Real y-o-y GDP growth in China reached about 6.7% in 2016, and should only slow to about 6.3% in 2017. The country’s banking system appears mostly healthy, and we think the risk of a financial crisis has receded. Profits in manufacturing rose by 16.0% y-o-y in Q3 2016, i.e. at the fastest rate in two years; this growth reflected not only rising sales, but also margin expansion driven by higher output prices. After three years of steady renminbi depreciation, the USD/RMB rate stands at 6.88, a level which should underpin solid exports this year, although in our view scope for further RMB depreciation is now limited. Coupled with continued expansion in the e-commerce and logistics sectors in and around first-tier cities, this favourable background should ensure firm leasing and investment demand for Chinese industrial property this year. Chinese industry as a whole may suffer if the new US administration implements its threat to impose steep tariffs on Chinese imports, but the impact on the logistics sector should be moderate, since it is driven more by domestic demand.
Shanghai’s logistics property market remained robust in 2016, underpinned by a positive outlook towards retail sales and other sectors that typically require logistics property. Seven high quality logistics developments were completed in 2016 with a total area of 624,800 sq metres (6.72 million sq ft), the highest annual supply since 2008. Despite the high new supply, given the strength of demand net absorption totalled nearly 640,000 sq metres (6.89 million sq ft,) and the overall vacancy rate fell by 1.6 percentage points y-o-y to 13.0% by end-December. The new completions accounted for 60% of net absorption. Strong demand and limited available quality leasing space pushed up average rent for Shanghai’s standard logistics property by 4.4% from 2015 to RMB1.29 per sq metre per day, up by 1.1 percentage points. Average rent for manufacturing property also increased, rising 3.9% y-o-y to RMB1.02 per sq metre per day.
The investment market remained attractive for logistics property developers and institutional investors in 2016, displaying considerable activity. Notably, in July, Logos Property Group closed its second joint venture with Ivanhoé Cambridge and CBRE Global Investment Partners, with the goal of investing USD400 million (RMB2.76 billion) into acquiring and developing logistics facilities in Shanghai and neighbouring cities. In the manufacturing sector, one notable transaction was Kerry Properties’ investment of RMB2.4 billion (USD348 million) to acquire an 18.9% share of a large industrial site in Pudong’s Houtan area; the company plans to redevelop the site into a mixed-use commercial and residential property.
Looking forward, we expect demand for industrial property in Shanghai to remain firm, reflecting both healthy economic conditions and growing consumer spending. Support for e-commerce in particular is strong, as is shown by the establishment of a Shanghai cross-border e-commerce demonstration zone and a pilot zone in early 2016. In November, the central government postponed a new and stricter supervision policy on cross-border e-commerce imports until end-2017. Despite the lack of support from Shanghai government, over 700,000 sq metres (7.53 million sq feet) of standard logistics property is scheduled to be completed in Shanghai in 2017, with nearly 60% by area in Pudong. In the short term, the vacancy rate will probably increase as a result, and rental growth may be constrained. Beyond that, prospects remain favourable.
In Beijing, strong growth in online retail sales – up by 18.2% y-o-y over the first 11 months of 2016 – has underpinned demand for logistics property. However, since a high percentage of high-quality warehouses in Beijing is occupied by tenants with long-term leases, available leasing space has been limited. This has encouraged companies to turn to nearby cities including Tianjin and Langfang to search for warehouses. Looking forward, constrained by Beijing's tight industrial land supply, we think that logistics developers will accelerate their expansion in Beijing's neighbouring cities. With further infrastructure development in Tianjin and Hebei, more cost-sensitive companies are likely to relocate or set up new warehouses in these areas.
Four prime logistics properties with a gross floor area of 225,000 sq metres (2.4 million sq ft) are scheduled for opening in Beijing in 2017. We expect these new projects to be quickly absorbed by the market, as e-commerce retailers and third-party logistics service providers should continue to seek space in the city to sustain and expand their business. Thus, the vacancy rate should only rise moderately: we forecast an increase of about 1ppt to 7.3% by end-2017. We predict a moderate increase in average industrial rent of 0.1% over 2017. With demand healthy, there is room for faster growth beyond this year.
Economic growth in Hong Kong beat expectations over the first nine months of 2016, with y-o-y real GDP growth of 0.8% in Q1, 1.7% in Q2 and 1.9% in Q3. This improvement was driven by strength in domestic demand and was reflected in rising business confidence. Despite this favourable backdrop, the industrial market underperformed in 2016, partly because investors shunned the market after the termination of the government’s industrial building revitalisation scheme. We expect a brighter market in 2017 since we expect industrial properties to serve as an alternative to residential assets after the imposition of harsh new stamp duty rules on residential property in Hong Kong in November 2016.
We expect the decline in rents and prices in the industrial sector over the past two years to come to an end in 2017 with rents trending upwards, led by mixed industrial and office (I/O) buildings. In the important logistics sub-sector, we predict growth in warehouse rents of up to 3% this year. We believe that demand should remain stable while some changes are likely in tenant profile in prime warehouses. We do not expect existing tenants to reduce their real estate requirements in general, while in addition the logistics market is becoming increasingly concentrated among large service providers. Despite the fact that some landlords are more open to negotiations in order to boost absorption, relocation demand should help support rents in decentralised locations. Moreover, new supply is limited: the 1.7 million sq ft (158,000 sq metre) development in Tai Po by the China Merchants Group is the only major new building opening that we anticipate in 2017.
Singapore’s recent economic performance in recent years has been mostly disappointing, with y-o-y real GDP growth of 2.0% in 2015 followed by weak figures over first three quarters of 2016, especially Q3 which showed a 1.9% q-o-q contraction. However, according to the government’s advance estimate GDP surged by 9.1% q-o-q in Q4, driven by a surprisingly strong rebound in both manufacturing and service sector activity. The monthly manufacturing PMI survey also points to a gradual improvement in industrial conditions with four consecutive months of expansion.
After a difficult 2016, in which most industrial companies stayed cautious on their real estate requirements, we expect the situation to continue for H1 2017 and most probably improve in H2 2017. As a result of the unexpected outcome of the US presidential election in last November, some industrialists are delaying their decisions in space commitment and adopting a “wait-and-see” approach. Nevertheless, leasing activities are likely to pick up in H2 2017 when the situation is clearer. In addition, in view of the upward pressure on interest rates, cost-conscious end-users who intend to purchase their own units could turn to leasing the premises instead.
We expect overall average industrial rents to remain flat for H1 2017 and to pick up marginally by end of 2017. In particular, the average rents for independent high-specification industrial buildings located outside the science and business parks look set to stay flat in H1 2017, and to turn up by about 5% by end-2017. We anticipate greater interest for hi-specification industrial space located near the MRT stations, under the Downtown Line 3. Given the improved accessibility after the completion and commencement of operations of the stations by end of 2017, we envisage a potential increase in demand for space with such attributes.
Coupled with the ample space options available, there should be opportunities for industrial occupiers to secure choice business premises at competitive rents. Tenants looking at a lease period of five years or more should consider locking in their rents in the current market. We believe that the rise in supply against subdued demand will result in a higher island-wide vacancy rate in 2017.
Japan's economy has been ticking away at a moderate pace impacted by weaker household consumption following the consumption tax hike in 2014, a decline in crude oil prices, and an uncertain global economy. Real GDP in Q2 2016 grew by 0.3% q-o-q, the weakest figure over the first three quarters of the year. Although historical revisions paint a slightly more positive picture, spending growth has been modest, and consumer confidence is weak. However, the Japanese yen has weakened by about 13% against the US dollar since the election of President Trump, and this depreciation should boost exports and support corporate profitability over the coming year. Oxford Economics now predicts y-o-y real GDP growth of 1.0% for both 2016 and 2017.