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News Release

Shanghai

Pudong Rents Up and Real Estate Investment Finished Strong in 2009

According to Jones Lang LaSalle Fourth Quarter Property Review


As rents in the Shanghai office market bottomed out, Pudong posted an increase in rents for the first time since mid 2008.  Pudong led the way with strong leasing and sales demand, and included one of the largest leasing deals in Shanghai’s office market history in the Shanghai World Financial Centre. “Effective rents in many Pudong buildings showed an increase in the fourth quarter,” noted Anthony Couse, managing director for Jones Lang LaSalle Shanghai. Robust demand from brands expanding ahead of the Expo continued to drive the retail market. Luxury residential sales cooled slightly, as buyers reacted to higher price levels. Shanghai’s investment market closed the year with a strong finish primarily among domestic en-bloc investors. The logistics market turned the corner, with rents up in the non-bonded sector and levelling off in the bonded sector.

Office

Rents in Pudong up by 1.4% q-o-q.   On the back of strong leasing demand, rents in Pudong increased by 1.4% q-o-q and is the first rental increase in the Pudong market since 2Q08 and takes the average up to RMB 6.1 per sqm per day. As occupancy improved further in Pudong’s new buildings, such as BEA Finance Centre, Mirae Asset Tower, and China Fortune Tower, landlords started to ask for higher rents and reduced rent free periods.  Effective rents, in many cases, were slightly up.  In Puxi, the pace of rental decline slowed to only 1.2% q-o-q. However, the Premium Grade A market in Puxi outperformed, posting a slight gain of 1.7% q-o-q.

Pudong leads the way with strong leasing and sales demand. The Pudong market experienced robust demand from consolidation and upgrading, which pushed the market vacancy rate down by 4.5 percentage points to 13.9% in spite of the completion of a new building, GC Tower. The marquee transaction was the leasing of 27,000 sqm in Shanghai World Financial Centre in Lujiazui by Ernst & Young to consolidate its three office premises in Puxi. The deal was one of the largest leasing transactions in the history of the Shanghai office market, and helped push the commitment rate of SWFC to a new high of around 70%. In addition, other recently-constructed Pudong buildings continued to fill up steadily, with the majority now exceeding an 80% commitment rate. The recent sale of CITIC Shipyard Tower II to another state owned bank after the purchase of Agricultural Bank of China shows continued strong demand from end-user buyers and reduces the supply in the leasing market. In Puxi, landlords had more enquiries and were more confident as vacancies remained low.   This was particularly true in the Premium Grade A office sector with the delayed completion of Wheelock Square and International Commerce Centre Phase 1 which remain under construction.  As such, vacant premium space has been filled quickly.  Domestic companies continued to be the biggest driver of demand in the Pudong market, while Puxi was more dependent on foreign multinational corporations.

Outlook for 2010: rising rents in Pudong.  Even with several new buildings planned to be completed by end-2010 in Pudong, rents are expected to rise up to 15 percent by year end.  Purchases of newly completed buildings by domestic owner occupiers, particularly those in highly visible areas, will drive a growing share of take-up in the Pudong market and limit the rise in the vacancy rate. In Puxi, the landlords of low-vacancy Premium Grade A buildings will maintain strong pricing power until the delivery of Wheelock Square and Henderson Metropolitan by mid 2010.  Takeup in the Puxi market has improved overall based on strong optimism among MNCs for their businesses in China.

Retail

Robust demand from retailers as Expo approaches. In 4Q09, demand for retail space in Shanghai was on the rise as many retailers were either opening new stores or looking for new locations. Faster economic growth drove demand for space among retailers, and Expo 2010 expedited decision making.   Examples include Chanel opening in the Peninsula Hotel on 25 November with a 480 sqm store. In Plaza 66, Dior plans to expand into a large store estimated at more than 1,000 sqm.  Dolce & Gabbana will open a new duplex store in the same property, and its sister brand D&G will open a shop on the ground level of Shanghai Times Square. Bauhaus will enter Raffles City on the 2nd floor, and its affiliated brand Tough will enter Super Brand Mall. Two Huaihai Road properties, Lippo Plaza and Hong Kong Plaza, made further progress with their upgrades.  Louis Vuitton and Ermenegildo Zegna started internal fit-out in Lippo Plaza, and Coach committed to open a 600 sqm shop in Hong Kong Plaza which will be its largest store in China. Tiffany, Apple, Cartier, and Longchamp will also enter Hong Kong Plaza.  Meanwhile, Hermes will open in a multi-storey old building nearby. All of these debuts are expected before Expo begins.

New projects finally hit the market; rents are up. Two new prime projects were delivered during the quarter, adding a total of 35,000 sqm GFA to the market.  Mall 818, located on Nanjing West Road, opened with a trendy theme targeting young, mass market clientele. Retailers which will open in the building include Levi’s, Dickies, Watsons, OVS Industry, and Ochirly.  Near the East Nanjing Road pedestrian street, a newly renovated building called Bund Plaza opened for business.  Average rents for ground floor space in prime downtown retail projects climbed to RMB 48.9 per sqm per day, a 3.5% q-o-q increase.  Nearly all prime retail precincts posted an increase in rents, among which, Nanjing West Road showed the largest rise, at 7.4% q-o-q.  The market vacancy rate stayed low, rising only 0.5 percentage points to 7%. The vacancy rate increase is solely attributed to Huaihai Road as all other precincts remained near zero vacancy. 

Outlook remains bright. With improving economic conditions and the Expo, the short-term Shanghai retail market outlook is strong. With increasingly more demand for space in the market, retailers will face more competition in securing space in well-established prime properties. Landlords of new projects will also see steady leasing progress in the coming months. Rents are expected to increase further and vacancy will remain low.

Residential

Sales volumes remained consistent.  While higher prices have clearly impacted affordability in the Shanghai residential market, sales volumes in Shanghai’s primary market overall remained consistently high in the fourth quarter and showed no signs of retreat. A total of 7.03 million sqm were sold, representing a marginal decline of 1.7% q-o-q. On the back of strong sales, prices continued to rise unabated during the first two months of the quarter, as shown by the CREIS Index released by the government.  After dropping from 7.5% growth m-o-m in August down to a rate of 4.1% and 4.5% in September and October, the index was back up 6.1% m-o-m in November.

No bubble.  Demand was exceptionally strong both because of good owner occupier demand, and from buyers who wanted to get in before government policy tightened in the New Year. Developers have been holding back new supply in order to be able to offer inventory at higher prices.  However, just because prices have gone up, does not mean that the market is at the type of extreme valuations that typify a bubble. There are a large number of policy tools available to the government to control further price increases.  Overall, the policy environment will evolve to keep prices from growing too quickly. We expect to see policies targeted at reducing the aggressiveness of investors while preserving policies that improve the affordability of housing for first time home buyers and “upgraders,” especially in smaller cities. Recently introduced regulatory measures include a longer holding period to qualify for an exemption from business tax, higher down payments required on second home purchases, and on the supply side, higher down payments required for land purchases. These indicate macro policies are leaning towards tightening. However, we expect that any new demand-side measures introduced will reflect a more nuanced approach and will preserve affordability while curbing speculation. The government is making efforts to increase the supply of apartments in an effort to contain future price increases. To achieve this, land auctions have been increased and many of these sales have additional conditions attached to them requiring developers to begin construction within one year and to begin pre-sales of apartments within 10 days of being granted the license to do so.

Luxury residential sales cool. In contrast to the mass market, the fourth quarter witnessed a cool-down in luxury apartment sales. Most luxury projects recorded fewer sales than they did in the third quarter, and in some cases, much fewer. However, newly launched projects were still well received by the market and sold quickly. For instance, the Bound of the Bund, developed by China Resources Land in Huangpu District, sold 78 units in 4Q09 at an average price of RMB 68,703 per sqm after 183 units were launched in October.  Similarly, Ocean One, developed by COFCO in Pudong, sold 66 units at an average of RMB 110,060 per sqm after 67 units were put onto the market for sale in November. In addition to these two new launches, two serviced apartment projects were put onto the market for strata title sale in 4Q09: City Apartments in Luwan District, and Belgravia Place in Changing District. Despite a slowdown in sales, capital values of luxury apartments in Shanghai continued to rise slightly in 4Q09, reaching an average value of RMB 55,087 per sqm, up 1.54% q-o-q.  This represented a slowdown from the rapid price growth witnessed in the second and third quarters of the year. 

Moderate Optimism for Luxury Residential in 2010:  The lower luxury apartment sales volume in 4Q09 demonstrated that buyers recognize that prices have increased too far, too fast.  Shanghai will remain a top destination for wealthy individuals (and newly wealthy individuals) in China to invest their cash but sales volumes will remain lower than the mid-2009 peak.  At the same time, demand will be suppressed by higher purchase and financing costs. Some demand for luxury units will come from sophisticated buyers who are able to arbitrage the cheapest mortgage rates in USD, HKD, NTD, and RMB.  But, buyers in general will see less incentive to rush into the market. The growth in prices will be slow in 2010. In contrast, the luxury leasing market is expected to pick up as economic growth accelerates and expatriate deployments begin to rise; rents will rise in 2010.

Investment

Acquisition totals rise to 25.6 billion in 2009, up 42% y-o-y.  In Shanghai, the total value of major real estate acquisition deals in 2009 reached 25.6 billion RMB, up 42% from 2008.  The investment market in 2009 was dominated by domestic buyers, owner occupiers, and the office sector.  Domestic buyers represented 88% of the transacted value in 2009 and the majority purchased to occupy the space for their own offices. In previous years, owner-occupiers, such as state owned banks and corporations, rarely purchased whole buildings in Shanghai.  This trend rapidly changed by the third quarter and accelerated in the fourth quarter of the year. Purchases by owner occupiers represented half of the year’s total transacted value. Additionally, the majority of purchases were in the office sector in 2009.  Office building transactions comprised 79% of the total transacted value, far exceeding any other real estate sector. An example which illustrates all three trends is the sale of the first tower in the CITIC Shipyard project to Agricultural Bank of China.  Deals outside of the office sector were dominated by cash-rich investors.  Zhejiang’s Honglou Group purchased the Infiniti Mall from Morgan Stanley for an estimated RMB 1.42 billion during the fourth quarter. Residential investments were also popular and included the purchase of the Shanghai Racquet Club and Apartments from ING for RMB 990 million in 3Q09,  and Zhongfang Forrest Villas (57 units totalling 19,993 sqm) from Carlyle Group by Tian An China Investment. In 2009, there were a total of four major en-bloc residential transactions closed in Shanghai.

Foreign investors coming back to the market.  Foreign investors were notably absent from the Shanghai investment market in 2009, completing only one purchase – the InPoint shopping mall. Foreign money will come back to the market as investors continue to look for suitable opportunities. Six months ago, almost no foreign investors were interested in the office sector as rents fell rapidly and it was unclear when a rental recovery would occur.  By year end, as rents bottomed out, a wide range of foreign investors began to look at investment opportunities in the Shanghai office market again. Improving prospects for rental growth in both the Puxi and Pudong markets over the next several years will continue to buoy interest among foreign investors in the office sector.

2010 Outlook.  The start of the year will undoubtedly be active with a total of 6 to 7 billion RMB worth of transactions currently in progress and targeted for completion in the first half of 2010.  Beyond that, investors will be watching closely for policy shifts to cool the economy which may influence the en-bloc investment market. Investors will also be looking for a sustained recovery in demand over the course of the year in the office sector. We expect that investors will be alert for changes in the lending environment which could create liquidity risk. Investment activity from the major insurance companies is expected to pick up and provide additional exit opportunities for asset disposal. In 2010, we expect that the proportion of deals done by investors, rather than owner occupiers, will increase.  These investors will be both domestic and foreign.

Industrial

Logistics

Bonded logistics market is turning the corner; non-bonded is performing well.   Shanghai’s total value of exports declined more slowly in October and November than at any point in 3Q09 and China’s exports actually returned to growth in December, up 17.7% y-o-y. As a bottom in export volumes started to form, net absorption picked up in the bonded warehouse market to reach a total of 21,040 sqm for the quarter.This marked the highest level of net absorption seen since 2Q08 and is indicative of improving demand for bonded space. Leading the trend was Waigaoqiao, the most mature bonded market in the city. Two logistics firms, Mitex and Kerry EAS, leased 8,874 and 1,022 sqm, respectively, in Phoenix Waigaoqiao Bonded Logistics Park.  Additionally, the non-bonded market remained robust, and available space was taken up quickly. In AMB Shanghai Jiuting Logistics Centre, 7,427 sqm was leased to Yamato-Bus Logistics, a distribution venture established in August 2009, after only being on the market one quarter. Meanwhile, a newly completed project, Vailog Jiading Distribution Centre Phase I, was fully leased out to two tenants, DB Schenker and ABB. DB Schenker also pre-committed to another 6,000 sqm of space in the second phase of the project.  Rents were stable in 4Q09 for both the non-bonded and bonded markets. Supported by rising absorption, the average bonded rent fell by only 1.1% to RMB 0.92 per sqm per day. This is the lowest rate of decline since 3Q08, and is approaching a bottom in the market. In the non-bonded market, after remaining flat for several quarters, rents began to show signs of growth again, edging up by 1.0% to RMB 0.98 per sqm per day. To meet pent-up demand in the coming quarters, developers are expected to speed up construction on projects and resume announcing new developments.

Business Parks

First-ever sale of a mature business park. In the first-ever sale of a mature business park property, First Shanghai Center, a development in Zhangjiang High Tech Zone, was sold for an undisclosed sum during the fourth quarter.  LaSalle Investment Management purchased the property in 2006 and subsequently leased it.  The property, with a total GFA of approximately 20,300 sqm, was sold at a high occupancy rate to a subsidiary of the Zhangjiang Group.  The transaction was the first ever to involve a high occupancy business park property and represents the first complete investment cycle for a business park in China consisting of acquisition, leasing, and disposal. The deal also signifies Zhangjiang Group’s confidence in the long term outlook for the business park market. The asset disposal was assisted by the Jones Lang LaSalle business parks team in Shanghai.  The outlook is for an increase in acquisitions by both owner occupiers and investors in 2010.

Manufacturing

There is a growing number manufacturing build-to-suit agreements and asset disposals in Shanghai.  Two examples occurred in the fourth quarter.  Tetra Pak Processing System entered into a partial built-to-suit agreement with Kangqiao Industrial Park for a 24,000-sqm GFA lease for a mixed-use facility which will provide a combination of manufacturing, warehousing, and office functions.  Also in Shanghai, a major appliance manufacturer successfully disposed its 35,124 sqm plant on 23,530-sqm of land in Jinqiao.  The seller was able to complete the deal during challenging market conditions for industrial asset disposal.

China

Office market stabilizes in 4th quarter.  Across China rents in the office sector fell at a slower rate as leasing demand in Tier 1 cities was robust, driven largely by domestic companies and purchases by owner-occupiers.  Rents in Tier 2 cities also seem to be approaching the bottom of the market though net take up was slow in Grade A buildings in spite of demand from domestic companies.  Capital values were up in the office sector across China with strong investment activity in Tier 1 cities.  Looming supply remains a concern and will pressure rents in most Tier 1 and 2 cities, except Shanghai, where the aggressive absorption of space by domestic financial services companies is improving sentiment among landlords.

Retail remains strong.  The retail property market saw rents rise slightly across Tier 1 and 2 cities with strong demand from international brands keeping vacancy rates low.  Keen investor interest resulted in Capital Value increases in most cities.  Beijing remained the exception, where the vacancy rate rose slightly to 17.1% and rents continued to decline.  While the positive story was similar in both Tier 1 and 2 cities, the large supply pipeline in many Tier 2 cities is a cause for concern in the 2010 outlook.

Residential prices surge across China.  Capital Values were up strongly in the luxury residential market in most Tier 1 cities.  Beijing led the way with a 12% rise, followed by Shenzhen at 8.4%, Guangzhou at 6.1% and Shanghai lagged with luxury prices up only 1.5%.  Transaction volumes slowed from their peak levels earlier in 2009 but most cities saw increased secondary market activity as many owners tried to take profits before tighter regulations came into effect in 2010.  Rents in luxury apartments were flat in Tier 1 cities on weak expat demand but the outlook is for higher rents in 2010 as more expats are expected to be deployed by MNCs this year.  Tier 2 cities had similar performances with transaction volumes slowing but prices rising strongly.  Luxury prices in Tianjin were up 9%, in Chengdu up 8.6% and in Qingdao up 6%.  The outlook remains strong for Tier 2 cities in 2010.