There is something very wrong with China's Economy.
From ZeroHedge, February 19:
Several years ago, a new, if slightly less ambitious, "Big short" trade emerged in US capital markets when several hedge funds - including Carl Icahn's - took aim at US malls, shorting various CMBS tranches or stocks outright, in anticipation of the continued deterioration of US bricks and mortar retailers in general and the mall experience in particular. This trade paid off handsomely several years ago, at which point it stabilized near lifetime lows. Not longer thereafter, in the immediate aftermath of the post-covid Work From Home shift, a new big short trade emerged, one targeting office space which has been sitting vacant at far higher rater than during the pre-covid world.
And while that particular trade has yet to pay off in the US, there is one place where office bears may strike gold first.
As Caixin notes, for the last few decades, the clusters of office buildings that reach into the sky above major Chinese cities have served as a symbol of the country’s economic rise. But over the last year, however, those same structures have begun to look like more of a drag.
Contrary to the US where office lockdowns kicked in parallel with the covid lockdowns, the Chinese market for office space did well during much of the pandemic. After an initial slump in the first year Covid emerged, the market bounced back big in 2021, underpinned by strong demand from tech and finance companies. Analysts had predicted a strong 2022 as well. Instead, corporate demand for office space collapsed after the first quarter. Even China’s biggest cities, where demand is usually the strongest, were not spared.
“The market performed well in the first quarter, so we thought our forecast that the Beijing office market would be solid in 2022 would become a reality, but nobody expected a sudden downturn in the second quarter,” an insider at a property market research firm told Caixin.
The reason why 2022 was so dismal for commercial real estate in China is due to disruptions from repeated Covid-19 lockdowns coupled with a government crackdown on the tech industry, a major leaser of prime office space. With the end of “zero Covid,” there has been some hope that commercial real estate might lurch back into another rapid recovery, but industry insiders suggest that any rebound is still a way off, and will be complicated by a coming rush of new supply this year.
The slump in office occupancy comes at a bad time for an economy that depends so heavily on real estate, particularly when the residential market remains plagued by an unprecedented debt and liquidity crisis. Real estate contributes an estimated 25% of China’s GDP through direct and indirect channels, according to Wang Tao, chief China economist at UBS Investment Bank. Goldman recently calculated that China's property market was the world's single largest asset class.*****While office space’s share of that contribution is difficult to pin down, investment in commercial property, which includes both office buildings and shopping centers, accounted for 12% of total real estate investment last year, according to the National Bureau of Statistics.In 2022, China’s largest cities of Beijing, Shanghai, Guangzhou and Shenzhen all suffered losses in net leased office space — an industry metric of the amount of newly leased space minus the total included in canceled leases.
In Beijing last year, net leased premium office space plunged to 81,300 square meters (875,106 square feet) from about 1 million square meters in 2021, according to data from Savills PLC, a real estate consultancy. All of last year’s gains took place in the first quarter, when net leased office space came in at 95,000 square meters, according to Savills data. That means renters canceled a net 13,700 square meters in office leases in the following three quarters. As more leases got canceled, the vacancy rate for Grade A office space nationwide rose 1.5 percentage points in 2022 to 16%, according to Cushman & Wakefield, another real estate consultancy....
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