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News Release

Shanghai

Office demand strengthens; policy tightening slows residential sales

According to Jones Lang LaSalle Second Quarter Property Review


Increased demand from domestic and foreign companies has strengthened the rental rebound in Shanghai’s office market, with rents up a further 4.9% in Pudong and 3.2% in Puxi.  “We see a significant number of Puxi based MNCs expanding their operations and believe that this trend will continue fuelling a rebound in the district,” noted Anthony Couse, managing director of Jones Lang LaSalle Shanghai. Demand from retailers for prime locations pushed the prime retail vacancy rate under 1.0%. Measures taken by the government to tighten residential market have considerably reduced both mass-market and luxury residential transaction volumes.  The en-bloc investment market slowed down as investors became more cautious about the outlook for China’s growth. Demand in Shanghai’s bonded logistics market continued to recover, with rents rising for the first time in six quarters.

Office

Rents continue to rise across the city.  Increased demand boosted landlords’ pricing power in Shanghai, with average rents across the city continuing to rise to RMB 6.6 per sqm per day, a 3.9% q-o-q increase. In Pudong, thanks to sustained strong demand and high occupancy levels in many buildings, the average rent rose to RMB 6.7 per sqm per day in 2Q10, a 4.9% q-o-q increase. “In Puxi, average rents increased by 3.2% q-o-q to RMB 6.5 per sqm per day on the back of growing interest from MNC tenants. The last quarter in which Puxi had a rental increase of more than 3% was over two years ago, in 1Q08,” noted Mr Couse. Premium Grade A offices on both sides of the river continued to outperform the regular Grade A market, with and 6.9% q-o-q and a 3.8% q-o-q increases recorded in Pudong and Puxi, respectively.

Demand from MNCs strengthens in Puxi and Pudong.  Leasing momentum from the prior two quarters continued into 2Q10, as demand stayed strong and occupancy levels in new buildings continued to rise. In Pudong, besides the sustained robust demand from domestic companies, foreign financial companies and those from other parts of Greater China became more active in the leasing market. UOB leased 5,000 sqm in Lujiazui Information Center and obtained the signage rights to the building. A Taiwanese bank took 1,300 sqm in Aurora Plaza to accommodate a branch.  Demand from mainland companies resulted in large deals such as a major domestic insurance company taking 2,700 sqm in Jin Mao Tower.  21st Century Tower in Pudong reached completion this quarter and is 100% owner occupied, but some owners may lease space.

Puxi’s recovery accelerated with upgrading demand appearing and more MNCs starting to expand. For example, a foreign pharmaceutical company pre-leased approximately 6,000 sqm in the newly-completed Wheelock Square.  The tenant will upgrade from a Grade B office in Puxi directly to Premium Grade A. Wheelock Square was the first new completion in Puxi in almost two years and reached 25% commitment by quarter-end and interest in the project was strong. In the decentralised Grade A market, recently-built buildings such as the InterContinental Centre and International Capital Plaza also benefited from tenants upgrading to higher-quality office space. These two buildings have achieved approximately 35% and 60% commitment rates, respectively.

Retail

Sustained demand from international brands.  Demand in the Shanghai retail market remained heated in 2Q10. More retailers such as Louis Vuitton, Zegna, Gucci, Dior, Tiffany, Hermes and Prada opened in the emerging luxury shopping destinations of Huaihai Road, the Bund and Shanghai ifc Mall. Other retailers actively followed in their steps. For instance, international fast fashion giant Inditex Group, opened multiple new locations for its brands (ZARA, Bershka, Stradivarius, Pull and Bear) in newly-delivered projects. The German electronics retailer Media Markt secured more than 10,000 sqm for their first flagship store on Huaihai Road. The eye-catching Uniqlo flagship store on Nanjing West Road made its debut in mid-May, enjoying long lines of customers waiting to enter for the first several days. Even with this sustained demand for prime retail space, average ground floor rents for Shanghai’s prime retail market were stable in 2Q10 at RMB 49.5 psm per day.

Retail vacancy rate continues to fall.  The vacancy rate decreased further to only 0.8%, which was a decline of 110 basis points compared with the previous quarter. This decline can be attributed to the increasing occupancy in Huaihai Road properties such as Joffre 688 and Infiniti.  No new prime retail project was delivered other than the Tom Lee Building, which accommodates the Uniqlo flagship store.  The refurbishment of the three prime properties of Hong Kong Plaza, Lippo Plaza and Yu Fashion Garden reached completion, and Shanghai ifc Mall had a soft-opening this quarter. Several brands started operating in Shanghai ifc Mall in April and May, including Louis Vuitton, Cartier, Dior and Tiffany, but the grand opening is scheduled for the fourth quarter. In Hong Kong Plaza and Lippo Plaza, a few brands have opened, including Louis Vuitton, Ermenegildo Zegna, Coach, Tiffany, Cartier, Chaumet and Mannings, with more expected in the following months. Yu Fashion Garden, previously known as the Dragon Gate Mall, is located in the Yu Garden retail precinct and has been repositioned as a trendy shopping destination. International brands such as Marks & Spencer, ZARA, H&M, Pull & Bear and Bershka have all committed to the project.

Residential

Tightening policies slow residential sales.  The central government introduced further tightening measures to cool the residential market in mid-April, ending the rebound in home sales that began in March.  Primary sales volumes fell to near-record lows in May and June. The cumulative effect of this phase of government tightening measures has brought Q2 transaction volumes down 62.3% from one year ago. Sales volumes for commodity housing, excluding low income housing, were down 71.8% from last year and May was the lowest ever since detailed records began in September 2005. Thanks to an uptick in sales at the end of the month, sales of commodity housing in June were up 31.9% from May. Even as the market slipped back into “wait and see” mode in April and May, most developers did not lower prices. Instead, the government’s CREIS index showed that prices continued to rise slowly, up by 1.7% m-o-m in April and 1.0% m-o-m in May.  Developers in Shanghai who had enjoyed strong sales in 2009 were not yet under strong pressure to cut prices in order to increase transaction volumes. “Price levels are expected to fall modestly over the next several months, possibly by 15 – 20%, as developers are expected to seek stronger cash flow and reduce prices in exchange for greater volume. Sales are also expected to rebound as the housing market enters the traditional high season in September and October as buyers, especially first time buyers, return to the market.” Noted Michael Klibaner, head of Research for Jones Lang LaSalle China.

Luxury market remains subdued.  Reacting to the regulatory changes, buyers mostly chose to stay on the sidelines to gauge the impact of the new measures on housing prices. Ongoing speculation over the rollout of a real estate tax on residential properties led to further deterioration in market sentiment. As a result, the sales market virtually grounded to a halt in May and June. For example, 1 Xinhua Lu and Bound of Bund both registered no transactions in 2Q10. There was one luxury project that launched pre-sales.  Hong Kong New World put 309 units of Dynasty on the Bund onto the market in April, and sold only 33 units at an average price of RMB 59,888 per sqm by the end of May. With only limited new supply, sellers continued to be reluctant to lower prices to increase the volume of sales. Capital values of luxury apartments were largely unchanged at RMB 55,213 per sqm on average in 2Q10. In the luxury rental market, a surge in leasing demand from visitors to the Expo led to a sharp 3.9 percentage point decline in vacancies despite the opening of two new serviced apartment projects, The Ascott on Huaihai Road and Oakwood Residence. Rental growth for luxury apartments accelerated from last quarter’s 1.0% q-o-q growth to 3.5% q-o-q in 2Q10.

Investment

Investors show more caution.  Preliminary figures indicate that the total sales value of en-bloc transactions reached RMB 22.7 billion year-to-date. Though both the number and total size of the deals were down from the first quarter, there were still some notable transactions that closed in the second quarter. Platinum, a 33,954 sqm office building located in Luwan District, was sold by SEB Immobilien to CSI Properties Limited, formerly known as Capital Strategic Investment, for RMB 1.85 billion at the start of the quarter. Hang Seng Bank purchased approximately 7,000 sqm of office and retail space from HSBC for self-use in HSBC Tower.  Hang Seng Bank also obtained the naming and signage rights to the building, all for a total of RMB 510 million.  In the residential investment market, a large transaction closed despite the slowdown in residential sales. Belgravia Place, a luxury serviced apartment project located in Changning District, was sold by Grosvenor and SEB Asset Management to Shanghai Huayi Technology Investment for an undisclosed price. Grosvenor and SEB had purchased Belgravia Place in July 2008.  Investors have shown more caution toward making acquisitions, particularly in the last month, as a result of the European debt crisis and the April government measures to cool residential real estate. Investors are closely monitoring rental growth, interest rates, and lending liquidity. After a period of rapid yield compression in late 2009, yields have remained largely stable in all property sectors throughout the first half of the year.

Industrial

Logistics

Bonded logistics market continues recovery.  The export market in Shanghai has recovered to its pre-crisis levels. Combined export values from January to April were only 1.1% lower than in the same time period in 2008 while port throughput was 3.4% higher than in 2008. Exports to ASEAN countries contributed the most to the recovery with export values 59% higher than in 2008, while exports to the EU, US and Japan were still lower than in 2008. As a result, the disparity in the performance of the Waigaoqiao and Lingang warehouse markets has become more apparent.  The Waigaoqiao market has been strong because it mainly services shipping lines through Southeast Asian countries while the Yangshan market remained weak because it is a container hub port for European and US lines.  “After falling for six consecutive quarters, bonded rents in Shanghai grew in 2Q10 by 1.6% q-o-q. The growth was driven by increasing rents in Waigaoqiao. Non-bonded rents rose for the third consecutive quarter, up 1.1% q-o-q on a like-for-like basis.

Business Parks

Continued focus on consolidation.  Companies in China continue to actively consider consolidation strategies in business park areas. Companies in industries like pharmaceuticals and medical devices which have a strong research & development (R&D) functions are particularly attracted to a consolidation strategy. Many companies are now considering linking the R&D staff with their manufacturing unit or with their sales and headquarters in business park facilities.  As an example of the importance of consolidated facilities, Jones Lang LaSalle recently completed a USD 140 million transaction where UTStarcom sold its facility in Hangzhou to the Zhongnan Group of Companies in the largest-ever business park transaction in China. This consolidated facility includes a manufacturing plant, R&D centres and administrative offices. UTStarcom leased back a portion of the space to maintain its operations in Hangzhou. Sufficient space for consolidation in Shanghai’s established business parks is becoming scarce, which could delay companies’ development plans as they look for sites in newer business parks.

Manufacturing

More site selection leads to strengthening demand.  Activity in the manufacturing sector continues to rebound after slower demand in 2008 and 2009. While many deals are still under negotiation, companies are entering the site selection process as an initial step in their expansion and growth plans.  As their confidence rises, companies are looking for ways to speed up the development timeline so that they can begin construction and operation as soon as possible. Many companies have looked to reduce the time spent on site selection by half, and some have even been looking at purchasing and altering existing facilities. This trend is particularly true for companies such as technology companies which place an emphasis on time-to-market. The increased demand is evident both in the greater Shanghai area and throughout the Yangtze River Delta.