China’s impressive Greater Bay Area (GBA), which links mega-cities in one economic trading zone, is already starting to show signs that it is emerging from the global economic coma induced by the coronavirus.

With a combined population bigger than that of the UK or Canada, the area is home to three of the top 10 container ports globally and sees more air traffic than the top three US airports combined. It is also an essential financial element in China’s plans to help facilitate Belt and Road Initiative (BRI) projects.

Indicators show that some of the cities that make up the GBA are faring better than others, but 2022 should provide the turnaround required to get back to business.

Giants like Amazon, OPPO, Tencent, and Toutiao have all inked deals on real estate over 10,000 square metres (sqm) in the area, and IT firms are moving in too, according to experts. Real estate values in Shenzhen alone have tripled in price in the last decade.

Key property markets in the GBA include Hong Kong, Shenzhen, Guangzhou, and Macau. The COVID-19 outbreak hit hard, but the latest trends show demand has begun to pick up, with Shenzhen playing a lead role.  

“COVID-19 only slowed down the property sales and construction progress in the first half of the year, while demand and transaction volume rebounded quickly since the Chinese government largely contained the pandemic,” said Martin Wong, Associate Director, Research & Consultancy, Greater China at Knight Frank.

Office revival

While Shenzhen, along with Guangzhou, saw office rental markets feeling some pressure in the first quarter of 2020 as the coronavirus outbreak curbed immediate leasing enquiries, industry experts say economic activities gradually picked up as companies resumed operations. 

“Business performance of most companies in both Guangzhou and Shenzhen returned to normal over third quarter 2020, and the office market saw some pick-up in leasing demand,” said Silvia Zeng, Head of Research, JLL South China. 

While relocation and expansion were more frequently observed than the first half, she pointed out that cost control was still a key strategic priority in many companies.

In Shenzhen, with pent-up demand being gradually released since the second quarter of 2020, leasing activities saw an apparent pick-up, according to JLL. 

“IT tenants became more active in the leasing market and showed robust expansion and relocation demand,” said Zeng, adding that the notable transactions over 10,000 sqm during the second and third quarter of 2020 includes OPPO, Tencent, Toutiao, and Amazon. 

On the other hand, Hong Kong has recorded subdued office demand since mid-2019 due to protests and the pandemic. Given that Hong Kong has yet to return to normal (unlike China) and business prospects remain murky, industry experts say tenants remain tentative about real estate decisions. 

Despite the short-term economic turbulence, CBRE says Chinese companies will continue to be a significant source of office leasing demand in Hong Kong in the medium-to-long run. 

“The organic growth of domestic Chinese corporations and expansion requirements from Hong Kong-based enterprises will fuel additional office demand, particularly in Shenzhen, with a relatively higher concentration of activity expected in the Futian CBD and Qianhai,” said Gaffney. 

Scarcity in residential units

As for the GBA residential market, the most salient characteristics are scarcity and rapidly rising prices, according to Juwai’s Chmeil. 

“Prices [of homes in Shenzhen] tripled over the past ten years to $8,330 per sqm. There is a supply crunch in part because only 22 percent of the city’s land is dedicated to housing,” he said. 

According to Knight Frank, in terms of key markets, Shenzhen, Dongguan, and Zhongshan are currently and will be the cities seeing more real estate activities. 

“We have seen housing price growth in these cities remain stable amid COVID-19,” said Wong of Knight Frank. 

He said the housing market in the GBA is also reaping the benefits of improved infrastructure, which clusters the 66-million residential population into a one-hour living zone.

Retail sector

In the retail sector, JLL data shows, Shenzhen recorded positive y-o-y growth of 1.9 percent in total retail sales in July, which is the first positive growth for the whole of 2020, up to that point, from a 14.8 percent y-o-y decline in the first half of 2020. Guangzhou also saw total retail sales reflect a positive 3.3 percent y-o-y return in August. 

“The improving consumption led to sales recovery in many malls in both cities which, in turn, supported a pick-up in overall leasing demand. It’s worth noting that customers’ appetites for luxury goods remained strong, and many luxury brands saw sales rebound, as residents are unlikely to travel overseas in the near term,” said Nelson Wong, Head of Research, JLL Greater China.

Retail in Hong Kong suffered due to the stalled tourism market, thanks to COVID-19. “This is most visible in the high streets in core commercial areas. However, with no tourism spending and rents dropping accordingly, we expect the sector could be the first to recover depending on when international travel returns,” he said.

There is a significant opportunity for logistics facilities as massive investments in road, rail, port, and air infrastructure drive demand. It’s not surprising that three GBA cities are among the world’s top 10 ports: Shenzhen, Guangzhou, and Hong Kong.

Industry data shows there is an ample supply pipeline in both Guangzhou and Shenzhen Grade A office markets.

According to JLL, more than one million sqm Gross Floor Area (GFA) of new office space will be distributed in Guangzhou’s office market in 2021. There will be 1.8 million sqm GFA of average annual new supply coming online in Shenzhen in 2021-2023. 

Market observers say commercial and logistics property development is happening rapidly, powered by property developers. 

“There is a substantial supply of investment-grade assets, but there is also significant competition for the available property,” said Juwai’s Chmiel.

Powering ahead

As China returns to steady and positive growth, the overall economic activity and real estate demand are expected to pick up in 2021 gradually, provided COVID-19 remains contained, experts agree.

However, they caution that political uncertainties between China and the US will ensure slower growth patterns than in previous years.

With new policies set to attract more foreign institutions to invest in Shenzhen, Gaffney said real estate investment activity is set to pick up in the coming years.

“Shenzhen’s high office vacancy rates and the supply overhang in the pipeline coupled with the impact of COVID-19, however, will ensure Shenzhen office rents come under pressure in the next 12-24 months, despite the gradual improvement in economic momentum,” he added.

In Hong Kong, retail could be the first to recover depending on the extent of the return to international travel. “But the office segment will likely see further downward rental pressure as business outlook stays uncertain,” said Zeng of JLL.

As the GBA mega-cities integration continues apace and a post-COVID recovery emerges, she said demand would likely rise in due course.

While it’s tempting to treat the GBA as if it were a single, gigantic real estate market, Juwai’s Chmeil says, “it is a multiplicity of individual markets with as much variation as you would see within any country in the world.” 

Looking forward to 2022, he expects Hong Kong and Macau to begin to dig their way out of the hole created by the pandemic. Shenzhen and Guangzhou are also likely to continue to power ahead.

(Reporting by Syed Ameen Kader; Editing by Charles Lavery; Additional editing by Anoop Menon)

(anoop.menon@refinitiv.com)

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