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News Release

Shanghai

Shanghai office rents start to bottom out; Investment activity picks up

According to Jones Lang LaSalle Third Quarter Shanghai Property Review


Following the previous quarter’s trend, the rate of decline in Grade-A office rents continued to slow, especially in Pudong. “As more space is being taken from the market through purchases by owner-occupiers and occupancy levels rise in recently completed buildings in Pudong, landlords are now more confident,” noted Anthony Couse, managing director for Jones Lang LaSalle Shanghai. The retail market remained stable during the third quarter with no new downtown projects completed, keeping available space limited. Several new luxury residential projects were very well received in the market and average capital values reached a new high in Q3. The overall investment market intensified this quarter due to increased acquisition activity from domestic owner-occupiers. Meanwhile, domestic distribution continued to fuel demand in the logistics market, with non-bonded space highly sought after.

Office

Rents decline only 3.6% q-o-q across the city.  Backed by improvements in leasing activity and market sentiment, declines in rent this quarter slowed significantly compared to 2Q09. This was particularly true in the Pudong CBD market, where rents fell only 2.2% q-o-q compared to an 8.5% q-o-q drop in the second quarter.  As occupancy levels in newly completed buildings in Pudong continued to rise, a growing number of landlords stopped lowering rents.  Domestic financial firms continue to be a major driver of new take-up in the Pudong market, resulting in vacancy rates dropping to 18.4% on the east side of the river. Puxi CBD rents fell slightly more than Pudong CBD at 4.4% q-o-q as more Puxi landlords lowered rents in order to compete with recently built, high quality buildings in Pudong. 

Buying demand from owner occupiers intensifies. The strong liquidity position and ready availability of capital for many domestic companies is enabling them to purchase office space; this has been seen especially in Pudong.  Landlords are also putting wholly-owned buildings up for sale to owner-occupiers.  The most notable deal this quarter was Agricultural Bank of China’s purchase of a 41-storey office tower that is part of the CITIC Shipyard development. The transaction went through at a total price of RMB 3.77 billion for the 85,073 sqm building.  Zhongrong Group sold more floors of Jasper Tower, with Shanghai Rural Commercial Bank purchasing 10 office floors as well as four retail units for a total price of RMB 1.05 billion. Other Pudong buildings are also under negotiations for sale. In Hongkou, a 15,190 sqm office tower in the Shanghai Port International Terminal project was purchased by the State Development and Investment Corporation for a total of RMB 1.05 billion.  So far, state-owned enterprises have purchased a total of six office towers in the development. Looking forward, buying demand from owner-occupiers will continue to grow as an important driver of office take-up in Pudong over the next 12 months. As companies purchase space in office buildings for self use, there will be less overhang in the leasing market, alleviating some pressure on landlords to lower rents.

Retail

Prime shopping mall rents remain stable.  After two quarters of marginal declines, average rents for ground floor space in prime downtown retail projects posted an increase of 2.0% q-o-q.  One driver of this was a rebound in rents along Huaihai Road, while landlords of buildings in most other areas held rents steady at 2Q09 levels. Many retailers continue focusing on improving the profitability of their stores rather than going ahead with expansion plans throughout the city. For example, Fendi re-opened this quarter after expanding in Plaza 66, the brand’s only Shanghai location. However, Me & City and G2000 both opened flagship stores along Huaihai Road with a size of 2,400 sqm and 1,000 sqm, respectively. Vacancy rates remain very low at 6.4%, as no new downtown supply was completed this quarter.  In a tight market, landlords maintain strong bargaining power with tenants. “Demand is expected to increase in the coming 12 months as new entrants, particularly in the mid market fashion sector, are already exploring 2010 openings in locations around Shanghai,” noted Eugene Tang, head of Retail for Jones Lang LaSalle Central China. “This will be welcome as 374,828 sqm of new supply is expected in that time.”

Residential

A robust summer, but a mellow autumn for home sales? The first part of Q3 was a continuation of the previous quarter’s robust sales volume, coupled with a declining level of inventory in mass market residential properties.  It was widely noted that owner-occupiers, as well as individual investors, returned to the market in droves to purchase property.  Shanghai was once again a preferred destination for investors from around the Yangtze River Delta.  Driven by strong demand, housing prices rose quickly in June and July to reach new highs, resulting in a 13.0% increase in the CREIS index from June to August.  On the back of rising prices, transaction volumes showed signs of moderation in September as high prices negatively impacted affordability.  On the whole, Q3 transaction volumes were down 11.7% q-o-q but remained far higher than one year ago, up 131.6% y-o-y. With higher prices coupled with the anticipation of regulatory changes and “fine-tuning” of credit policies for second-home buyers, sales volume is likely to retreat in the coming months even as the market enters a traditionally busy season for sales.

Buying demand for luxury apartments still strong.   After a strong 2Q09, buying demand for luxury apartments in Shanghai continued to strengthen this quarter. Affluent Chinese investors, mainly from Shanghai and Zhejiang, still made up the majority of buyers. Several luxury projects achieved record high sales velocity.  For instance Star River, a luxury development in Pudong, launched 322 units on August 8th and sold 311 units this quarter with an average price around RMB 52,030 per sqm. The next day, The Bund House put 86 units onto the market and sold 75 by the end of Q3 at an average price of RMB 52,463 per sqm. The famous Tomson Riviera development also witnessed a very significant pick-up in sales this quarter, selling 22 units compared to only 19 units sold over the past three years. Meanwhile, the luxury residential leasing market remained sluggish with no signs of a pick-up in the number of expatriates in 2009. Michael Klibaner, head of Research for Jones Lang LaSalle Shanghai noted: “Rents stopped declining as more landlords took apartments off the leasing market and put them into the hot sales market.”

Investment

Increased market activity drives up capital values. After relatively few office acquisitions in the past two quarters, multiple sizable transactions took place in 3Q09.  The largest in the Puxi submarket was SOHO China’s RMB 2.45 billion acquisition of The Exchange from a real estate fund managed by Morgan Stanley.  The building, renamed The Exchange-SOHO, has already changed hands several times in the past and it is widely expected that SOHO China will begin to sell the building through strata-title sale in the near future. The first en-bloc purchase by a foreign investor in 2009 occurred this quarter with Capital Strategic Investment (CSI) of Hong Kong spending RMB 480 million for the 11,000 sqm (GFA) In Point shopping centre at the corner of West Nanjing Road and Wujiang Road.  “Due to low vacancy rates and the potential for growth in rents, prime retail projects are highly sought after by both foreign and domestic investors. As a result, the bidding process for the limited number of prime retail projects for sale is becoming more competitive, compressing yields and increasing capital values.” Noted Greg Hyland, head of Investment for Jones Lang LaSalle Shanghai. 

Despite high vacancies and future supply concerns, average yields for the office sector also compressed this quarter due to the sudden pick-up in owner-occupier investment demand, especially in Lujiazui. As demonstrated through these acquisitions domestic players still are the most active purchasers of office space as most foreign investors focus on other real estate sectors within the city. Several transactions also occurred this quarter in the residential sector. One example includes Morgan Stanley’s sale of Shama Xujiahui to a local developer for RMB 780 million.

Industrial

Logistics

Domestic distribution continues to fuel demand.

Domestic distribution continued to play a growing role in the Shanghai logistics market as the city continued to support double digit retail sales growth of 14.6% y-o-y in August.  Meanwhile, import and export volumes continued to decline in August at the high rates of 23% and 13% y-o-y, respectively.  As a result, quality non-bonded space continues to be highly sought after, allowing rents to remain stable, while rents for bonded space continue to fall. The effect on the overall market average rent was limited, remaining flat at RMB 0.96 per sqm per day.  The overall market is also anticipated to remain tight for the remainder of the year as upcoming space to be delivered through year-end is mostly pre-committed.

Business Parks

Market remains stable. Overall, the business park market remained relatively stable this quarter with average rents hovering around RMB 3.0 per sqm per day. While the Puxi market was rather quiet, the Zhangjiang and Jinqiao submarkets were particularly active with small domestic IT firms being the main driver of demand.  While MNCs are still actively exploring expansion and relocation possibilities in business parks, inquires from such domestic firms for business park space is a rising trend. In terms of future supply, the next large business park project set to reach completion is IBP Science Park plot number 6 in 4Q09 with a GFA of 76,832 sqm. During 1H10, three projects will open across the popular areas of Caohejing, Jinqiao and Zhangjiang adding 154,977 sqm, 24,000 sqm and 65,000 sqm, respectively.

Manufacturing

MNCs look to expand production to meet domestic needs. During the quarter, an increasing number of multinational firms have started to plan new manufacturing facility projects. “Several industries such as fine chemicals, FMCG and food & beverage are particularly active due to the growing demand for their products in the domestic market.” Noted Stuart Ross, head of Industrial for Jones Lang LaSalle China.  For instance, Bostik held a ground breaking ceremony for a new plant in Changshu, Jiangsu Province with a total planned investment of USD 48 million. Upon completion this factory will be the company’s largest in the world. Bostik is a subsidiary of Fortune Global 500 company Total and one of the world’s leading adhesive and sealant companies. Meanwhile, investors remained interested in acquiring manufacturing facilities with high occupancy rates and stable tenants around the Yangtze River Delta. However, no large acquisitions occurred during the quarter.