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News Release


Rental Growth Slows in Office Market as Economic Outlook Affects Tenant Strategy; Retail Assets Attract Attention in Shanghai’s Investment Market

According to Jones Lang LaSalle's third quarter property review

In Shanghai’s Grade A office market, rents remained flat at RMB 9.0 per sqm per day. “Leasing demand has weakened as companies adjust for a slower economic forecast both in China and abroad,” commented Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai, “however, the limited supply in core-areas has allowed landlords to retain bargaining power and continue raising rents.” Rents continued to grow this quarter in the supply-constrained Lujiazui area, for example, while Puxi rents remained flat this quarter. In the retail market, international retailers continue to expand in the city, sustaining growth for ground-floor rents. First-time homebuyer demand remained healthy in the residential market, sustaining mass-market sales volumes. Thus far, the traditional strong season of September-October has been disappointing, however.  Meanwhile, in the investment market, transaction volume declined slightly as economic uncertainty impacts investors, although interest in quality assets, particularly from the retail sector, remains strong. In the non-bonded logistics market, the slowing export market led to weaker demand for warehouse space, although inquiries from retailers and consumer goods makers were high as China’ s retail sales growth slowed but remained positive.


Leasing demand for office space remains tied to economic outlook. New inquiries for office space in Puxi remained limited this quarter as most MNCs are hesitant to relocate or expand before confidence in the economy is restored. Demand from certain industries, such as retail, held up despite weaker growth forecasts. In Pudong, leasing activity picked up this quarter, driven by domestic tenants from finance and IT sectors upgrading into Grade A office space. Meanwhile, the decentralised market continues to see strong net absorption and attract tenants with large-scale expansion requirements. For example, a domestic internet company, Qi Fan, leased 7,000 sqm in the newly-completed Lujiazui Financial Service Plaza in decentralised Pudong.  “Large deals such as this show the increasing importance of decentralised office space in the Shanghai market,” noted Anny Zhang, Head of Pudong Markets for Jones Lang LaSalle Shanghai.

New projects continue to see healthy precommitment levels.  In Changning District in Puxi, GIFC Phase II and L’Avenue were completed with between 50-60% of space pre-leased in both projects. In Pudong, SOHO Century Plaza (44,000 sqm) was completed. In the decentralised market, four buildings were completed with a total of 206,796 sqm of office space: Lujiazui Finance Service Plaza, Longyu International Plaza, Guoson Center Tower 1, and Chamtime Corporate Avenue.

Rents flat in Puxi and up slightly in Pudong; Lujiazui sees consistent growth. Puxi rents remained flat for the third quarter, as vacancy remained low for the overall market but subdued demand and new supply in decentralised areas weakened landlord bargaining power. In Pudong, rents are continuing to rise but at a slower pace than previous quarters, while the rental trend has diverged in the Little Lujiazui and Zhuyuan submarkets due to supply factors. In Little Lujiazui, no new lettable supply has been delivered since 3Q11, and landlords remain confident, raising rents by around 3% this quarter. In Zhuyuan, on the other hand, new supply has contributed to lower rental expectations in existing projects. Rents in Premium Grade A buildings have outperformed the overall market, rising by 2.0% to RMB 10.9 per sqm per day.


Weaker economic outlook continues to weigh on investors. Activity in the investment market was relatively subdued in 3Q12 as investors anticipate a slower growth environment for China in the coming quarters. Preliminary data indicates that large-scale commercial real estate transaction volume slowed from RMB 12.7 billion in the second quarter to approximately RMB 7.0 billion in the third quarter. Capital values for office and retail assets have begun to flatten out as sellers are becoming more negotiable due to a less robust outlook for future cash flows.

Asian capital active in the market; demand for quality office and retail assets has not faded. “Despite a slowdown in overall demand, Asian capital remained very active in Shanghai’s investment market while European and American investors were relatively inactive,” noted Alan Li, Head of Investment for Jones Lang LaSalle Shanghai. “We have continued to see strong interest from Singapore and Hong Kong-based players.” For example, this quarter Jones Lang LaSalle acted on behalf of CITIC Capital to sell Waterfront Place, a decentralized Grade A office project, for RMB 850 million. The buyer was ARA Dragon Fund 1, part of ARA Asset Management. This deal highlights the increased attention being paid to Shanghai’s decentralized office market, where a large volume of new supply offers investors with opportunities outside of the traditional CBD market. Domestic investors have also maintained a keen interest in office assets. For instance, Jones Lang LaSalle also secured a domestic securities company to purchase approximately 15,000 sqm within Shanghai Poly Plaza in Pudong for approximately RMB 950 million.  In addition, Taiwan’s Cathay Financial Holdings purchased five floors of Oriental Financial Plaza in Lujiazui for RMB 679 million. A number of other deals in the market consisted of private money, small to medium deal size, and suburban locations.

Strong outlook for consumption makes retail assets attractive. Looking forward, low vacancy in the CBD areas of Pudong and Puxi and strong service sector growth are encouraging institutional investors to look at office and retail investment opportunities. Despite a slowdown in retail sales growth reported by several large retailers, we do not see any change in investor interest in retail assets. The China consumption growth story remains one of the best in the world. In fact, for the country as a whole, real retail sales were up 11.4% in the first eight months of 2012 compared to 11.3% growth over the same period last year, with lower nominal growth figures are due to lower inflation. In Shanghai, well-managed properties which monopolize their surrounding trade area are well-positioned to generate strong returns for their investors. It is also becoming evident that future government policy will favour consumption over investment as the government looks to commit to longer term structural reforms for the economy. This has the potential to boost consumption despite slower economic growth in the future. Finally, sustained demand from inter-Asian investors and self-use demand from Chinese corporates will continue to drive the investment market and prevent a significant decline in prices.


Retailer expansion has not slowed down in the third quarter. “Retailers have continued with expansion plans despite slowing retail sales growth in many properties in 1H12,” commented Eugene Tang, Head of Retail for Jones Lang LaSalle Greater China. “However, many retailers are now becoming more selective in choosing locations.” Key projects in prime locations remained sought-after by new entrants like Kate Spade which opened stores in Grand Gateway and Raffles City, while Tumi opened one location in Plaza 66 and a flagship store in Xintiandi. Meanwhile, Swedish fashion brand Bjorn Borg made its debut in Jiuguang department store and also announced to open a number of stores both in Shanghai and the rest of China. Although the turnover rents are seeing a slowdown in shopping malls, slower retail sales growth has not yet filtered down to significant change in ground floor base rents. The benchmark ground floor base rent figure for shopping centres on the open market grew by another 1.0% q-o-q on a like for like basis to RMB 47.9 per sqm per day, and decentralised rents increased 1.1% q-o-q to RMB 19.1 per sqm per day.

Several small scale retail malls reach completion.  In the prime market, Shanghai Agile International Plaza (22,000 sqm) was completed this quarter. The project is located north of People’s Square and has no major brands. In the decentralised market, two small-scale projects, One Prime (28,000 sqm) on North Sichuan Rd. and Shengyuan Living Mall (35,000 sqm) in Zhabei were completed. One Prime continues the upgrading trend of the traditional North Sichuan Rd. retail cluster by securing popular brands including Longchamp, Godiva, Hotwind and I Do. Shengyuan is a community mall serving local residents. Anchor tenants include Century Lianhua, kidswant and English First. As the shopping mall format becomes increasingly popular, small-sized old department stores are losing their appeal, and even closing down, due to their limited trade mix and product selection.


Demand from first-time homebuyers holds up.   “With demand from first-time homebuyers remaining stable, the sales volume of commodity housing in the primary market in 3Q12 rose slightly,” commented Joe Zhou, Head of Research for Jones Lang LaSalle Shanghai. In the primary market, prices remained flat and increased by 4.1% y-o-y. However, September, a traditional strong season for home sales, concluded with only 811,492  sqm sold, significantly lower than in June when sales volume peaked at 1,033,846 sqm. Meanwhile, the high-end segment saw sales momentum fade in several projects in emerging areas such as the Xuhui Riverfront. After offering significant discounts in the first and second quarters, these projects held prices stable in 3Q12, leading to slower sales. 

Rents flat in the serviced apartment market as leasing demand stabilizes. The leasing market was underpinned by solid demand from expatriates in 3Q12. Although MNCs remained cautious expanding in the current economic environment, they have not yet lowered the number of expatriates in Shanghai. As a result, overall leasing demand was stable in the third quarter, and landlords held rents flat following 10 consecutive quarters of rental growth. In the serviced apartment market, 3Q12 saw a project comprising 60 units in Pudong open for lease. Meanwhile, The One - Executive Suites in Jing’an held its grand opening, adding 244 units onto the leasing market. This new supply pushed up the average vacancy rate for serviced apartments to 11.3% in 3Q12 from 8.8% in 2Q12.



Non-bonded demand moderates due to slowing economic growth. “Manufacturers and other firms with indirect exposure to weak overseas export markets are scaling back their expansion plans,” commented Stuart Ross, Head of Industrial for Jones Lang LaSalle China. “On the other hand, inquiries from retailers and consumer goods makers were high as China’ s retail sales growth slowed but remained positive.” In 3Q12 there were no new major leases or pre-leases, though many firms made inquiries with upcoming projects. Demand remains high in West Shanghai, but a lack of vacancy there is leading potential tenants to consider space around Pudong Airport (PVG) and in Lingang. Space in PVG is relatively expensive and has attracted interest from high-end manufacturers and others with high rental affordability.
Vacancy remains tight in non-bonded warehouse space. Two non-bonded projects were completed in 3Q12. The 80,000 sqm Blogis Songjiang Park Phase 2 was fully pre-leased upon completion, with 40,000 sqm taken by appliance maker Haier. The 40,000 sqm Goodman Pudong International Airport Project (Site C1) was completed near Pudong airport. Major tenants include Johnson & Johnson and Richemont. Non-bonded vacancy rose 40 basis points to 6.1% as the Goodman project was 20% vacant upon completion. Absorption grew to 109,000 sqm due to the strong pre-leasing demand for new projects. The bonded market saw no transactions and few inquiries this quarter, leaving the vacancy rate unchanged at 22.0%.

Non-bonded landlords remain confident due to limited supply. Non-bonded rental growth slowed to 1.9% q-o-q this quarter after growing 4.0% in 2Q12, with effective rent rising to RMB 1.20 per sqm per day. Growth remained positive this quarter because available space in desirable parts of Shanghai is limited and overall demand remains relatively strong. Bonded rents remained flat at RMB 1.06 per sqm per day.

Business Parks

New developers moving into the business park market. Demand has begun to weaken in the business park market as multinational companies have become more hesitant to sign new leasing deals given the uncertain economic environment. Despite this, weaker external markets have actually benefitted the Shanghai business park market in some cases as heightened efforts towards cost-savings and consolidation are leading to increased expansion into China from more expensive markets for R&D and other facilities. This quarter also saw a new group of developers, including Forte and Vanke, enter into the business park market. Slowing sales in the residential and strata-titled office markets in Shanghai have led these developers to expand into new spheres, including business parks. Traditional business park zones such as Zhangjiang Hi-Tech Park have focused primarily on attracting key tenants with large registered capital in order to build up a strong tax base. Many of these new developments are now changing their focus toward strata-title sales for investment purposes, which has the potential to affect pricing and rental expectations for the business parks in surrounding areas. 


Manufacturers focus on the domestic market. As demand for Chinese exports continues to decline in major markets in the US and Europe, some manufacturers have been forced to cancel expansion plans and close plants in export processing zones across China. Companies have also become much more conservative investing in later phases of manufacturing facilities which were established over the last few years. Due to the slowdown in manufacturer expansion, local governments are becoming much more aggressive attracting projects with large registered capital by offering increasing subsidies and tax incentives.  Meanwhile, some manufacturers focusing on the domestic market, in industries such as pharmaceuticals, medical equipment, auto parts, and food processing, have continued to expand their investment in China. For example, OSI Group, a main supplier of meat products to McDonald’s, began construction on a $90 million facility in Xihua, Henan, which was chosen as a location due to its proximity to agricultural production in the area. Recent examples from the auto industry also include a new $1.96 billion Volkswagen plant in Foshan which will begin operations by mid-2013 and a $760 million Ford plant in Hangzhou that will open in 2015, both of which will make cars for the domestic market.