increase in expansion and relocation demand in recent quarters, mainly driven by TMT and financial services; however, other sectors were also emerging into the spotlight, underscoring the optimism in the market. Digital economy companies are expected to exhibit demand in terms of new setups, expansions and upgrades. Shenzhen’s office market is likely to maintain its strong recovery momentum with improved business for most companies as well as steady growth of leading companies. Therefore, net absorption in 2021 is likely to recover to the level of 2019 – reaching a four-year peak in 2021, and will continue to remain high from 2022 to 2024. Therefore, over the medium to long term, Shenzhen’s Grade A rent is anticipated to remain largely stable in 2022 and return to positive growth thereafter.

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