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News Release


Pudong office market rents outperform Puxi; first-time homebuyers continue to support the residential market.

According to Jones Lang LaSalle Fourth Quarter Property Review

Overall average rents in the Grade A office market remained flat at RMB 9.0 per sqm per day this quarter. “Rental performance now depends largely on location,” noted Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai. “In Pudong rental growth remains strong due to limited supply, while Puxi rents have started to decline due to subdued demand from MNCs.” In the retail market, a slowdown in sales-growth has led to difficulty for inexperienced landlords. However, prime-area malls continue to perform well and lease space quickly. First-time homebuyers continued to drive the residential market and support mass-market sales volumes as tightening measures on investment demand remained firmly in place in Shanghai this quarter. In the en-bloc investment market, transactions volumes improved in the fourth quarter as demand for core-CBD office and retail assets strengthened. Rents continued to grow in the non-bonded logistics market as space in Western Shanghai is limited and demand remained stable from retailers and consumer-products companies.  Long term growth trends continued in the hotels sector, although new supply has hurt revenue growth for five-star brands.


In Puxi, rental performance weakens as multinationals remain cautious.  In the fourth quarter multinationals remained cautious, and have not yet resumed office expansion plans. MNC retailers continued to sign several deals this quarter, evidenced by H&M leasing 9,146 sqm in Eco City, expanding from another building in the Jing’an core-CBD. However, new inquiries for space from MNCs across industries remained low this quarter. Weak demand from multinationals and a large supply of new decentralised office space has led to an erosion in landlord confidence. Falling rents in Premium Grade A buildings in the core-CBD precipitated a fall in average Puxi market rents, which dropped by 2.1% q-o-q. In Puxi, one newly refurbished office building, Verdant Place (formerly Novel Plaza) reopened this quarter in Huangpu.

Domestic demand fuels rental growth in Pudong.  Domestic tenants have stepped in to boost office leasing demand in Pudong, with domestic financial institutions and professional services companies driving the market, in contrast to foreign financial firms who mainly chose to renew their office leases in the past several quarters. For example, Changshu Rural Commercial Bank leased 1,000 sqm in 21st Century Tower this quarter to set up a new office. As no new projects were delivered in Pudong this quarter, the market remained tight with little available space for expansion. As a result, rents continued to climb in Pudong, growing by 1.4% q-o-q, boosted by sustained leasing demand from domestics. For full-year 2012, rents declined by 1.2% in Puxi while growing by 6.8% in Pudong.

Strong year for the decentralised market. The decentralised market continued to perform well this quarter due to strong net absorption in newly completed projects. Rents continued to grow by 1.7%, bringing full year rental growth to 6.5%. Two buildings within The North in decentralised Putuo were completed this quarter with a total of 50,624 sqm of space. In 2012, approximately 65% of new office supply was located in the decentralised market. With the vast majority of this supply located in decentralised Puxi, CBD landlords are now feeling the effect of decentralised space which is in high demand from tenants looking to save on costs or upgrade from decentralised Grade B buildings.

Demand is expected to improve in 2013, although supply pressure will continue. As China’s economic growth stabilizes and business confidence gradually improves, we expect for office demand to strengthen by the second half of 2013. However, in Puxi we expect rents to continue to decline in the near term as renewed confidence from MNCs takes several quarters to translate into significant office take-up. 2013 is also forecasted to receive a large volume of decentralised supply, mainly in Puxi, which will likely put pressure on landlords in the CBD as some tenants consider relocating to new projects. In Pudong we believe landlords will remain confident due to the undersupply of office space in Lujiazui and relatively small non-core and decentralised markets, and will continue to raise rental expectations.


Prime areas continue to attract top retailers. “For shopping centres, the gap between the market winners and losers widened further this quarter,” commented Eugene Tang, Head of Retail for Jones Lang LaSalle China. “Several new decentralised centres, opened with high vacancy, while prime area projects by experienced operators, on the other hand, succeeded in attracting more high-profile tenants.” Saint Laurent Paris, for example, made its China debut with a 300 sqm concept store in Réel, while 10 Corso Como, an Italian fashion brand leased 2,000 sqm for its first store in China in Wheelock Square on West Nanjing Rd. International brands continue to open in Shanghai but are increasingly sensitive to the profit potential of each store. In the prime market, Réel Department Store (45,700 sqm) and Takashimaya Department Store (61,000 sqm) were completed this quarter.

Retailers offer incentives to combat slowdown in retail sales growth. During the October golden week, retail sales increased by 9.2% y-o-y, slower than the 17.1% y-o-y growth recorded one year earlier. Department stores launched annual year-end promotions a month earlier this year in response to growing competition from online retail for Shanghai’s increasingly price-sensitive consumers. New World Department Stores, First Yaohan and the Pacific Department Stores were able to generate a 50% increase in foot traffic and daily turnover on average as a result.

Rents continue to grow in both CBD and decentralised markets. In prime areas, open-market ground floor base rents for shopping malls rose by 1.3% q-o-q to RMB 48.5 per sqm per day. For decentralised projects, the benchmark rent figure increased 1.6% q-o-q to RMB 19.4 per sqm. On a like-for-like basis, rents in prime and decentralised markets increased by 4.1% and 5.5% y-o-y, respectively. Vacancy rates increased marginally in some existing shopping centres as several electronics stores and large-format restaurants closed.
Rental growth likely to slow in 2013, however prime market projects in good shape. As consumers remain sensitive to prices, rental growth is likely to be slow through the first half of 2013. Some mild pick-up may take place in the second half of 2013 if pro-consumption policies are aggressively rolled out to generate higher sales. In a slower growth environment, variance of store performance is likely to increase due to locations and level of experience of operators. The gap in pre-commitment performance between prime and decentralised is widening, leading to more potential new completions with high vacancy. For example, projects in the prime market due to complete in 2-3 quarters currently enjoy double the pre-commitment rates of their decentralised counterparts.


First time homebuyers are the main market-driver in 2012. Tightening measures including Home Purchase Restrictions (HPRs) remained firmly in place in Shanghai in 4Q12. Improving sales momentum in 2Q12 and 3Q12 carried through to 4Q12 as demand from first-time homebuyers held up well and continued to facilitate a sales recovery this year. The sales volume of commodity housing in the primary market rose by 25% q-o-q to 3.1 million sqm in 4Q12, concluding 2012 with 9.5 million sqm sold, up 30% from 2011 and comparable to 2010 before the implementation of HPRs.

High-end momentum picks up slightly due to sales increase in mature areas.  In the high-end segment, 4Q12 saw 452 units sold, slightly up from 433 units in 3Q12 as some projects in mature areas achieved a noticeable sales increase during the quarter, offsetting the sales decline in emerging areas. For example, the Palace sold 36 units in 4Q12 compared to 11 units in 3Q12 and Shanghai Arch sold 23 units in 4Q12 compared to 13 units in 3Q12. Primary sales prices for high-end apartments stabilized at around RMB 67,600 per sqm as few developers offered further discounts to promote sales. In the land market, developers remained active acquiring land. Future Land Development Holdings spent RMB 1.74 billion on three residential-use (or mixed-use) land plots in Jiading District in December. All three plots were transacted at a premium of more than 50% over the reserve price.

Tighter corporate budgets restrict demand in the serviced apartment market. In the leasing market, demand remained largely stable as MNCs from automotive, pharmaceutical and retail industries continued to deploy new expatriates to Shanghai. However, as corporate budgets for housing allowance tightened due to the economic environment, demand for centrally located serviced apartments was diluted by high-end non-serviced apartments with lower rents. As a result, some recently opened serviced apartments saw slow leasing progress and landlords chose to hold rents flat for the second consecutive quarter. Fraser Residence in Luwan District finished its refurbishment and re-opened in October, with 324 renovated units. With demand holding stable, new supply in 4Q12 pushed up the overall vacancy rate to 12.9% in 4Q12 from 11.3% in 3Q12.

Government will continue to reign in investment demand in the residential market. We expect HPRs to continue into 2013. “Sales momentum in the mass market is likely to remain stable next year as the government continues to improve affordability for first-time buyers and even upgraders to some extent,” noted Joe Zhou, Head of Research for Jones Lang LaSalle Shanghai.  “In the high-end segment, we maintain our view that sales will remain subdued in 2013 as the majority of buyers with strong affordability are not eligible for new home purchases due to the HPRs,” he added.


Consolidation in pricing fuels demand for core-CBD office and retail assets. In the office market, capital values have remained flat for several quarters due to weaker rental performance, particularly in Puxi. In the retail market, a slowdown in retail sales growth in the second half of 2012 also has put a damper on growth in prices. As a result, a large amount of capital has returned to the market to take advantage of the current consolidation in pricing. Yields remained flat in 4Q12 as sellers’ price expectations remained stable due to more moderate expectations for future cash-flows.

Core-CBD assets were the most attractive for foreign institutional investors and private equity, as well as domestic insurance capital this quarter. For example, Plaza 353 on East Nanjing Rd. was sold to a JV between ADIA (Abu Dhabi Investment Authority) and Macquarie Bank, while Blackstone Group purchased the office portion of the soon-to-be-completed Huamin Imperial Tower in the Jingan District core-CBD. In addition, No. 8 Huangpu, a recently renovated office building in the Bund area was purchased by domestic insurer PICC for RMB 1.18 billion to take advantage of the building’s signage potential and secure office space for self-use.

Investment market activity expected to increase in 2013. “Investment market activity is expected to strengthen in 2013 as investors return to the market and seek out core-area, mature office and retail assets with strong income and cash flow,” noted Alan Li, Head of Investment for Jones Lang LaSalle Shanghai. Cost of credit is expected to decline, spurring demand from overseas institutional investors. Meanwhile domestic capital from the insurance sector is expected to play a larger role in the coming quarters, particularly in Pudong and Lujiazui where high-profile office buildings are in high demand, as well as in office assets in 2nd tier cities. The expectation of investors is that core-CBD office assets may see flat or even declining rents in the near term, but in the next 3-4 years rents will return to positive growth territory of 5-10% per annum, driving investment returns. The current slowdown is viewed as an opportunity to enter the market before growth accelerates again. The mid-to-long term outlook for retail is equally positive. However available assets to purchase are more limited in the CBD, and high-quality decentralized retail assets are likely to become a main focus for potential investors in 2013.



Demand from retailers and logistics firms remains healthy. While demand from industries exposed to weak export markets remained subdued, inquiries from retailers, consumer goods makers, and logistics firms remained strong this quarter. Two logistics firms leased 20,000 sqm and 12,000 sqm respectively in the recently-completed Blogis Songjiang Phase 2 and Goodman PVG Site 1 projects. Meanwhile, the e-commerce firm 360buy preleased 30,000 sqm in an upcoming project due in 3Q13. One new logistics project, the 45,000 sqm Vailog Lingang facility was completed in 4Q12. About two-thirds of the project was leased by the time of its completion. The logistics firm Geodis preleased about 19,000 sqm in the project in the first quarter of 2012.

New bonded warehouse facility planned in Waigaoqiao. The bonded market saw no transactions and few new inquiries this quarter, leaving the vacancy rate unchanged at 22.0%. However, China’s largest logistics developer, GLP is planning to build a large bonded facility near Waigaoqiao port. The 200,000 sqm project is planned to be completed by 2014. Once finished, it will be the first new bonded space built in Shanghai since 2008. Shanghai’s bonded warehouse market has been quiet for several quarters, and this project represents a bet that increased Asian trade flows will boost demand for space over the next several years.

Shanghai logistics rents continue to grow gradually. Non-bonded rental growth slowed to 0.9% q-o-q this quarter after growing by 1.9% in 3Q12, with effective rents rising to RMB 1.2 per sqm per day. Despite slow leasing activity, landlords remain confident in their ability to continue raising rents in a market with limited supply, and developers of upcoming projects are reportedly raising rental expectations. Bonded rents remained flat at RMB 1.1 per sqm per day this quarter.

2013 will see a large influx of new non-bonded supply. “About 350,000 sqm of new non-bonded supply is expected for 2013, with about 133,000 sqm under construction and 217,000 sqm still proposed. A portion of the proposed projects could be delayed into 2014 due to limitations on the sale of industrial land. Assuming that 80% of currently proposed 2013 projects are completed, next year should see about 307,000 sqm of new supply, a 50% increase over 2012. Much of this new supply is in Shanghai’s highly desirable western districts, where projects are often fully preleased upon completion,” commented Stuart Ross, Head of Industrial for Jones Lang LaSalle China

Business Parks

Telecommunications and IT companies active in business parks. This quarter, the Shanghai government accelerated progress on its network convergence initiative (internet, broadcasting and internet network services) in order to better provide all three forms of communications services with higher speed and lower prices.  “Government contracts have fuelled leasing demand for business park space as large telecommunications providers such as Qualcom and Digital China expand their operations in order to support this initiative for the city,” noted Tammy Tang, Head of Business Parks for Jones Lang LaSalle China. In other sectors, however demand has continued to slow down in the fourth quarter as most decision-makers remain concerned about the global economic situation and have put many new expansion plans on hold. Weaker demand has meant slow leasing progress in recently completed projects.


Manufacturing demand slows in the fourth quarter.  A decrease in external demand and slower global economic growth has hurt cash flows for many global manufacturers and in turn weakened demand for new manufacturing facilities across China. As many manufacturers have invested heavily to build up capacity in China over the past 1-2 years, the recent slowdown caused new inquiries to fall to their lowest level in 2012. In response to weaker demand, local governments are now actively offering incentives in order to attract new projects with large registered capital. Such incentives include, for companies with a certain level of registered capital, rebating part of the locally-retained portion of taxes including the CIT, VAT and individual income taxes. These attractive new policies and cheap land prices are creating a good environment for developers to invest in the sector, despite the weaker external conditions. The most active businesses in the manufacturing sector continue to be from pharmaceutical, medical equipment, consumer goods, and new materials sectors, while machinery and automotive companies remain quiet. The primary focus for the majority of manufacturers setting up new facilities continues to be China’s domestic market, and setting up locally continues to be the preferred approach for building long-term manufacturing networks.


Hotel sector sees stable demand growth and market development. Shanghai’s domestic and international tourist arrivals have shown significant growth over the past decade, reflecting Shanghai’s economic growth, its important role in China’s development and the strength of the Yangtze River Delta economy. Economic trends suggest that tourist arrivals in Shanghai will continue to grow, supporting lodging demand. However, while demand has increased across Shanghai, a steady stream of new supply, especially after the 2010 expo year, has asserted pressure on hotel performance. The impact of new supply has essentially wiped out any gain in Revenue per Available Room (RevPAR). Year-to-date through November 2012, the occupancy of shanghai five- star hotels had increased 1.1 percentage points to 59.1% due to growing demand, while the Average Room Rate (ADR) was RMB 1,113. The RevPAR reached RMB 657.
Emerging hotel submarkets are beginning to take shape. Historically, internationally-branded hotels were developed in clusters around core commercial areas in Shanghai with a high concentration of tourist sites and international Grade A offices. Among the key development areas were People’s Square, Lujiazui Financial District, the Bund as well as Nanjing Road & Huaihai Road. In recent years, there has been an emerging trend of hotel development in new submarkets, such as Songjiang, Hongqiao, Zhabei and Yangpu. With land in core development areas becoming increasingly scarce and expensive and as international hotel management companies continue to expand their brand presence, these emerging submarkets are expected to continue to mature in the coming quarters.

Shanghai hotel market outlook.  According to the latest data collected by Jones Lang LaSalle Hotels & Hospitality Group, by the end of 2012, the total major internationally-branded hotels’ room stock reached 46,200 (almost 1.5 times the room stock in 2009) with stock by 2015 estimated to grow to around 60,400. Future hotel occupancy and rates, to a large extent, will be impacted by the timing, quantity and positioning of new supply. Meanwhile, many large-scale attractions and developments are scheduled to be put into use in the next few years, boosting hotel demand.  For instance, Shanghai Disneyland in Pudong, the new Hongqiao National Conference and Exhibition Center and the redevelopment of the Expo area will have a large impact on the economy, tourist make-up and hotel demand in their individual submarkets.