China mulls a US$277 billion property deal
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
US inflation figures due out later today are expected to show a small, merciful step in the right direction. Core inflation is likely to have risen 0.3% last month, down from a 0.4% rise in each of the previous three months, according to a Bloomberg survey of economists.
This would be positive in the sense that it avoids another bout of uncertainty, but it also won't go far in convincing Federal Reserve officials that rates need to fall. UK Labour market figures published by the ONS yesterday morning told a similar story - regular wages excluding bonuses came in a touch hotter than analysts had expected, rising by 6% in the first quarter.
Other aspects of that release showed some cooling, but probably not enough to coax more Bank of England officials into voting for a cut in June. Indeed, analysts appear divided on how to read the figures, and investors still put the chances of a first cut in June at about 50-50. We'll know more when we see the next Consumer Prices Index, out next Wednesday.
Secondary offices
The date of the first rate cut isn't the only major question hanging over property markets - what to do about London's stock of secondary quality offices presents another.
Annual take-up for these offices has fallen by 34.2% since the pandemic and availability is up by about half to 10.4m sq ft. This is about both the 'flight to quality' and the incoming MEES legislation which, in its present form, requires rented office stock to have a minimum EPC rating of C by 2027 and a rating of B by 2030. As things stand, 97.6m sq ft of offices in London have an EPC rating of below C and are therefore unlettable from 2027 in their current form - that's almost 40% of the capital's office stock.
As part of the London Series, the Knight Frank Project and Building Consultancy team have estimated the costs associated with the key works required to reduce operational energy consumption across six scenarios - one of which shows the mix of interventions required in order to upgrade an EPC non-compliant office to a B rating and future proof assets beyond the potential 2030 MEES deadline.
The team estimates that the costs associated with the most comprehensive retrofit strategy will be between £70-£110 per sq ft. That means the cost of bringing compliance to the entire London office market will be between £11.8-£18.9bn. See the piece for more.
Prime offices
The supply dynamics for prime offices tell a very different story. The development pipeline gives rise to a potential cumulative under-supply of 4.8 million square feet by the end of 2026, which will fuel rental growth over the long term - you can see our forecasts in the London Report.
Not all markets enjoy these tailwinds. Average prime rents in Asia Pacific fell 3.2% in Q1 compared to a year earlier and have eased for seven consecutive quarters, according to the latest research from Christine Li. The index is being dragged down by Chinese Mainland markets, where new supply is outpacing demand - 60% of new supply is concentrated in Chinese Mainland markets such as Beijing, Shanghai and Shenzhen.
Prime office vacancies ticked up again to 14.9% across the region. This continues an upward trend that has seen vacancies breach record levels since late 2022.
While the figures may be concerning to the Chinese government, their focus is still very much on the residential market. Bloomberg this morning reports that officials are considering a proposal for local governments to buy millions of unsold homes in order to ease a glut and stabilise the market. The numbers in this story illustrate the staggering size of the problem - Shujin Chen, head of China financial and property research at Jefferies, says that at least 2 trillion yuan - or US$277 billion - would be required.
Country homes
Volatile mortgage rates and economic uncertainty mean the UK residential market transactions are being driven by buyers that really need to move. The trend means that the outlook is brightening for property markets outside of the capital, which are typically more needs-driven and linked to seasonal patterns of higher activity in spring and autumn, according to Tom Bill's latest update.
The number of offers made between £1 million and £2 million in country markets was 5% higher than the five-year average (excluding 2020) in the four weeks to last Friday. When you consider how strong the market was in spring 2021 and 2022 during the ‘escape to the country’ boom, that’s a strong performance.
There was an equivalent decline of 4% between £2 million and £5 million, which also paints an improving picture but reflects the larger proportion of discretionary buyers in higher price brackets. See the piece for more.
In other news...
Europe's CRE price slump eases as rents increase (Bloomberg), after the great resignation, workers decide to stay put (Times), ultra-long mortgages ‘threaten retirement crisis’ (Times), UK lacks skills and capacity for big infrastructure projects, MPs warn (FT), Labour faces non-dom ‘black hole’, Tories claim (FT), and finally, Asda to create new ‘town centre’ and build 1,500 homes in London (FT).