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News Release

Shanghai

Office Rental Decline Slowing; Domestic Investors Expand Presence

According to Jones Lang LaSalle Second Quarter Property Review


The Grade-A office market had a change in pace as quarterly rental declines began to slow as leasing activity increased with domestic financial firms taking up space in Pudong. “Lower rents are encouraging many companies’ flight to quality in the supply heavy Pudong office market” noted Anthony Couse, Managing Director for Jones Lang LaSalle Shanghai. In the retail market, renovations on Huaihai Road caused the overall market rental average to decline 2.4% q-o-q.  Mass-market and luxury residential transaction volumes were both on the rise this quarter as a result of strong demand. International visitors’ tightened travel budgets combined with the emergence of new supply is expected to further affect the Shanghai hotels industry for the rest of the year.  Meanwhile serviced apartments are adjusting to the market by lowering rents and allowing shorter lease terms. In the investment market, recent increased loan allocations and encouragement from the government are driving more domestic players to pursue acquisition opportunities. West Shanghai’s logistics sector continues to grow in popularity with both tenants and investors looking to expand domestic distribution networks within the Yangtze River Delta.

Office

Puxi rents fall harder than Pudong.  After several quarters of Pudong rents falling more quickly than Puxi, Puxi rents declined 10.5% q-o-q while Pudong rents fell by 8.5% q-o-q.  As a result, the rental gap between Puxi and Pudong narrowed marginally with average rents at RMB 6.6 per sqm per day and RMB 6.1 per sqm per day, respectively. Since the peak of the market last year, Puxi rents have fallen by 29.6% while Pudong rents are down 43.3%. This quarter also saw the announcement of several developments originally slated for completion by the end of the year being postponed to 2010. One notable example was Wheelock Square, with a GFA of 114,000 sqm, officially being pushed back until 2010. In addition, some projects slated for completion next year are being pushed into 2011 as more developers consider delaying their office projects.  As new projects postpone their completion dates, rental declines are anticipated to slow significantly in the next few quarters. However, due to high vacancy rates across the CBD, 20% in Pudong and 9.2% in Puxi, as well as competition from new Grade-A spec buildings located in emerging decentralised locations, a rental recovery is not yet on the horizon.

Companies’ flight to quality drives Grade-A demand.  Compared to the previous quarter, 2Q09 saw an increase in leasing activity. The majority of leasing transactions were in Pudong and involved domestic companies, especially financial firms. One area of the city popular with these companies was Zhuyuan due to the area’s low rents, proximity to Lujiazui and convenient transportation links. One building in Zhuyuan particularly successful in attracting domestic financial firms this quarter was Chamtime International Financial Centre now with an occupancy rate of over 90%. In Lujiazui, companies taking advantage of low rents in Grade-A office space helped improve occupancy levels in recently completed buildings such as One Lujiazui, Mirae Asset Tower and BEA Finance Tower. All three of these buildings now boast occupancy levels of around 75%. For instance, Mazars relocated from Xinmei Union Square and leased 2,300 sqm in One Lujiazui. Also AXA relocated from China Merchants Tower and took 4,000 sqm in Mirae Asset Tower. These buildings have been particularly successful in attracting tenants looking to upgrade their corporate image with the appeal of the Lujiazui skyline. Another significant deal signed this quarter in Pudong was by DBS. Jones Lang LaSalle helped DBS lease 13,000 sqm in Lujiazui Finance Tower and obtain naming and signage rights for the building. Lujiazui Finance Tower will now be known as DBS Bank Tower. Meanwhile, the Puxi market remained noticeably quiet despite the recent pickup in Pudong. The main reason was that demand for space in Shanghai this quarter derived predominately from financial services companies preferring to locate in or near Shanghai’s financial centre, Lujiazui.  

Retail

Prime ground floor average rents fall 2.4%.  Rising concerns about sustainable growth in retail sales, combined with retailers scaling back expansion plans, resulted in some landlords lowering rental expectations. The retail precinct that experienced the greatest change was Huaihai Road as several projects undergo renovations in order to reposition their tenant-mix. For instance, Infiniti is renovating the total area of the project and the only tenants operating at the moment are F&B and a few street-side fashion brands.  All other downtown prime retail precincts however witnessed little change in rental levels and some prestigious projects along West Nanjing Road were able to slightly increase rents.

Fast fashion on the rise; large retailers to develop own shopping centres. Three retail projects entered the market this quarter Golden Eagle Plaza, Channel One and Life 1 Plaza.  Golden Eagle, located near the famous West Nanjing Road shopping street, was recently renovated and is now anchored by a 1,600 sqm Gucci flagship store. Channel One, located in Putuo District, performed well in terms of leasing by landing popular international fashion retailers Uniqlo, H&M, as well as Inditex Group’s Zara and Bershka brands. This location is the first Bershka store in Shanghai. These brands fall under the category of fast fashion which is a quickly growing retail sector across China. Uniqlo leased the entire Euro Plaza, formerly known as the Tom Lee Building, on Nanjing West Road.  The building is over 9,000 sqm and will be Uniqlo’s largest store in Shanghai; the remainder of the building Uniqlo will sublet to other Japanese retailers. Life 1 Plaza, part of Wanda Plaza in Wujiaochang, also finished renovations and leased all six floors to HOLA among which two are for self-use and the remaining space is sublet to fashion and F&B brands. At least four major big-box retailers have recently expressed intentions of developing shopping centres in Shanghai rather than leasing a large amount of space in a shopping centre. IKEA has announced that they are actively searching for locations to build IKEA malls that will position IKEA as the anchor tenant of the shopping centre.

Residential

Both primary and luxury market transaction volumes increase. After a solid increase in transaction volume in 1Q09, Shanghai’s primary residential market saw further improvement in buying sentiment, with transaction volume surging by 88% q-o-q and 69% y-o-y in 2Q09 on the back of strong demand from end-users. In the luxury residential market, upbeat economic headlines helped buyers regain confidence and re-enter the market.  Differing from previous surges in transactions, this round was largely driven by the Chinese local buyers. Wealthy local buyers have been particularly active in the market, looking to buy properties in Shanghai’s prime locations as a long-term investment.  A stronger-than-expected recovery in sales in 2Q09 reduced pressure on developers to cut sales prices. With some developers and sellers raising prices, average capital values of luxury apartments in Shanghai recorded a mild increase of 2.3% q-o-q in 2Q09 after two quarters of decline.

Investors exit through strata-title sales. With leasing demand from expatriates remaining soft and vacancies continuing to increase, some investors have turned away from en-bloc acquisitions of serviced apartment properties. Rents this quarter in the overall luxury residential market declined 2.6% q-o-q, the fourth consecutive quarterly decrease while landlords look to retain and attract tenants in a competitive market.  As a result foreign investors capable of doing so are now turning to strata-title sales in order to offload serviced apartment assets into the hot sales market. Three examples of projects now up for sale are Morgan Stanley’s Chateau Pinnacle, HKR’s Chelsea and Carlyle’s Residence 8.  All three projects have thus far been very successful in selling units.  Morgan Stanley, for instance, sold all available units by the end of 2Q09.

Hotel

Market Moving Forward Amid Tough Times. The impact of the global economic crisis on Shanghai’s hotels that became apparent during 2008 has continued into 2009. Lily Ng, Senior Vice President Jones Lang LaSalle Hotels, commented “The weakened global economy and the consequently tighter travel budgets have dramatically affected international tourist arrivals to Shanghai. In combination with new supply added to the city in the past few years, the city’s five-star hotels in particular have started to significantly lower room rates to bolster the dwindling occupancy rates”. During the first five months of 2009, ADR and occupancy rates among a sample of five-star hotels totalling 10,458 guest rooms in Shanghai declined by 23.7% and 14.2 percentage points, respectively, resulting in a decline in RevPAR of 42.0% over the same period in 2008. 

A number of new hotels, many of them located in Pudong, are expected to open over the next 12 to 18 months so Shanghai five-star hotels’ occupancy and room rate will continue to feel pressure in the near term.  “While our outlook for the rest of 2009 remains cautious, Shanghai hotels are looking forward to the much hyped World Expo 2010 to boost tourist arrivals and hotel demand“,  Ng commented.  “Riding on Shanghai’s position as China’s financial hub and the economic strength of the Yangtze River Delta, the World Expo 2010 could act as a catalyst to generate new business prospects.  Further, the city’s already strong MICE (meetings, incentives, conventions and exhibitions) market has plenty of room to grow and could benefit from additional conventions to be held during and after the World Expo 2010”, Ng added.

Serviced Apartment

Increased Flexibility to Endure Uncertain Times. The recent decline in occupancy among Shanghai’s serviced apartments is attributed to decline in expatriate relocation and corporate travel, the global economic downturn and increasing competitive pressure from non-serviced residential apartments.

In response to increasing competition and consequently declining occupancy levels, many serviced apartments decided to cut rents and to accept shorter lease terms. The results are evident in serviced apartment performance in the second quarter of 2009 when occupancy among high-end (sample size: 3,100 units) and luxury (2,100 units) serviced apartments declined by seven and 11 percentage points, respectively.  Rents followed suit and declined by 17.2% and 14.8% over the same period in 2008, respectively. 

Ng added, “However, serviced apartments generally take a flexible positioning on the residential-hotel continuum and owners and managers can adjust this position in response to the performance of either market.  For real estate investors, this flexibility helps to mitigate risk and acts as a natural hedge against the volatility and cyclical nature of both the residential and the hotel market.”

Investment

Domestic buyers are on the rise.  At the moment, some foreign funds with refinancing pressures are looking to rationalise their portfolios on a selective basis as domestic players are actively searching for acquisition opportunities. Domestic investors are showing more interest in investment opportunities due to moderating asset prices and increased liquidity through bank lending. One recent example this quarter was a domestic investor’s acquisition of City Apartment from Macquarie Properties for RMB 300 million, which is RMB 100 million lower than what Macquarie paid for the property four years ago. Many foreign funds are still active in the market but some are unwilling to outbid domestic buyers. Domestic buyers tend to have a longer term focus as well as cheaper capital and are thus able to outbid prospective foreign buyers looking for shorter term investments. In addition, the number of potential domestic buyers in the market has increased due to loosened investment regulations allowing domestic insurance companies to invest in real estate and the preliminary emergence of Chinese REITs. 

Industrial

Logistics

West Shanghai continues to grow as a logistics hotspot. In May, export and import volumes continued to decline in Shanghai falling 29.7% and 20.4% y-o-y, respectively. As a result demand for bonded warehouses remained weak this quarter and vacancies stayed high at 39.7%.  Meanwhile, the growing need for domestic distribution from retailers, consumer electronics and FMCG manufacturers in the Yangtze River Delta is driving demand in the non-bonded warehousing market, specifically in western Shanghai. Developments located in Songjiang, Fengxian, Kunshan, Jiading and Qingpu are highly sought after due to their strategic location which allows them to service both Shanghai and neighbouring markets in the Yangtze River Delta. Roughly 120,000 sqm of new supply will be completed in these districts within 2H09 to help meet the growing demand.

Business Parks

Expanding pharmaceutical and chemical companies drive demand. Companies involved in the pharmaceutical and chemical industries are now looking to further expand their presence in the Chinese market. One way these companies are looking to expand is by boosting their R&D capabilities. Business parks in Shanghai are able to accommodate R&D centres due to their large space availability, specialized building specifications, proximity to research institutes and low costs. Companies are not only interested in leasing space but are also considering purchasing space in light of low prices. A continuing source of demand for business park space is from current CBD occupiers that do not require a presence downtown. In terms of rents, popular business parks in established industry clusters showed stable rental performance.  A mature industry cluster can help to drive synergy in a specific industry thus reducing operating cost and improving efficiency for occupiers in a park.  As more quality business park space is completed in the market and companies look to expand, relocating to a business park becomes a sensible location solution. 

Manufacturing

Manufacturers re-examine asset strategies. Many manufacturers owning and operating their facilities in and around Shanghai are beginning to explore various asset strategies as companies’ financial statements come under increased scrutiny. One way manufacturers are able to free up cash and boost their balance sheet is through a sale-and-leaseback. Although global demand for China’s exports significantly declined, underlying demand for manufactured products still remains relatively strong in the domestic market. Taking this into consideration, many domestic investors are confident about future take-up potential and are actively exploring investment opportunities involving manufacturers looking to offload assets.