New era for office market in Central China?

April 27, 2012 / By

The signs were hardly subtle. For years, there have been talks about the inland advantages – policy support, labour and resource endowment, improving infrastructure – tilting economic growth from the coastal areas and toward the central and western regions.

Chengdu, now amongst the most mature and economically diverse tier 2 cities – so much so that our China50 report calls Chengdu the top Tier 1.5 city! – was the vanguard during the Go West (Inland) movement which began in 2000. For the past three years, it has been the darling of multinationals and property developers. As of 2012H1, Chengdu remains by far the city with the largest Grade A stock amongst Tier 2 and 3 markets and a key market where almost all renowned property developers, domestic and foreign alike, are active.

In line with its impressive economic development, office rents in Chengdu grew quickly in 2010 and 2011. While office demand has not shown signs of slowing, now supply has largely caught up, giving tenants a breather from the double-digit rental increases since 2010.

While attention from foreign investors and developers has largely been concentrated on Chengdu, new expansion demand has finally taken off in Central China, with Wuhan quietly emerging as one of the only China Tier 1.5 cities where we’re forecasting rental growth north of 15% in 2012, after a stunning increase of over 20% in 2011.

So what is at play here causing the relatively nascent Wuhan office market to suddenly…. wake up?

A few powerful factors converged: policy support, economic development, and pent up demand for office development.

• After establishing a western hub, an increasing number of MNCs and foreign institutions have finally turned their attention to Central China. Demand from new business set-ups, which began emerging in 2010H2, is proving to be a small, but growing trend for the city.

• The local economy is domestically-driven and is taking off, with no notable impact from the global economic slowdown that has been causing companies to hold off expansion plans in the more internationally-exposed YRD cities, such as Hangzhou.

• Starved of high quality supply through 2010H1, pent-up (upgrade and expansion) demand drove much of the net absorption and rental increases over the last two years. Also, supply from new completions which handed over in 2010-11 still hasn’t caught up with the surge in demand.

The confluence of these factors has given landlords of Wuhan’s Grade A office buildings pricing power that should enable them to enjoy double digit rental growth for the next several years. It’s a good spot to be in, at least until supply catches up in 2014.

For more detailed analysis on Wuhan Office Sector, check out the China Real Estate Intelligence Service report for Wuhan Office 1Q12.


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