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News Release

Shanghai

Pudong CBD vacancy rate falls to lowest since 4Q07; Shanghai logistics market boost on the back of a continued recovery in international trade

According to JLL Second Quarter Property Review


SHANGHAI, 9 July 2014 – Demand from domestic financial services tenants continued to propel the Pudong leasing market, where rents grew 2.5%, and began to contribute to stronger take-up in the Puxi CBD market as well. "As financial reforms move forward and the Shanghai Free Trade Zone (FTZ) regulations become more stream-lined, we are seeing strong demand from domestic asset managers, private equity firms and other financial services looking to expand or set up new offices here." said Anthony Couse, Managing Director for JLL East China. In the logistics market, strong pre-commitment in new non-bonded facilities led to a decline in vacancy, while investor demand for the asset class continues to drive yield compression along with M&A activity. The residential market was subdued in April and May, but saw some improvement in June following China Central bank move supports first-time home buyers. Fast fashion tenants expanded aggressively this quarter and were the main driver for new leasing transactions in the retail sector, although vacancy increased as new supply reached completion. Investment activity improved in the second quarter, primarily driven by demand from domestic owner occupiers in the office sector.

Office

Domestic financial firms remain a driving force in the leasing market. Domestic companies from the financial services sector became increasingly active in the CBD leasing market in 2Q14, particularly in the Pudong submarket. The Shanghai Free Trade Zone (FTZ) and related financial reform initiatives attracted domestic companies looking to register in the FTZ but lease office space in the traditional CBD area. "Many of these companies are interested in the office space in Lujiazui in order to enhance their corporate image," noted Anny Zhang, Head of Pudong Markets for JLL Shanghai. For example, Xinhua Assets and Equity Exchange registered in the FTZ in 2Q14 and leased around 1,000 sqm in SWFC. In the Puxi CBD market, with the exception of retailers, most MNC companies were inactive in the leasing market and preferred to renew space in their current buildings. Meanwhile, as available office space in the Pudong CBD was very limited, more domestic financial service companies turned to Puxi for office space. For example, a domestic financial company leased around 2,100 sqm in Verdant Place in the People's Square area.

Pudong rents outperform due to limited supply; Puxi rents stable. In Pudong, strong demand from domestic companies combined with limited available leasing space caused Grade A rents to continue to increase, rising 2.5% q-o-q to RMB 9.8 per sqm per day. Pudong Premium Grade A rents grew more moderately however, up 0.6% q-o-q. In Puxi, rents remained flat in 2Q14, up slightly by 0.4% q-o-q to RMB 9.0 per sqm per day. Continued new supply intensified competition among Premium Grade A buildings in Puxi, causing Puxi Premium Grade A rents to fall slightly by 0.6% q-o-q.;

Puxi remains a tenant market as new supply continues to reach the market. In the Puxi CBD, two new projects with a total GFA of 104,621 sqm reached completion in 2Q14: Henderson 688 (59,774 sqm) in Jing'an District and 100 Bund Square (44,847 sqm) in Huangpu District. In the decentralised market, two new projects with a total of 94,958 sqm of office space were completed: Greenland The Centre (32,833 sqm) in Xuhui District and Lujiazui Century Financial Plaza Bloc 2 (62,125 sqm) in Pudong District. In contrast, no new projects reached completion in the Pudong CBD and strong demand continued to push down the vacancy rate which fell to 2.4% in 2Q14. This marked the lowest vacancy rate in the Pudong CBD since 4Q07.

Strata-titled Office

Strong buying demand for self-use quickly absorbed new supply launched this quarter. Three projects with a total GFA of 76,234 sqm launched in 2Q14, with around one third of the space already absorbed. Domestic private companies continued to show great interest in purchasing high-end office space for self-use. Sales performance continued to vary by submarket. Submarkets such as Lujiazui Bund, Puxi Bund, and Hongqiao Transportation Hub are especially favoured by buyers, and outperformed in terms of both sales velocity and transaction price. For example, Poly International Center (35,164 sqm) launched this quarter and achieved a sales ratio to 64%.  A domestic private bank was the anchor buyer of this project, purchasing around 18,800 sqm for self-use at the price of RMB 90,000 per sqm. Underpinned by strong buying demand, transaction volumes increased by 47% y-o-y and transaction prices rose by 3.6% y-o-y this quarter. We expect domestic private companies will continue to purchase high-end office space for self-use, driving up buying demand.  Transaction prices are expected to grow steadily throughout 2014.

Logistics

Non-bonded market vacancy falls due to strong activity in Lingang. In the non-bonded market, leasing demand remained stable in 2Q14, but was still relatively weak compared to the market's peak two years ago. Two new projects reached completion in West Shanghai. GLP delivered its Liantang project in Qingpu District, providing the market with 51,000 sqm of single-storey non-bonded space, 70% of which was pre-leased by appliance-maker Haier. In Songjiang, E-Shang completed a 47,500 sqm double-storey warehouse with a pre-commitment rate of around 30%. The market's overall vacancy rate fell by 1.6 percentage points q-o-q to 9%, thanks to strong take-up in the long-subdued Lingang submarket. For example, some existing tenants in GLP's Lingang project expanded in order to consolidate their Shanghai warehousing capacity. Landlords continue to be cautious, however, as leasing activities have not yet indicated a sustained improvement in demand. In addition, inquiries were reported to be at a similar level to last quarter.

International trade recovery helps to boost demand in the bonded market. In the bonded market, demand improved further in 2Q14 on the back of a continued recovery in international trade. In addition to 3PLs and trading companies, high-tech manufacturers also became active leasing bonded space in Waigaoqiao and Lingang. With no new completions in the quarter, bonded vacancy continued to decline to 9.9%, down 5 percentage points compared to last quarter.

Rental growth slows in non-bonded market but maintains upward trend. With demand remaining stable, non-bonded rents posted slight growth of 0.9% q-o-q to RMB 1.27 per sqm per day in 2Q14 as landlords remained concerned over the sustainability of current demand levels. In the bonded market, rents maintained steady growth to RMB 1.18 per sqm, rising by 3.8% q-o-q, much faster than one year ago just before the announcement of the Shanghai Free Trade Zone. Shanghai is set to introduce a new land policy which will reduce the industrial land-use period from 50 to 20 years. Secondary land prices rose this quarter as developers sought to pick up parcels unaffected by the policy.

A significant trend for Shanghai's future supply of logistics space is the emergence of multi-storey warehouses. Due to elevated land costs and pressure from local governments for larger registered capital for industrial projects, logistics developers acquiring land in Shanghai are becoming less likely to build single-storey projects. For example, five more new projects with over 500,000 sqm of GFA will be finished by the end of 2014, four of which will be built with two or more storeys. As most tenants prefer single-storey projects for their convenience and efficiency, lower effective rents are expected for multi-storey space as landlords offer longer rent free periods to encourage take-up. "While absorption in multi-storey projects is expected to be slower than single-storey projects as tenants adjust to this new type of product, we are optimistic that new space will be fully leased out as many tenants are eager to remain within the Shanghai market, including grocery suppliers and express delivery companies which are extremely time sensitive and focused on the Shanghai market," noted Stuart Ross, Head of Industrial for JLL China.

Residential

Sales fall in April and May, but recovery on the horizon. Buying sentiment in Shanghai's residential market deteriorated further in April and May as home buyers remained on the sidelines amidst policy and price uncertainties. As a result, sales volumes of commodity housing saw a contraction of 17% and 22% m-o-m in April and May, respectively. Coming into June, as the People's Bank of China urged banks to increase mortgage availability, especially for first-time home buyers, market sentiment gradually improved towards the end of June, leading to a mild recovery of 19% in sales volume for June. As such, the total sales volume in 2Q14 recorded 2.1 million sqm, slightly up 1.4% q-o-q, but down 29.0% y-o-y.

High-end prices stabilize in the quarter as buying demand improves. Primary prices for high-end apartments remained largely flat this quarter. Although several projects offered price discounts for a few units, most developers in Shanghai held their prices firm. "Those developers which did offer discounts tended to be in serious need of cash and only offered discounts on certain units in their projects which successfully lured buyers back to their projects," said Joe Zhou, Head of Research for JLL Eastern China. In the secondary market individual sellers became more flexible on their sales prices due to reduced enquires in 2Q14. As a result, average secondary prices flattened out in 2Q14.

In the sales market, The Bound of Bund in Huangpu District, developed by China Resources, launched 106 units in 2Q14, of which 29 were sold during the quarter at an average price of RMB 83,361 per sqm. Meanwhile, West Shore developed by Poly launched 131 units for sale in late June.

Rents stabilize for serviced apartments but performance varies widely by project. In the leasing market, demand picked up moderately in 2Q14 as international schools in Shanghai became active leasing serviced apartments for their faculty members, leading to a pick-up in new leases. With no new completions this quarter, the vacancy rate for serviced apartments fell by 2.8 percentage points to 15.1% in 2Q14. Rental performance diverged among different projects however, as projects facing rising vacancy rates offered more rental discounts this quarter, while others with high occupancy, such as Residences at Kerry Parkside in Pudong District continued to raise their rents. On average, rents for serviced apartments edged up by 0.4% q-o-q in 2Q14.

Retail

Fast Fashion tenants step up their expansion in Shanghai. Fast fashion tenants remained active this quarter setting up new stores. H&M, for example, opened their largest flagship store in Shanghai, occupying 3,500 sqm of space and four storeys in Mosaic (previously known as Plaza 353) on East Nanjing Road. Other fast fashion brands continued to expand in non-core properties. C&A, after leaving Middle Huaihai Road, opened a new 3,000 sqm street shop on North Sichuan Road in Hongkou District. Hollister entered Global Harbour, while American Eagle Outfitters also plans to open a new store in Daning Life Hub. Meanwhile, New Look opened three new stores. "These brands are still very bullish about expansion in China, and will continue to evolve their physical locations in Shanghai in order to maximize exposure and improve their brand image," commented Eugene Tang, Head of Retail for JLL Greater China. F&B tenants continued to expand rapidly across the city. Casual dining chain Salad+, for instance, is opening two new stores in Jing'an and Pudong CBD to meet the needs of office workers.

One core property closes for renovation; two new decentralized projects added. Golden Eagle Department Store (40,000 sqm), located adjacent to CITIC Plaza on West Nanjing Road, closed down all of its shops (except for Gucci) for renovation. Low foot traffic and poor sales performance contributed to this decision. In the non-core market, the River Mall, located at the Expo Site in Pudong, held its grand opening in April and became the largest shopping mall in Shanghai with a total retail GFA of over 330,000 sqm. The project is long and narrow, stretching 1.1 km in total, and includes a rooftop zoo with exotic animals. This quarter, we also added a new retail property in non-core Shanghai - Baoland Plaza (35,470 sqm) - located on the North Bund in Yangpu. The project features supporting retail amenities for local office workers and residents. Anchor tenants include Tesco, Decathlon, and a Physical gym. As of 2Q14, the project is fully occupied.

Rents continue to grow, with strongest performance in the decentralized market. In the core area, open-market ground floor base rents increased 0.8% q-o-q to RMB 51.7 per sqm per day, while non-core rents rose by 3.9% q-o-q to RMB 17.3 per sqm per day. Vacancy increased to 8.3% in the core area, as several anchor tenants vacated their space (including a gym, several weight loss centres, and a restaurant). Vacancy increased to 6.8% in the non-core market due to the higher vacancy level at newly opened properties.

Investment

Investors remain cautious in the second quarter. Fears about the health of the residential sector and a broader slowdown in growth continued to affect sentiment this quarter. While overall investment volumes remained suppressed relative to 2013, the second quarter saw a pick-up in activity from the first quarter with transaction volumes nearly doubling to approximately RMB 11.1 billion. Office market investment was bolstered by owner-occupier demand, especially from domestic financial services companies interested in buying en-bloc for self-use. For example, Ping An acquired two twin towers of Greenland Center Phase 2 for around RMB 4.4 Billion, the largest transaction in Shanghai so far this year. Ping An plans to self-use a large part of the space. For the second consecutive quarter there were no major transactions of retail assets as oversupply and slowing rental growth turn off investors to the sector. Yields continued to widen slightly in both sectors as forecasts for rental growth are trimmed back and sellers adjust their expectations to accommodate more conservative investors.

The logistics sector, in contrast, remained very active in the quarter. Investors continued to pursue direct investment in logistics assets as well as equity stakes in developers. APG, for example, invested USD 650 million in E-Shang, acquiring a 20% stake. E-Shang is one of the major warehouse developers based in Shanghai with projects across a number of cities in China, including Shanghai, Kunshan, Jiaxing and Jinan.

As tradable office and retail assets in the core market remained limited, some large funds are now venturing outside of the core market in Shanghai in order to find ways to deploy their capital. We expect to see more transactions of lower-grade properties in core locations or Grade A properties in non-core locations, and for Shanghai and other Tier 1 cities to remain the focus for most institutional investors in China.

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