The Chinese office market is entering into a period of unprecedented supply over the next three years. There is a 25.6 million sq m pipeline planned for completion between 2014 and 2016. This is triple the 8.2 million sq m supply which came on stream between 2011 and 2013.
However, the reality may not be as scary as it looks. We estimate that only 55% of the planned pipeline will in fact be delivered in 2014-16, mostly due to delays and reductions in size. Therefore, the supply overhang will be less severe than the planned pipeline suggests.
Based on our analysis of the absorption pattern of 200 buildings that were completed between 2009 and 2014 Q1 showed that it took almost 24 months on average for a new building to achieve full occupancy (97%). Buildings in tier I cities achieved absorption at a faster pace, whilst the pace of absorption in tier II has clearly recently been declining.
With the exception of 2010 and 2011 when the effect of the economic stimulus drove a major speed-up in corporate expansion plans, the overall increase in new supply in China over the past two years has outstripped net absorption, propelling vacancy to higher levels in nearly all major cities to an average of 12.7%.
Although we forecasts net absorption to increase over the next three years, vacancy rates are still expected to rise to over 20% by 2016. Even taking into account the anticipated construction delays, new supply is forecast to continue to surpass net absorption in the coming few years.
Both tier I and tier II cities will see supply exceeding absorption potential over the next three years. While as a whole, some cities will fare better than others, amidst the coming wave of new supply, the situation is generally poised to become more imbalanced across tier II cities.
Source : DTZ (Groupe UGL)