25th Floor, Two ICCNo. 288 South Shaanxi RoadShanghaiChina

SUZHOUAsian City Report – 1H/2020

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Savills Research

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Suzhou Asian City Report Suzhou Asian City Report

Grade A office rents fall as vacancy rates reach multi-year highs

SUPPLY AND DEMANDSuzhou has seen a swift economic recovery following the outbreak of COVID-19 and the subsequent lockdowns. Industrial added value from above a designated scale in Suzhou increased by 1.6% year-on-year (YoY) in 1H/2020, while the value of monthly output recorded four consecutive months of growth. Suzhou’s four leading industries, namely biomedicine, new-generation information technology, nanotechnology and artificial intelligence contributed 21.6% of total added value. In line with national policy directives, the investment in emerging industries grew rapidly, reaching RMB57.2 billion in the first half of 2020, up 32.6% YoY.

The establishment of Jiangsu Pilot Free Trade Zone in August 2019, which includes three areas in Nanjing, Suzhou and Lianyungang, in combination with proactive promotion of investment opportunities in Suzhou and increased transparency brought by the launch of the Infographic Guide To Investment In Suzhou, have helped to increase utilised foreign direct investment in Suzhou, eventually totalling US$7.83 billion in 1H/2020, up 151.6% YoY.

No new Grade A office supply was launched onto the market in 1H/2020, with existing stock remaining at 2.0 million sq m.

Key occupier demand came from the finance, real estate, professional services and IT sectors with tenants relocating to new, high-quality projects, such as Suzhou Centre, Tishman’s The Summit and other landmark projects in the West Suzhou Industrial Park (SIP) business area. Tenants preferred high-quality office buildings and co-working spaces, but a key selling point was landlords and spaces that had minimal or no fit-out costs in order to reduce cash flow pressure on tenants in the short term.

RENTS AND VACANCY RATES21,844 sq m of Grade A office space was handed back to the market in 1H/2020. Given no new supply, the citywide Grade A office vacancy rate increased by just 0.4 of a percentage point (ppt) YoY to 29.8%. Several small-and mid-sized enterprises closed operations, mainly affected by the pandemic. East SIP and Moon Bay area saw vacancy rates increase more significantly than other areas. However, as business activity started to return to normal in Q2/2020, high-quality office buildings, especially in West SIP, saw an increase in relocation tenant enquiries, eventually driving up occupancy rates in this business area.

Due to the significant impact of COVID-19 on the economy and the office market, Grade A office rents fell 7.3% YoY to an average of RMB92.9 per sq m per month. To contain the economic fallout of the epidemic, the Suzhou government encouraged state-owned enterprise to offer rent reduction and exemption policies for SME tenants, which lasted for nearly two months. Additionally, some private landlords also gave rental discounts or reduced effective rents by preferential measures such as rent-free periods in order to retain tenants and maintain stable tenant occupancy rates.

OFFICE MARKET OUTLOOKSuzhou’s Grade A office leasing market saw no new supply in 1H/2020, but many Grade A office developments are scheduled to launch in the next three years, such as Suzhou ICC (2021) and Vanke projects (2022) in West SIP. Additionally, Suzhou Zhongnan Centre, which will be the tallest building in Suzhou, started construction in Q2/2020. The market is also expected to receive some high-end sales development in the coming quarters, including the launch of Suzhou IFS in 2H/2020.April also saw the announcement of the SIP-Xiangcheng Cooperation Zone, jointly built by SIP and Xiangcheng District. Located just to the north of Xiangcheng business district and nearby Caohu Lake, the area covers 50.58 sq km. The development will be led by Sungent (苏州新建元控股集团), and jointly invested in by Suzhou Urban Investment Group (苏州城投集团) and Xiangcheng Urban Investment Group (相城城投集团).

GRAPH 1: Suzhou Grade A Office Market New Supply, Net Take-up and Vacancy Rate, 2015 to 1H/2020

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Source Savills Research

GRAPH 2: Grade A Office Rental Index By Selected Areas, Q3/2015 to Q2/2020

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Source Savills Research

GRAPH 4: Shopping Mall Rental Index By Selected Areas, Q3/2015 to Q2/2020

Source Savills Research

GRAPH 3: Shopping Mall Supply and Vacancy Rate, 2015 to 1H/2020

Source Savills Research

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RESEARCHJames Macdonald

Senior Director, China

+8621 6391 6688

james.macdonald@savills.com.cn

COVID-19 had a significant impact on Suzhou’s retail market, both for landlords and tenants

SUPPLY AND DEMANDSuzhou’s retail sales contracted by 9.2% YoY in the first six months of 2020 due to the continued fallout from COVID-19, though this figure compares favourably with the 18.4% contraction recorded in the first quarter. Online retail sales, however, recorded phenomenal growth, expanding 37.6% YoY. Under the promotion of policies such as the “night economy” and consumer coupons, Suzhou’s retail market recovered swiftly in 1H/2020. Online and offline retail sales of consumer goods from 23 key enterprises totalled RMB870 million over the Labour Day holiday, up 2.8% over the same period last year.

No new projects were launched onto the market in 1H/2020, with the total retail stock staying at 6.5 million sq m.

In terms of market demand, Suzhou is still favoured by domestic chain brands, but most of the new stores were opened before the outbreak of COVID-19. Yitiao (一条), a lifestyle e-commerce platform opened an offline store in Suzhou Centre; In City introduced Nayuki’s Bla Bla Bar, a sub-brand of Nayuki’s Tea, on its first floor; leisure and entertainment brand Hophub Trampoline Park and popular milk tea brand Machi Machi entered the first floor of Longfor Shishan Paradise Walk.

Emerging domestic brands supported by financial backers maintained their rapid expansion despite the impact of the epidemic, such as the online-to-offline imported products marketplace KKV, as well as skincare and makeup collection stores the Colorist and Wow Colour.

RENTS AND VACANCY RATESCitywide vacancy rates increased by 3.4 ppts YoY to 12.2% in 1H/2020. The increase in vacancy rates resulted from smaller retailers under cash flow pressure permanently closing locations as well as some larger brand making store network adjustments. Sectors particularly affected by COVID-19 included the F&B and apparel sectors. Several shopping malls in more suburban locations suffered a more significant impact as owners saw tenant defaults and store closures.

First-floor rents fell 1.0% YoY to an average of RMB336.0 per sq m per month in 1H/2020 with every submarket recording declines. Many landlords gave rental concessions or extended rent-free periods to attract new brands.

RETAIL MARKET OUTLOOKA number of retail centres originally scheduled to be handed over in the first half of 2020 have been delayed to 2H/2020 or early next year. There are now eight projects with a total GFA of 700,000 sq m scheduled to open in the second half of 2020, including Longfor Xinghu Paradise Walk, Hong Tang Shopping Mall and High-speed Railway Wuyue Plaza. Projects are mainly located in emerging business areas and some represent the first large-scale retail centre in a particular region.

International retailers recognise the progress of Suzhou’s economic recovery and consumer appeal and are still optimistic about the future of Suzhou’s retail market. Costco’s third store in Mainland China will be located in Xushuguan area of Suzhou New District, adjacent to Aeon Mall SND, Decathlon and IKEA.