GLOBAL DOWNTURN'S IMPACT HITS CHINA COMMERCIAL PROPERTY MARKET

Home sales in China rebounded in the first quarter with the
average sales price easing, while rents were mostly steady.

National Bureau of Statistics figures for the first quarter
showed that private-sector housing sales volume increased 8.2
per cent in 70 large and medium-sized cities, with a 1.3 per
cent price drop per sq m in March from a year earlier.

In the commercial property market, both sales and prices
were up, because people were buying properties for investment.
Yet rents were down and vacancies were up, indicating that a
rebound in demand was some way off, analysts said.

Chen Sheng, vice president of the China Index Academy (CIA),
a private-sector research institute that specializes in real
estate, told Xinhua that the rebound of the nation's
non-residential property market largely depended on the overall
economic situation.

"Unlike homes that are for shelter, the buyers of office
buildings, retail and industrial properties purchase them for
investment purposes or their own business needs," Chen said.

China's economy expanded by 6.1 per cent year on year in the
first quarter, the lowest growth rate in 10 years, reflecting
the domestic impact of the global downturn.

The economic growth rate was 4.5 percentage points lower
than the first quarter of 2008 and down 0.7 percentage points
from the previous quarter.

NEED, DEMAND FOR OFFICES DIVERGES

A report by DTZ, a British-based real estate advisory and
consultancy firm, showed that leasing demand for office space
in Beijing had begun to dramatically weaken in the first
quarter as world economic conditions deteriorated.

The average first-quarter office building vacancy rate in
the capital city rose 5.72 percentage points from the fourth
quarter of 2008 to 18.97 per cent, DTZ figures showed

At the same time, average monthly rents for Beijing office
buildings fell 9.26 per cent quarter on quarter to 207 yuan
(US$30.40) per sq m.

Richard Wang, director of DTZ's north China consultancy
department, said over-supply was a key problem facing the
Beijing office property sector.

He added that 1.3 million sq m of new supply would come into
the market in Beijing this year, mostly in the central business
district, where many multinational companies were based. That's
more than double the 603,000 sq m of new office building space
that came into Beijing's market in 2008, according to DTZ
figures.

At least some of the space coming into the Beijing market
this year was affected by the Olympics, as developers had to
stop construction work for several weeks before and during the
Olympics and Paralympics to fulfill the government's
air-quality promises for the Games.

That suspension, and a decision by some developers to wait
for better market conditions, pushed more office space into
this year's market, said Billy Ip, DTZ North China's business
space-retail director.

Beijing is not the only city with an office space overhang.
DTZ figures showed that office vacancies hit 11.86 per cent at
the end of March, up from 9.29 per cent a quarter earlier, in
Shenyang, capital of northeastern Liaoning Province.

Average monthly office rents in the city fell 2.35 per cent
quarter on quarter to 145.16 yuan per sq m.

These figures likely reflect a spending binge in 2008. Total
investment in the property sector in Shenyang, a traditional
heavy industrial base, was 101.1 billion yuan in 2008, up 38.4
per cent year on year. The growth rate was 17.5 percentage
points above the national average.

Not only that, the investment value trailed only Beijing and
Shanghai among more than 660 mid-sized and large Chinese
cities, said Fan Hanzhang, president of the Shenyang Real
Estate Research Institute.

In the long run, these investments might pay off, Fan said,
because secondary cities with the prospects of rapid
development meant better investment prospects in terms of value
appreciation.

Fan added that Shenyang's average housing price was less
than 4,000 yuan per sq m, less than one third of prices in
Beijing or Shanghai.

PAIN IN GUANGDONG

Office building owners in parts of southern China were even
worse off than those in Shenyang in the first quarter. Jones
Lang Lasalle reported that the office vacancy rate in
Guangzhou, capital of Guangdong Province, was 21.2 per cent,
unchanged from the fourth quarter of 2008, while average rents
fell 8.8 per cent. The firm didn't give a yuan figure for
office space.

Chen said southern and eastern provinces, Guangdong in
particular, had been hard hit by falling export demand since
last year, with many factories and export trading companies
going bankrupt.

Guangdong is famous for its toy, bag, suitcase, shoe and
home appliance exports.

But the province's economy expanded 5.8 per cent year on
year during the first quarter, 0.3 percentage point below the
national average, slowed by the export slump.

Chen added that there was a contrast in the fundamental
situations for residential and commercial properties in China.
The main problem for the residential property market was that
high prices in many big cities like Shanghai, Beijing and
Guangdong were not affordable to residents. However, the main
problem for commercial property was the weakening willingness
to invest by domestic entrepreneurs.

"The crux of the problem in the Beijing and other
metropolitan markets [for commercial space] is that actual
demand fell short of expectations, and this divergence could
not be eliminated in a short period," Chen said.

International and domestic companies had begun to lease
smaller and cheaper offices, affected by the financial turmoil
and economic downturn since last year, he added.

Wang said whether a strong revival in the rental market
would develop in early 2010 would depend heavily upon global
and domestic expectations for output growth over the next two
years.

Chen said after China released second-quarter economic data
in July, then it would be time to judge whether the commercial
property sector would pick up this year.

EXPO NO PANACEA

Spurred by the State Council (cabinet)'s goal, announced in
March, to build Shanghai into a global financial and shipping
hub by 2020, office building sales in the city picked up in the
first quarter. Analysts said that the ambitious plan gave
investors confidence in the city's long-term development
prospects.

CIA figures showed the average office sales price in
Shanghai rose 76.3 per cent to 25,660 yuan per sq m in the
first quarter year on year.

But average daily office rents in China's largest city eased
6.2 per cent to 7.6 yuan per sq m in the first three months
from the fourth quarter, according to Colliers International,
which said vacancy rates and inventories were still high.

Chen said that the coming Shanghai Expo would definitely
buoy the local economy, but mainly those sectors related to
exhibition and hospitality activity, not the property sector.

He added that the industrial sector was more vulnerable to
the global situation, and it would take time for exports to
regain momentum when the world economy revived.

RETAIL SALES UP, LEASING STAGNANT

Retailers have felt the brunt of dampened consumer sentiment
and sales revenues have begun to decline, putting downward
pressure on retail property rents.

China's first-quarter retail sales grew 15 per cent year on
year to 2.94 trillion yuan and those in Beijing rose 12.6 per
cent to 122.1 billion yuan, but most of those gains represented
higher unit volume achieved by aggressive discounting by large
supermarkets, Chen said.

Those conditions didn't translate into gains by luxury
brands or small community shops in many cities, and these
retailers were unwilling to open new outlets or expand existing
ones, he added.

CB Richard Ellis said the retail property vacancy rate in
Beijing rose by 1 percentage point to 8.2 per cent in the first
quarter, compared with the fourth quarter, and rents also
declined. The firm didn't give a specific average rent amount,
but local media reports have said retail property rents fell 5
per cent to 10 per cent in Beijing's central districts during
the first quarter.

The situation was similar in Shanghai, where Jones Lang
Lasalle said the daily average retail property rent fell 1.4
per cent during the first quarter from the fourth, to 47 yuan
per sq m. That was the first quarter-on-quarter drop since
1999.

"Following lower levels of business activity, a number of
retailers have begun to postpone previous expansion plans,
focusing more attention on the management and operation of
their currently occupied outlets," according to DTZ.

UNEVEN IMPACT

Analysts said the financial crisis and economic slowdown
were having a divergent impact on different shopping malls.
Well-established ones in locations such as Wangfujing and Xidan
in Beijing were less affected, as they had a steady stream of
customers. New malls, however, felt a greater pinch from the
slowdown.

To boost their leasing, one option for developers was to
adjust their base tenant focus from high-end luxury retailers
to middle-market retailers to ensure a reasonable level of
occupancy, Wang said.

"A second option is to reduce effective rents through longer
rent-free periods and rental concessions," he added.

Some leading global clothing brands intended to cut their
leasing costs by 30 per cent to 40 per cent in response to
bleak growth expectations. Many retailers simply deemed it wise
to wait until the business climate improved, according to
DTZ.

SALES IMPROVE SLIGHTLY

Despite the current weak retail climate, CIA found that
sales of retail property nationwide rose to 6.133 million sq m
in the first quarter from 5.688 million sq m in the fourth
quarter, echoing the home-buying revival, with the average
sales price rising from 6,188 yuan per sq m to 6,567 yuan.

Wang said that given the overall investment environment,
interest in retail properties had increased. These properties
had transportation access, good construction quality,
facilities and stable rental income. Some real estate investors
had begun to regard retail properties as one of the better
options, said Wang.

In some cities with untapped consumption potential, foreign
and domestic developers were continuing to invest in building
more retail properties.

Indonesia-based Ciputra Group, for example, plans a 3
billion U.S. dollar project to build shopping malls, hotels,
cinemas and high-end residential properties in Shenyang.

INDUSTRIAL RENTS EASE

Affected by weakening export and import demand, the average
rental price for both standard industrial premises and
logistics space used as regular company warehouses has declined
in Beijing.

The average daily rental for standard industrial premises
fell 8.8 per cent quarter on quarter to 1.07 yuan per sq m in
the first three months in Beijing, while logistics space rent
dropped 7.4 per cent to 0.875 yuan per sq m, DTZ found.

Although Beijing isn't really a production center, Ip of DTZ
said that the capital was close to Hebei Province and three
other provinces in northeast China. All these provinces are
centers for both agriculture and industry, and many of their
products go through Beijing.

Beijing's Capital International Airport is the country's
largest, able to handle more than 55 million passengers and
more than 1.1 million tonnes of cargo annually.

The declines in Beijing industrial rents showed the impact
of the slowdown on these nearby provinces, analysts said.

HIGH VACANCIES IN GUANGDONG

Jones Lang Lasalle data showed that the average rents in
Guangzhou's industrial parks declined 2.4 per cent quarter on
quarter in the first three months. It didn't provide a rental
figure.

Chen said that to his knowledge, the export downturn had led
to the closure of more than 50,000 factories in southeastern
China, Guangdong Province in particular.

Local media have reported that there were more than 17
million sq m of vacant factory warehouses as of November just
in Shenzhen, an export hub in Guangdong. That represented a
vacancy rate of more than 20 per cent, and rents were down 15
per cent.

"Industrial property rents in the coming half, especially
within the logistics sector, should continue to decline as
conditions for import-and export-associated businesses will
continue to deteriorate and occupier demand from manufacturing
and logistics will continue to stagnate," DTZ said.

FOREIGN BUYERS EMERGE

However, industrial property prices in Beijing edged up in
the first quarter, with the standard warehouse up 0.5 per cent
to 4,712 yuan per sq m, compared with the fourth quarter,
according to DTZ.

Wang noted that there were relatively low entry barriers to
foreign investment in the industrial property sector.

Chen added that in recent months, he had noticed that
domestic and foreign institutional investors - especially from
Singapore and the United States - had pooled funds to purchase
Chinese industrial property in expectations of a rebound.

Wang said that many factors would support a longer-term
rebound in industrial property. He cited manufacturers' need to
upgrade, improve their product quality and expand research and
development facilities.

Chen said lower warehouse prices and labor costs in central
and western China had drawn factories from southeastern and
coastal areas since last year. The beneficiaries of these moves
included Jiangxi and Anhui provinces. These moves would create
demand for industrial space in those regions.

He added that China's stimulus plans, which cover areas
including petrochemicals, steel, textiles and even the
logistics industry itself, would boost investors' confidence
about the property sector.

(XIC)

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