Understanding supply delays in China commercial property markets

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Understanding supply delays in China commercial property markets

June 8, 2012 / By Steven McCord

When looking at future supply forecasts for retail or office in China, a common pattern seems to appear time and again. The future supply forms a ‘wave’, with the largest amount of completions expected in the coming 12 months, typically much higher than previous or future years. Revisiting the same chart one year later, it looks surprisingly similar, with the same large stack expected in the coming 12 months. It is as though the ‘wave’ has rolled forward a year and the actual completions in the prior year were closer to previous trend levels. While this has been especially pronounced in areas building out new CBDs, it is necessary to understand this phenomenon to be able to more accurately forecast the commercial property markets in China.

We first quantified this pattern when examining our historical supply forecasts for Shanghai CBD Grade A Office going back to 2005, where looking at the expected supply 12 months forward compared to actual completions a year later, we found that 30 – 50% of the anticipated supply was eventually delayed. Interestingly, this held up through ‘good’, supply constrained markets and ‘bad’, high vacancy markets. Similar proportions of supply delays have since been observed in other cities and sectors, and are also not easily explained by market cycles.

The reasons for rampant project delays are many and varied. One important cause is optimistic completion dates. Sometimes there is slippage in obtaining the appropriate permits, problems with anchor tenants, a change in pre-leasing strategy, a change in lease vs sell strategy, a change in market conditions or available financing, all of which can impact the completion date. Completion date is defined when the shopping centre is publicly accessible and a minimum percentage of tenants are open for business – usually coinciding with the project’s soft opening. In office buildings, completion refers to the property having an occupancy permit.

A supply wave can even appear in aggregate data — retail completions across China are a good example. This chart shows a wave of supply for 2012. If you were looking at this chart a year earlier, there would be a wave in 2011! Any number of factors can create a delay of two or three quarters, which is enough to bump a project into the following year. In sum, when looking at future supply charts for China, it is important to remember that a significant portion of the upcoming supply for the next year will be delayed. When we are doing our forecasting of short term market performance, this delay pattern is taken into consideration.