Commercial Properties – Part 3 商业地产（下）
We are continuing to look deeper into some major types of commercial properties in this issue, including offices, hotels, and car parks.
On offices, we believe investors would still target at the Grade-A offices in the Tier-1 cities such as Beijing and Shanghai where Multi-National Companies (MNCs) are crowding into.
We all witnessed that there are more and more modernized and taller office buildings completed in the past decade. However, the vacancy rates are actually improving. Beijing improved from 9.1% to 5.0% during 2004 and 2013 while Shanghai has been kept at about 6% over the mentioned period.
On the back of increasing supply and concerns on the slowing growth of the economy in China, some of the investors would question about the value of investment in office. Let’s have brief look at the rate of return. In 2004, the return on Grade-A offices in Beijing and Shanghai were over 8%, compared to 6% as of end-2013. This is higher than that of the residential units but still not as sexy as other high yield bond products in the market. The return is similar to the wealth management product offered by most of the banks, why bother to invest in the office market?
As mentioned in the previous issue, the offices market is relatively stable and resilient. Moreover, despite the slower growth of economy in China, its growth is still than most of the other developed countries in the world. Hence, investors could opt for offices as risk diversion. Moreover, there is a good potential for capital gain as well.
This is another industry that has been developed at a high speed over the past few years with multinational operators rushing into the China market to set up their networks. Industry data showed that the total numbers of star rated hotel rooms have been declining but that of the 5-star hotels have been increasing. Hence the average occupancy rate among the 5-star hotels dropped to 56% in 2013, representing 4ppt drop from 2012. In addition, the average room rates among the 5-star hotels have been standing at about RMB700 in the past three years. Such observation suggested that the increasing supply and declining occupancy rates are exerting pressures on the room rate.
However, the data gives the operators confidence as the domestic tourism market has been steadily growing. From 2007 to 2013, total number of domestic travelers increased at a compound annual growth rate (CAGR) of 12.4% to 3.26 billions. During the same period, the total revenue from domestic travel increased at a faster CAGR of 23% to RMB2.63 billions. Moreover, with better developed highways and the toll-free arrangement at long holidays, and also the increasing ownership of cars, weekend and holiday travelers will creating a substantial demand to the hotel industry.
Hotel operators are looking forward to the growing domestic tourism as well as the growing middle-income group. Hence they are setting up the network to capture this opportunity.
The automobile industry, not only primary market but also the pre-owned cars trading and car rental companies are all rapidly developing in recent years. With the growing car ownership and usages, the demand on parking spaces will then increase at a fast pace.
If you own a car, you must notice that it is more difficult for you to find a space to park your cars. We feel this in Shanghai and also seeing that, the parking fee has becoming much more expensive. Previously it was charging RMB10 per hour and many of them are charging 50% more at RMB15 per hour now. Moreover, many of the large malls offered free parking in about 3 years ago but now, even you are willing to pay, and it is not easy to get a place for your car.
In Westgate Mall of Shanghai, the mall operator is using double decker parking devices in their underground car park but due to the popular location, car owners still have to queue for some time to get a place.
China is the number one nation in the world in terms of car sales. Car makers are trying to expand their business here by bringing in more localization of the plant to lower the cost. In addition, the loosening of the single child policy could be a driving factor for further growing of the car ownership. All in all, car parking spaces will be in great demand and the fees are believed to be increased. Hence it would be an attractive investment tool.