One year after China’s State Council unveiled the outline development plan for the Greater Bay Area, a strategic growth zone combining the mainland’s Guangdong province with Hong Kong and Macau, leading property consultancy Knight Frank already sees opportunities on the rise in the region.
Now home to 68 million people, the Greater Bay Area, which combines the sophistication of the service industries in Hong Kong and Macau with the dynamism of Guangdong, is seeing growth in leasing rates and capital values for real estate, while a growing middle class fuels consumption.
To find out more about how the growth of this region creates openings for business owners, Mingtiandi spoke with Knight Frank’s Greater Bay Area team, led by Ken Kan, Managing Director for Shenzhen and Head of Offices Services in South China for the company and Even Huang, General Manager of the company’s Guangzhou office.
Also joining the conversation were Ann Huang, Senior Director of Landlord Project Services and Simon Lam, Senior Director for Landlord Project Services.
Mingtiandi: Both China’s central government and the local authorities in Hong Kong have made the Greater Bay Area a top priority. How is government policy creating business opportunities in southern China?
Ken Kan: The development of high quality infrastructure and the upgrading of industry have been the key factors driving growth in the Greater Bay Area.
In Shenzhen especially, the policy focus on foreign exchange reform, advancing the internationalisation process of the renminbi and optimising the listing system of Hong Kong’s Growth Enterprise Market (GEM), are making the region a more popular investment destination for both international and domestic enterprises.
Mingtiandi: Traditionally, Shanghai and Beijing have been the mainland cities drawing the most interest from commercial developers, due to their higher office and retail rents. Have you seen a change in rental levels in Greater Bay Area cities?
Ann Huang: In Guangzhou and Shenzhen retail rentals increased by 3 to 4 percent during 2019, with average rents for premium properties reaching RMB 750 per square metre per month and RMB 850 per square metre per month, respectively.
Compared to Shanghai and Beijing, rental levels for retail property in the Greater Bay area are significantly lower, about one-quarter to one-third of the levels seen in those first-tier locations, which gives a lot of space for further growth in southern China’s metropolises.
Mingtiandi: What’s driving up rents in the region? Is there a scarcity of available space, or is growth supported by increasing consumption and other commercial activity?
Ann Huang: Given the area’s technology focus and the rise of tech and finance-driven industry, the Greater Bay Area is a popular destination for young talent and the region has seen years of sustained population net inflow, measuring 3.0 percent and 2.6 percent per annum in Shenzhen and Guangzhou respectively over the last 10 years.
The rising salaries that technology and finance companies are paying to attract and retain talent has led to a population with high earning potential and increasing disposable income, which leads to increasing consumption, expanding retail sales and ultimately rising rental tolerance for retailers.
Simon Lam: In addition, the Greater Bay Area remains structurally undersupplied in terms of both total and per capita supply of retail property compared to China’s other first tier cities of Beijing and Shanghai.
According to Knight Frank’s recent research report ‘Guangdong-Hong Kong-Macao Greater Bay Area: Comparative Study of Quality Retail Property Market and Mainland China Cities” the Greater Bay Area has 0.21 square metres of retail space per capita – well below the ratios in Shanghai, Beijing and Wuhan, which have 0.70, 0.57 and 0.55 per person respectively.
With the region’s improving demographics, this shortage of supply leaves significant room for future development.
Mingtiandi: What’s driving increased consumption in the Greater Bay Area?
Simon Lam: Much of the rise in spending in the area comes from the growth in disposable income for Greater Bay residents. This is partly a result of rising wages, and also comes from a reduction in income taxes and other improvements in the country’s social income allocation system.
The establishment and popularisation of China’s social insurance system has also helped to spur spending.
Mingtiandi: What indicators do you see that suggest growth in retail and office activity will continue to rise?
Ken Kan: Over the past couple of years, the Greater Bay Area’s investment market has seen increasing transaction volumes for both en-bloc and strata-title property. Foreign investors have become more active across sectors such as hospitality, transportation, retail, real estate, high-tech and healthcare.
Simon Lam: According to Knight Frank’s study of high quality retail property market in the major mainland cities of Guangdong, Hong Kong and Macao, the overall market share of foreign developers is relatively low, with Guangzhou and Foshan having the highest proportion of involvement by foreign builders, at 15.9 percent and 14.8 percent respectively.
As the importance of the Greater Bay Area grows, and as its per capita disposable income and total retail sales continue to increase, the demand for high-quality retail is growing in parallel.
Mingtiandi: Within the Greater Bay Area, which cities have the most attractive conditions for acquiring retail assets? For office?
Even Huang: The central business districts of the first tier cities of Guangzhou and Shenzhen, have the most active retail markets providing strong support for investment returns. However, high quality, mature retail assets can be expensive to acquire, and supply of core properties is limited.
Second and third tier cities in the region, such as Foshan, Dongguan, Zhuhai and Huizhou, have strong industrial focuses and have become target destinations for talent as well as for industries which are relocating from the first tier cities as costs rise and infrastructure develops across the region. Assets in these developing second and third tier cities possess potential for rapid growth and more opportunistic returns.
Mingtiandi: Is there a significant supply of investment-quality retail assets in the region, or should investors count on developing their own portfolios?
Even Huang: The quantity of premium retail assets in the Greater Bay Area is significantly lower than that of Beijing and Shanghai. Investors have the option of either purchasing mature premium retail assets, developing properties from the ground up, or purchasing less well-operated and under-managed assets to improve asset value through a value-add strategy of renewal and efficient property management.
Given the changing nature of the retail landscape, with contemporary shopping centres incorporating smart technologies as well as offering more consumer and experience-oriented elements, there is significant opportunity for developers to build or refurbish existing assets to meet evolving consumer preferences, leading to an upgrade in the quality of the retail market overall.
Mingtiandi: What role does the Greater Bay Area’s proximity and access to Hong Kong have in driving up real estate values in the area?
Even Huang: The Greater Bay Area’s proximity and access to Hong Kong will encourage further growth and access to international markets whilst Shenzhen’s international policies are developed. Real estate investment interest and activity into the Greater Bay Area from Hong Kong-based private equity and institutional funds has been increasing, as seen by recent transactions by Link REIT and Baring Private Equity Asia.
Mingtiandi: What impact have the high speed rail link and the Hong Kong- Macau-Zhuhai bridge had on property values in the region? On commercial activity?
Even Huang: Significant improvement in commercial activity has been seen especially in Zhuhai, and there have also been commercial development opportunities around Guangzhou South Station as the area grows into southern China’s largest integrated transport hub.
Mingtiandi: Have there been instances where international investors have been able to purchase commercial real estate portfolios in the Greater Bay area?
Even Huang: In March 2019, Link REIT acquired Central Walk in Shenzhen Futian CBD from Yijing Group for RMB 6.6 billion. Helped along by the appeal of the mall’s direct connection to the city’s metro system, the transaction represented a unit price of RMB 78,665 per square metre for the 66,800 square metre property – a record high for a retail mall in China.
In January 2018, CapitaLand acquired Rock Square, which is in Guangzhou’s Haizhu district, from PGIM Real Estate, for RMB 3.3 billion.
Mingtiandi: What changes do you expect to see in the Greater Bay Area real estate market during 2020?
Ken Kan: Companies from high-end industries such as TMT, professional and financial services will continue to enter the core cities of the Greater Bay Area, Shenzhen and Guangzhou to the benefit of the office market.
Even Huang: The high-speed railway link, Hong Kong-Macau-Zhuhai bridge and Nansha bridge will also improve logistics asset values in the Greater Bay Area, especially those on the west bank of Pearl River.
Ann Huang: As the high-speed and inter-city railways shorten traveling time, second tier cities in Guangdong province will receive greater population and industry inflows, which will bring more opportunities in commercial and residential real estate development in these burgeoning hubs.
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This sponsored feature was contributed by Knight Frank Greater China. All images are courtesy of Knight Frank Greater China.