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News Release


Pudong office market continues to outperform; Record year for the Shanghai investment market in 2013

According to Jones Lang LaSalle Fourth Quarter Property Review

Pudong office market rents continued to grow this quarter, driven by strong leasing demand from financial institutions. While domestic tenants also increased their activity in Puxi, overall demand was relatively weak and several new projects were delivered this quarter, leading to a further decline in Puxi rents. “Shanghai’s investment market had a record year in 2013,” noted Anthony Couse, Managing Director for Jones Lang LaSalle Eastern China. “Both foreign and domestic buyers continued to aggressively pursue commercial assets in Shanghai, leading to the strongest year for transaction volume on record.” In the retail market, two core projects and one new non-core project opened in 4Q13, with new store openings concentrated amongst fashion and F&B brands. New tightening policies weighed on the residential sales market with stricter purchasing qualifications for non-local residents and more stringent mortgage requirements for second-home buyers announced. Demand for non-bonded logistics space improved this quarter, leading to improved rental performance. Investment demand remains robust to tap in to the rapidly growing logistics sector.


Weak demand in Puxi CBD as most foreign companies remain cost-conscious. In the Puxi CBD market, overall leasing demand remained weak this quarter. Most MNC tenants continued to be cost-conscious on leasing budgets and increasingly considered decentralised options. In contrast, domestic companies appeared to be increasingly active in the Puxi CBD market, which has been traditionally dominated by MNCs. For example, one state-owned enterprise leased around 4,200 sqm in 2 Grand Gateway. In light of weak demand from MNCs, rents in Puxi dropped slightly by 0.2% q-o-q to RMB 9.1 per sqm per day. In the Puxi Premium Grade A market, competition intensified due to rental discounts offered by newly completed projects and the preleasing of upcoming projects. More landlords were willing to negotiate on rents in order to close deals, resulting in Puxi Premium Grade A rents posting a noticeable decline of 2.3% q-o-q in 4Q13.

Strong demand in Pudong from domestic financial companies; rents continue to grow. In the Pudong CBD market, demand from domestic financial institutions continued to be strong. This quarter saw a number of new setups from domestic companies in the financial services sector looking to lease office space in Pudong. For example, one domestic investment company based in Guizhou set up a new branch office in Shanghai and leased 6,000 sqm in China Finance Information Tower. Strong demand from domestic tenants, coupled with limited available leasing supply, continued to drive rental growth, a notable contrast to the Puxi CBD market.  Pudong Grade A rents increased by 2.4% q-o-q to RMB 9.4 per sqm per day, while the Pudong Premium Grade A average rent reached RMB 11.1 per sqm per day, up 2.1% q-o-q.

Six new Grade A office projects delivered in the fourth quarter. Four new projects with total GFA of 270,638 sqm were completed in the CBD in 4Q13. In the Puxi CBD, 5 Corporate Avenue (50,342 sqm) and Shanghai Arch (110,000 sqm) were delivered into the leasing market this quarter. Meanwhile, China Merchants Bank Lujiazui Project (75,000 sqm) and China Finance Information Tower (35,296 sqm) reached completion in the Pudong CBD. Lettable space in Pudong remained limited, however because a large portion of office space in the two new projects was for owner-occupation. In the decentralised market, two new projects with a total of 83,734 sqm of office space were completed in Puxi: The Springs Phase 1 (55,000 sqm) in Yangpu District and Star Plaza (28,734 sqm) in Xuhui District.

Rental growth expected to continue in Pudong, but remain flat in Puxi. Looking forward, domestic companies are expected to increase their activity in Puxi, partially offsetting the subdued demand from MNCs who are unlikely to increase their rental expenditure in 2014. Eric Xin, National Director for Markets at Jones Lang LaSalle said, “We expect for rents to remain flat in 2014 in Puxi. In Pudong, we anticipate strong demand from domestic financial tenants to continually drive rental growth through 2014. Shanghai Tower will deliver much needed supply to the Pudong market when it reaches completion in 2015.” 

Strata-titled Office

Self-use demand drove transaction volume to its highest level in the past 5 quarters. Grade A strata-titled transaction volume jumped to 52,243 sqm in 4Q13, reaching the highest level since 4Q12, mainly supported by corporate buyers acquiring large contiguous space for self-use purposes. Domestic financial institutions continued to be active in purchasing office space in the Pudong CBD area. For example, one domestic bank purchased around 4,700 sqm of office space in Oriental Financial Plaza Tower B in 4Q. Meanwhile, corporate buyers in non-service sectors, who sought large contiguous office space for self-use were also attracted to recently launched strata-titled offices in the decentralised market. For example, a manufacturer acquired around 21,000 sqm of office space in HQ Green Valley Plaza this quarter. Driven by strong buying demand, transaction prices rose by 1.2% q-o-q in the CBD market and 0.7% q-o-q in the decentralised market in 4Q13. In 2013, the CBD market witnessed transaction prices rise by 6.0% y-o-y and the decentralised market saw transaction prices grow by a more moderate 2.0% y-o-y. These two growth rate figures were basically on par with 2012 figures.


2013 is a record year for the Shanghai investment market. The total volume of commercial real estate transactions in Shanghai reached RMB 56.7 billion in 2013. This was the strongest year on record for the Shanghai investment market with transaction volumes more than doubling the level witnessed in 2012 and surpassing the previous high of RMB 46.4 billion recorded in 2011. RMB 26.3 billion of these deals were transacted in the fourth quarter, led by the largest ever office transaction in Shanghai. In this deal, Oriental Financial Center was sold for approximately RMB 7.1 billion to a domestic buyer. In addition, one domestic owner-occupier from North East China acquired Gubei International Financial Center Phase 1 this quarter, which will be used as its Shanghai headquarters. Finally, Jones Lang LaSalle sold two buildings in the International Shipping Service Center on behalf of the landlord to a domestic owner-occupier. These transactions were indicative of sustained strong demand from Chinese end-users for office assets in Shanghai. Meanwhile, in the retail market New World China purchased the anchor department store of Wanda Plaza Wujiaochang (21,000 sqm) through one of its subsidiary companies based in Shenyang for RMB 280 million.

Robust demand from both foreign and domestic buyers in 2013. While domestic buyers were the most active in the fourth quarter, foreign investors were also very keen to acquire core commercial property in Shanghai. For example, Brookfield Asset Management agreed to acquire a 21.7% stake in the Shanghai Xintiandi portfolio spun off from Shui On Land for approximately RMB 4.6 billion which includes six office, retail and mixed-use properties. Angelo Gordon, a US-based investment firm, also made a USD200 million purchase of a serviced apartment complex in Pudong consisting of about 466 units for lease. In fact, for the full year, foreign investors accounted for approximately half of the investment market in Shanghai with 48% of transactions. The most popular asset class in Shanghai continued to be office property, accounting for 59% of transactions in 2013.

Robust demand in Shanghai will continue to drive strong deal volume next year. Looking ahead to 2014, the investment market is set to remain very strong given the large volume of capital raised by foreign investors along with steady demand from domestic financial institutions, including banks and insurance companies, to buy assets in Tier 1 cities. “We are seeing a steady increase in liquidity in the China market and anticipate that transaction volume will remain strong in 2014,” noted Alan Li, Head of Investment for Jones Lang LaSalle Shanghai. There is a two-tier market emerging in terms of investor behavior in Shanghai. While foreign investors may become slightly more cautious due to slowing rental growth and a gradual increase in off-shore interest rates as a result of monetary policy in the U.S., domestic owner occupiers are expected to remain willing to pay very high prices for office assets in core locations. Deals transacted this quarter underline this trend. If borrowing costs do increase for foreign players, we may see a slight widening of yields for assets that they purchase, but for domestic end-users we expect for yields to remain flat as demand has shown no sign of weakening and on-shore interest rates are unlikely to increase. 

Logistics property a key focus for investors in 2014. Although there were no major sales transactions in the logistics market this quarter, we expect to see robust investment demand for this asset class moving forward. GLP established a USD 3 billion fund for investing in logistics properties in China. According to GLP, this fund will be utilized to support 1.8 million sqm of warehouse space. In addition, Alibaba invested USD 361 million in Haier, aimed at expanding Haier’s warehouse capacity and distribution network in China’s inland markets. Such fundraising activities are evidence of very strong investment activity ahead for this asset class.


Three new projects open to the public this quarter. Two core projects and one new non-core project opened in 4Q13. Eco City in Jing’an district opened with 70% occupancy. While the basement food court has been partially open since May, the rest of the project gradually opened in October, officially marking the project’s completion. Tenants include locally-owned quick service concepts such as Caliburger, as well as bigger restaurants like Lulu and Four Seasons. Lane Crawford returned to Shanghai, opening in October as the anchor of Wharf’s Shanghai Times Square. In the non-core market, Hi-Time CITIC Plaza opened with 50% occupancy along North Sichuan Road, anchored by Uniqlo and a Japanese sporting goods store Sports Depo.

Strong leasing demand in fashion and F&B trades. Among fashion retailers, new stores were concentrated in recently opened mid-to-high end shopping centres, namely IAPM and Jing’an Kerry Center. For instance, Max & Co, under the Italian luxury fashion group MaxMara, opened a 260 sqm concept store in Jing’an Kerry Centre. In the mid-range market, Japanese fashion collection store Retro Gallery expanded into SML with a 500 sqm store. Restaurant operators also remained active expanding in Shanghai. Two Japanese restaurants under the Wowprime Group entered CRC Times Square and Metro City this quarter.

Driven by stable expansion demand and low vacancy, rental growth continued.  In the core area, open-market ground floor base rents rose 1.2% q-o-q to RMB 50.5 per sqm per day, while non-core rents rose by 1.9% q-o-q to RMB 19.9 per sqm per day. Vacancy was flat at 6.9% in the core market but decreased slightly to 5.7% in the non-core market due to the opening of the CITIC Shenhong food court.

Tougher times ahead for some new openings. The e-commerce boom will likely lead to more department store closures, as consumers become more brand conscious and can easily purchase apparel items cheaply online. Among mid-market retailers, expansion plans are being carried out more scientifically and diligently in terms of site locations. “Facing fierce competition, some landlords of new malls will have no choice but to offer generous terms and incentives to attract tenants,” noted Eugene Tang, Head of Retail for Jones Lang LaSalle Greater China. “Rental growth will persist in high-occupancy, mature properties, but may be lower than previous years in newer, lower occupancy properties.”


Policy stance is tightened further, leading to a moderation in sales activity.  Residential policy was tightened further in Shanghai in early November by announcing stricter purchasing qualifications for non-local residents and more stringent mortgage requirements for second-home buyers. Coupled with seasonality, the new measures resulted in a moderation in activity in the sales market towards the end of the year. However, due to the strong sales achieved in October, sales volume of commodity housing in the primary market still posted an increase of 19% q-o-q in 4Q13, concluding the year with 12.9 million sqm sold, up 36% from 2012.

High-end price growth slows to 0.3% q-o-q as several projects offer discounts. In the sales market, no high-end projects launched new units in 4Q13. As a result, new launches in 2013 only totalled 771 units, down 35% y-o-y, marking the fifth consecutive annual decline in new supply after the peak in 2008. With sales lower than expected in the first three quarters of 2013 and annual sales target in mind, several developers began to offer price discounts towards year-end in order to entice buyers. As a result, the pace of growth in primary prices for high-end apartments slowed down by 2.4 ppts to 0.3% q-o-q in 4Q13.

Serviced apartment rents decline by 1.4% q-o-q as demand softens. In the leasing market, demand continued to soften in 4Q13 due to a combination of seasonality and MNCs’ increasing cost sensitivity. “Most MNCs remained reluctant to deploy new expatriates to Shanghai with a few even reducing housing allowance in reaction to tighter budgets amidst a slower economic environment,” commented Joe Zhou, Head of Research for Jones Lang LaSalle Shanghai. On the back of softening leasing demand, new completions pushed up the overall vacancy rate by 3.3 percentage points to 17.9% in 4Q13. Rents for serviced apartments declined by 1.4% q-o-q in the quarter as some landlords offered promotions to fill vacancies.

New tightening measures expected to have the desired cooling effect. The new tightening measures are likely to weaken market sentiment in the sales market and result in a decline in sales volume in 2014 in both mass and high-end markets. However, the upward trend in sales price is not likely to be reversed, although price growth is expected to be limited in 2014. In the leasing market, we expect demand for serviced apartments to remain weak in 2014. As such, new completions in 2014 could further drive up vacancies and lead to larger downward pressure on rents for serviced apartments.



Vacancy rate falls amid stronger demand in the logistics market. Demand for non-bonded warehouse space rebounded this quarter due to both a seasonal market upturn and China’s improving economic performance since 3Q13.  Demand was strongest in West Shanghai, where Prologis and Vailog completed 58,000 sqm and 100,000 sqm non-bonded warehouses in Qingpu and Jiading, respectively. Both projects were fully leased upon completion.  As a result, Shanghai’s non-bonded vacancy fell from 9.9% to 9.2%. Shanghai’s non-bonded rental growth accelerated to 1.0% q-o-q on a like-for-like basis. Spot rents in Kunshan grew 1.1% q-o-q as demand remained strong, while rents in Jiaxing were flat due to its inferior location and slower demand.

Optimism continues in the bonded market. Demand in the bonded market remained solid this quarter, benefiting from continued optimism over Shanghai’s Free Trade Zone (FTZ). Manufacturers and 3PLs were active in the market, with several deals currently under negotiation in the southeast Lingang submarket. Bonded rents continued to grow 1.1% q-o-q on optimism from landlords in the FTZ. Rental growth mainly came from projects in Lingang, indicating strong potential for future growth. “We remain cautiously optimistic about Shanghai’s bonded market, which stands to benefit if the FTZ delivers on its promise of boosting Shanghai’s role in international commerce,” added Stuart Ross, Head of Industrial for Jones Lang LaSalle China. “The 2013 FTZ announcement generated much fanfare, but the government will need to implement more concrete policies in the year to come if the bonded market’s recent upturn is to continue.” 

Non-bonded rental growth more moderate looking forward. China’s slowing economy weighed on non-bonded rental growth for much of 2013, leaving rental growth for the year at 4.1%. Rental growth is expected to continue at a similar pace in 2014. Forecasts for the non-bonded sector have been revised down slightly as a result of both a structural slowdown in China’s economy as well as better integration of satellite cities like Kunshan, which are transitioning from second-choice alternatives to Shanghai into more attractive locations in their own right.

Business Parks

Steady leasing demand in business parks driven by expansion from the CBD. Leasing activity in the business parks market in Shanghai remained stable in the fourth quarter, although seasonality led to a brief slowdown in December. With a number of ongoing deals being negotiated, activity is expected to pick up again in 1Q14. Businesses from new materials, automotive and automotive parts sectors were particularly active in the main business park clusters of Zhangjiang and Caohejing. For example, Borouge, a multinational materials company relocated from Plaza 66 in Puxi to Zhangjiang and expanded to approximately 6,500 sqm.

Moving forward, a key source of demand will be large multinational tenants relocating from Grade A or Premium Grade A offices in the CBD. Businesses from pharmaceutical or logistics sectors located in expensive offices downtown will increasingly consider relocating to business park space to expand their office size and save on costs. This growing trend will coincide with a large pipeline of future supply deliveries in 2014, encouraging many tenants to take advantage of negotiable rents once new projects reach the market. Meanwhile, in Waigaoqiao leasing demand from MNC banks and financial institutions will continue to be strong in order to gain access to the Shanghai FTZ. Although space requirements are not very large in the FTZ, a lack of available business park stock will ensure continued rental growth in Waigaoqiao next year.


Demand strengthening in the manufacturing sector.  Demand in the manufacturing sector showed signs of improvement in the fourth quarter of 2013. Due to economic uncertainty, many firms were hesitant to set up new manufacturing facilities in the first half of the year. As the economic picture in China became more stable in the second half, many manufacturers became more optimistic expanding to support the growing domestic market. That said, the site selection process has become more rigorous as manufacturers are more stringently reviewing their business plans both in China and globally. Jiangsu province has remained a major targeted location for firms, while Zhejiang has also received renewed interest over the past quarter. For example, Merck announced a new pharmaceutical manufacturing facility to be located in Nantong Economical Technological Development Area which will manufacture pharmaceutical products under the Merck Serono division of the company. In addition to pharmaceutical tenants, demand from the food, auto parts, and automation sectors all showed stronger demand to set up new facilities in the YRD region this quarter and will drive stronger activity in 2014.