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According to Jones Lang LaSalle's second quarter Shanghai property review
In the Grade A office market, rents rose to RMB 9.0 per sqm per day, an increase of 1.4% q-o-q. “Rental growth was driven by the Pudong submarket, where office supply is constricted and demand from domestic tenants continued to improve,” commented Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai. “In Puxi, new leasing activity was concentrated in upcoming projects, while bargaining power began to erode for landlords in existing office buildings, leading to flat rents.” In the Shanghai retail market, leasing activity remained strong, pushing up ground floor rents across the city. Government policy easing helped to fuel a mild recovery in the residential market, as first-time home buyers returned to the market. Discounting in the high-end also led to improved sales volumes in 2Q12. Meanwhile, in the investment market, demand for office assets, particularly from domestic owner-occupiers remained robust and drove a rebound in transaction volume. In the non-bonded logistics market, leasing demand has begun to shift towards the Pudong airport area in the east as warehouse space in West Shanghai remains fully occupied. Office
Leasing demand remains weakened; new projects outperform the market. Tenant leasing decisions continued to be impacted by economic uncertainty, leading to subdued demand in the overall market and fewer new enquiries for office space. However, in upcoming buildings in the Puxi CBD, demand was strong. Jing An Kerry Center Tower 3, for example, is now more than 80% pre-committed one quarter prior to completion driven by expansion from MNCs. Cost savings requirements have also led to increased demand and strong net take-up in decentralised and non-core areas of Puxi. In Pudong, domestic tenants from the financial sector were the main driver of demand, with MNC financial institutions remaining largely inactive. Fu Peng Investment, for example, leased one whole floor in DBS Bank Tower (2,700 sqm), expanding and upgrading from a Grade B building.
New decentralised supply outweighs new CBD supply. Two new buildings, SML Center (43,867 sqm) in Puxi and Oriental Financial Plaza (85,000 sqm) in Pudong reached completion this quarter. Decentralised areas continued to see a large volume of new supply, with five new buildings delivered in decentralised Puxi: CITIC Plaza Shen Hong, Greenland Center Phase I, Pujiang Prime, Capitaland Hongkou Plaza and Capitaland Minhang Plaza. Year to date, decentralised areas have seen approximately 375,000 sqm of new supply, more than twice the amount of new supply in CBD areas.
Rents have evened out in Puxi, growth continues in supply-constrained Lujiazui. In light of weakened leasing demand, rents in the Puxi submarket held flat this quarter, increasing only slightly by 0.9% to RMB 9.2 per sqm per day for the Grade A market, but showing no growth in the Premium Grade A market. In Pudong, landlords have remained more confident due to the tight supply environment and stable demand from domestic companies, and rents grew by 1.9% q-o-q to reach RMB 8.7 per sqm per day. Premium Grade A rents in Pudong outperformed the overall market, rising by 3.0% as the market vacancy rate in Lujiazui fell to 4.9%. “In the second half of the year, rents in Puxi will remain under pressure from new supply and the large volume of relatively inexpensive decentralised office space, while Pudong rents will continue to grow at a moderate pace as space in Lujiazui remains very tight,” noted Anny Zhang, Head of Pudong Markets for Jones Lang LaSalle Shanghai. “However, we expect that stimulus measures will have a positive effect boosting demand, and that companies which have put off expansion plans will once again resume their leasing strategies.”
RetailLeasing activity strong, ground floor rents continue to trend upwards. “Leasing activity remained strong this quarter due to an optimistic outlook for retail markets in Shanghai and Greater China, underpinned by steady growth in retail sales and an expanding urban middle class,” noted Eugene Tang, Head of Retail for Jones Lang LaSalle greater China. For example, Marks & Spencer opened its largest store in China (4,200 sqm) in Golden Bell Plaza on Huaihai Rd. while Ashley, an American home products brand, made its debut in China by opening a 3,300 sqm store in Zhongshan Park. “As leasing demand continued to strengthen this quarter, average ground floor base rents for prime retail grew by 1.2% q-o-q on a like-for-like basis to RMB 47.1 psm per day,” said Eugene. As retail sales continue to grow in decentralised markets, many retailers have accelerated expansion plans into decentralised Shanghai, tapping into the large consumer population living outside of the city centre. WE, for example, chose to open two new decentralised locations in Sunny Days City and Hongkou Cloud 9 after opening one flagship store in 2011 on East Nanjing Rd. As a result of strengthening demand, rents in the decentralised market increased by 1.5% q-o-q to RMB 18.9 psm per day. New supply delivered with strong pre-commitment. In the prime market, Yifeng House (29,026 sqm) was completed this quarter. Located along the Bund, the high-end project has signed luxury brands Bottega Veneta, Gucci, and Valentino. In the decentralised market, Sunny Days City (90,000 sqm) was opened to the public with near 100% commitment and anchor tenants including Carrefour, Gap, Uniqlo and H&M. The fourth Wanda Plaza (170,000 sqm) in Shanghai was completed in Baoshan District. Baoshan Wanda features a Wanda Department Store, KTV and cinema in line with Wanda’s typical tenant mix. This project will help to satisfy the high demand for shopping options in the densely populated northern region of Shanghai.ResidentialEasing monetary policy fuels a mild recovery in Shanghai’s housing market. The Central government continued to ease monetary policy in 2Q12 by cutting the required reserved ratio and benchmark lending rate in response to weaker-than-expected economic data this quarter. “Coupled with more reasonable pricing from developers, the loosening monetary policies helped fuel a mild recovery in buying sentiment in the residential market,” commented Joe Zhou, Head of Research for Jones Lang LaSalle Shanghai. After a dip in April, sales volumes of commodity housing in the primary market witnessed a strong rebound in May and June, up 32% m-o-m and 27% m-o-m respectively, as first-time home buyers continue to become more active in the market. In the high-end segment, sales volume rose from 237 units in 1Q12 to 558 units in 2Q12 as affluent buyers made purchases in several projects offering significant discounts in emerging high-end residential areas. The most notable was the Xuhui riverfront where Shanghai Bay sold 108 units this quarter and Greenland Hysun unloaded 124 residential apartments along with 82 units of serviced apartments. Shanghai Arch, developed by SHKP on the Pudong riverfront, sold its first 38 units this quarter after launching in March.Three new high end projects launch sales in 2Q12. Xuhui Top of City, developed by Zhongkai Group, launched its first batch of 231 units in June with an average asking price of RMB 75,000 per sqm. In Xuhui, Greenland Hysun added another 144 units to the market in May. Ocean One on the Pudong riverfront added another 63 units for sale in June after its first sales launch in late 2009. Demand from expatriates drives up high end apartment rents. “In the high-end leasing market, demand remained strong in 2Q12 as MNCs in several industries, including automotive, retail and pharmaceutical continued to deploy expatriates to Shanghai to facilitate their business expansions,” added Joe. As a result, the average vacancy rate for serviced apartments fell to 8.8% in 2Q12. One new serviced apartment project, ifc Residence developed by SHKP, opened to the public this quarter with 296 units available for lease. Strong demand coupled with low vacancies in existing serviced apartment projects strengthened landlords’ confidence, pushing up rents by 2.6% q-o-q.InvestmentTransaction volume rebounds, boosted by demand for office assets. “Despite high costs and persistent difficulties obtaining financing, this quarter the investment market saw a strong rebound in transaction volumes as demand remains robust for office and retail assets,” noted Alan Li, Head of Investment for Jones Lang LaSalle Shanghai. “Owner-occupiers were especially active pursuing upcoming office projects in Pudong.” For example, one building in the future development Pudong Financial Plaza was bought by Alibaba Group for approximately RMB 64,000 per sqm, or more than RMB 3 billion in total. In the retail market, two en-bloc transactions were closed this quarter. A Shijiazhuang-based company acquired Atlantic Department Store (15,000 sqm) in Wujiaochang for RMB 360 million or RMB 24,000 per sqm. The retail podium of Shanghai Rich Gate was also sold for RMB 1.075 billion or RMB 95,000 per sqm. While demand for retail assets remained strong, the office market has remained the focus for most investors due to a lack of tradable assets available in the market. The second quarter also saw Shanghai’s first en-bloc logistics transaction since 2008 in Lingang. Goodman purchased the OceanBlue Lingang Logistics Center from Maersk, acquiring 57,000 of non-bonded space which it will then lease back to Maersk for the next 10 years. Overall, Shanghai saw more than RMB 11 billion in en-bloc commericial real estate transactions and more than RMB 7 billion in office transactions in the second quarter. We expect that volumes may continue to accelerate should debt financing become more widely available or less expensive. As rental growth slowed in the office market, yields decompressed slightly for the second consecutive quarter, while yields have remained flat for retail assets.
Logistics West Shanghai logistics space remains fully occupied. “In the non-bonded market, West Shanghai remained fully occupied for the sixth consecutive quarter. Facilities in the western part of the municipality remained in high demand from tenants in the e-commerce, manufacturing, and consumer goods industries,” commented Stuart Ross, Head of Industrial for Jones Lang LaSalle China. For example, domestic appliance maker Haier pre-leased 40,000 sqm in the upcoming Blogis Songjiang Phase 2 project. Projects launching in West Shanghai during the past year have all been fully pre-leased upon completion. There were no new completions this quarter as the 80,000 sqm Blogis Park Songjiang Phase 2 slipped into early 3Q12, while the bonded market saw no new supply in 2Q12 for the fourteenth consecutive quarter, in light of limited demand for bonded warehouse space.Leasing demand spills over from West Shanghai to new areas. Low vacancy in West Shanghai has driven other potential tenants to areas where space is still available, including neighbouring cities like Jiaxing, Taicang, and Kunshan to the West and Pudong to the East. Enquiry levels continued to rise in the Pudong Airport (PVG) area, which attracts both logistics firms seeking to sublease space to end users as well as overflow demand from West Shanghai. Johnson & Johnson, for example, pre-leased 20,000 sqm of space in the upcoming Goodman Pudong International Airport Logistics Park. Tenants who cannot afford the airport area’s high rents also expressed interest in Pudong’s Lingang district, whose remote location has traditionally held vacancies high and rents low. As most major leases this quarter were pre-leasing deals in future projects, the overall non-bonded vacancy rate in existing stock edged down only slightly, from 5.9% to 5.7%, due to activity in the Pudong airport area.Strong demand fuels landlord confidence in non-bonded warehouses. Average non-bonded rents increased 4.0% to RMB 1.18 per sqm per day as landlords raised rental expectations due to a larger volume of enquiries this quarter. Projects in West Shanghai, PVG, and Fengxian contributed the most to rental growth as supply remained limited and demand was strong. Bonded rents remained flat at RMB 1.06 per sqm per day. Less vacant space and stronger demand allowed Waigaoqiao to maintain significantly higher rents than Lingang. Business ParksLarge pipeline of new supply and strong preleasing activities in business park market. While financial companies have ceased their expansion into business parks this quarter, demand has remained strong from I.T. companies and the long term trend to relocate and expand into business parks and set up new R&D facilities has remained strong. Over the next two quarters Zhangjiang Hi-Tech Park in Pudong will see four new projects completed with a combined 320,000 sqm of new space. Despite this wave of new supply, precommitment rates have reached about 50% for these four projects, revealing the resilient demand for high quality business park space. New supply in the market is also beginning to cater to higher value-add services. In Anting, for example, a traditional automobile manufacturing hub in Jiading District, office space is now being added to support the traditional R&D and manufacturing facilities. J Tower, a 16,000 sqm office tower was completed this quarter to support MNC and domestic automotive firms with manufacturing capacity in the area. Two new R&D facilities, with a total of 300,000 sqm will also be completed in Anting in 2013.ManufacturingEconomic slowdown leads to longer transaction time for manufacturing facilities. New enquiries for manufacturing space declined in the second quarter as manufacturers have become more conservative about investing in new facilities. Although the review period for new manufacturing facilities has become longer, projects are unlikely to be cancelled and demand from certain core industries remains strong. Automotive, biopharmaceutical and performance materials industries have all remained active this quarter leasing and setting up new manufacturing facilities. Novelis, for example, set up a USD 100 million facility in Changzhou to produce aluminium products for the assembly of vehicles for a recent JV set up between Jaguar Land Rover and Chery Automotive. Meanwhile, Boehringer Ingelheim set up a new facility in Taizhou, Jiangsu to produce animal health products. While overall demand began to slow over the quarter, demand for higher quality workshop space in the Yangtze River Delta has grown stronger, with new developers entering the market to satisfy this demand. For example, in Wujiang Development Zone in Jiangsu, Goodman will introduce high quality workshop space into a new facility in addition to logistics space, with about 50% of space going to each use. The government has begun to support this new allocation of industrial land as demand has grown for this higher value-add industry and it allows for development areas to attract big name MNC companies that still find it difficult to develop such manufacturing facilities themselves.
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