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News Release

Shanghai

Domestic financial and professional services firms propel CBD leasing market; affordable luxury and F&B tenants fuel declines in retail vacancy

According to JLL Third Quarter Property Review


SHANGHAI, 14 October 2014 – Domestic financial and professional service firms continued to be active in the Pudong CBD and expanded in the Puxi CBD as well. "We are seeing demand rising from new types of financial service firms, such as internet finance companies," said Anthony Couse, Managing Director for JLL East China. Pudong CBD rents maintained their upward trajectory, while rents in the Puxi CBD slipped further as landlords focused on retaining existing tenants. Demand from affordable luxury brands and F&B tenants combined with take-up in recently completed decentralized projects to reduce vacancy in Shanghai's retail market. In the logistics market, non-bonded rental growth slowed and vacancy rose as three new properties were completed with limited pre-commitments, though some space was under negotiation. High-end residential sales slowed amid soft demand, though most developers held prices flat and a record-setting residential land sale indicated optimism about the market's future. In the investment market, foreign funds continued seeking opportunities in Shanghai's office market, with particular interest in affordable decentralized and Grade B opportunities.

Office

Financial and professional services firms drive CBD leasing market. In Pudong, domestic companies in the financial service sector continued to demonstrate strong demand. For example, a state-owned insurance company leased around 5,000 sqm in SWFC. Demand also strengthened among companies engaged in less traditional types of financial services, such as a domestic internet finance company that leased 640 sqm in Hong Jia Tower to establish their Shanghai office. In Puxi, domestic financial services firms and domestic professional services firms both were active. For example, Grandall Law Firm leased two floors in Garden Square.

Four Grade A projects reached completion this quarter. In the Pudong CBD, the 87,170 sqm Oriental Financial Centre reached completion in 3Q14. Half of the space in this building will be for lease, with the other half of space to be self-used by Bank of Communications, the building's owner. In the Puxi CBD, the 39,000 sqm SOHO Fuxing Plaza reached completion in Huangpu District. In the decentralised market, two new projects with a combined total of 43,756 sqm of office space were completed in Minhang District: Xizi International Center (27,126 sqm) and The Hub Tower 1 (16,630 sqm).

Pudong rents extend lead as Puxi landlords focus on retaining high-profile tenants. Pudong Grade A rents rose by 1.7% q-o-q to RMB 10.0 per sqm per day, while Pudong Premium Grade A rents grew by 1.2% q-o-q to RMB 11.4 per sqm per day. Meanwhile, Grade A rents in Puxi dropped slightly by 0.9% q-o-q to RMB 8.8 per sqm per day. Landlords of Puxi Premium Grade A buildings were more willing to offer discount rates to keep good profile tenants in their buildings. As a result, rents in Puxi Premium Grade A market continued to decline in 3Q14, reaching RMB 10.1 per sqm per day, down by 1.4% q-o-q.

Strata-titled Office

Strong demand for both investment and self-use purposes continued to boost transaction volume this quarter. Poly West Bund Center in the Puxi Riverside launched 31,821 sqm for pre-sale in the quarter. Meanwhile, Vanke Zone 1 and Hongqiao Sincere Center in the Hongqiao Transportation Hub added another 16,522 sqm and 29,788 sqm, respectively, onto the strata-titled Grade A office market. Projects in Hongqiao Transportation Hub continued to enjoy fast sales velocity. The two projects achieved respective sales ratios to 37% and 69% this quarter. The transacted space in Hongqiao Sincere Center was wholly purchased by one domestic financial institution, who intends to hold the space for leasing. Additionally, domestic companies were also active in buying large office space for self-use. As of 3Q14, the year-to-date transaction volume is now running 29.4% higher than the same period last year. With several deals under negotiation, 2014 is expected to see the market achieve its highest annual transaction volume in several years.

Business Parks

Expansion and new setup of pharmaceutical firms and e-commerce companies drive strong demand in business parks. Leasing activity in the Shanghai business parks market was robust in the third quarter. Pharmaceutical, hi-tech & IT, and e-commerce companies were particularly active in the core business park clusters of Caohejing, Zhangjiang and Linkong. For example, a multinational pharmaceutical company leased around 5,000 sqm to set up a new R&D facility in the recently completed SBP Phase 3 Bloc #3 of Caohejing Hi-tech Park. Interest in investment rose as domestic companies continue to look for spaces for expansion. For example, Shanghai Fuxin Intelligent Transportation Solutions purchased Lotus Plaza Bloc #1 in Zhangjiang Hi-tech Park, and plans to occupy the entire building. Looking forward, prospects are good for the core locations in Caohejing and Zhangjiang even considering steady increases in supply over the next few quarters, due to those areas' mature business clusters, developed public transportation networks, and proximity to many companies' customer bases. 

Retail

Expansion demand remains strong among affordable luxury and F&B tenants. In the high-end market, affordable luxury brands continued to expand as Michael Kors opened two new stores in IFC and Raffles City. Demand was strong from F&B tenants. "The 'afternoon tea' concept has taken off as a way to encourage sales between lunch and dinner times, and coffee and tea shops serving light refreshments are highly sought after by landlords," said Eugene Tang, Head of JLL Retail for Shanghai and Eastern China. For example, TWG Tea from Singapore opened three branches in Grand Gateway, IFC mall, and iapm. In the mid-range market, several retailers closed stores this quarter following rapid expansion over the past several years. Among these was La Chapelle, which closed four stores, including a 1,000 sqm flagship in Agile International Plaza near People's Square.

Core and non-core areas each saw one new project open. In the core market, a 4,000 sqm Maison Hermès flagship store opened on Huaihai Road after six years of renovation. The new Maison extends over four floors and hosts almost all of the brand's product lines as well as a champagne bar on the third floor and event space on the top floor. Located in a highly visible position, the store is intended to further enhance the brand's premium image among aspirational Chinese consumers. In the non-core market, the 48,000 sqm Met Plaza opened with 70% of space open and trading. The project is adjacent to South Qilianshan Road Station on Metro Line 13. This community centre supports the densely populated area between the middle and outer ring roads in Putuo district. Anchor tenants include McDonald's, Starbucks, and Hotwind, as well as a planned underground supermarket.

Rents rise in core areas while vacancy falls throughout Shanghai. In the core area, open-market ground floor base rents increased by 1.4% q-o-q to RMB 52.4per sqm per day. Non-core rents stayed flat at RMB 17.3 per sqm per day. In non-core areas, a large disparity exists between mature regional centres and newer properties, which are becoming increasingly generous on rental terms in order to achieve high occupancy. Vacancy decreased to 7.2% in the core areas as several properties filled vacant upper floor space with F&B tenants. Vacancy also decreased to 6.6% in the non-core market as tenants continued to fill up vacant areas in Shanghai's largest retail property – River Mall. There were no en-bloc transactions in the quarter.

Residential

Purchase restrictions leave mass market sales subdued, but new mortgage policies point to future recovery. Although nearly all tier II and III cities have now lifted home purchase restrictions (HPRs), the policy remains firmly in place in Shanghai. HPRs and tight mortgage policies both contributed to subdued buying demand in Shanghai's residential market, as potential buyers continued to delay their purchase decisions, awaiting further confirmation of both policies and price trends. As a result, sales volumes of commodity housing contracted by a respective 2% and 7% m-o-m in July and August. Coming into September, a traditionally busy season for home sales, sales volumes increased by 31% m-o-m, but were down 40% from a year ago. Sales volumes for the full quarter totalled 2,228,016 sqm, up 6% q-o-q but down 29% y-o-y. We expect Shanghai to maintain HPRs in the short term, but the September 30th decision by the PBOC (China's central bank) to loosen mortgage policy is likely to support a moderate sales recovery over the remainder of the year.

High-end sales prices nearly flat despite slowing sales. Most projects experienced a sales slowdown in 3Q14 due to weak buying sentiment. However, several newly launched projects, such as Vanke's Emerald Riverside, achieved better-than-expected sales. As a result, the high-end segment recorded 343 units sold during the quarter, up 16% from 2Q14. In the sales market, a total of 555 units from five projects were launched in 3Q14. "Amidst weak sentiment, some cash-constrained developers became more flexible in sales prices in order to attract more buyers, but overall most developers remained reluctant to cut prices," Joe Zhou, Head of Research for JLL Eastern China. As a result, primary prices for high-end apartments only edged down by 0.3% q-o-q this quarter. 

The K.Wah Group's Grand Summit in Jing'an District launched its first 156 units in July, and sold 9 units at an average price of RMB 97,533 per sqm.  Vanke's Emerald Riverside in Pudong District launched 103 units in September and sold 48 units in 3Q14, averaging RMB 71,393 per sqm.

Huangpu residential plot sets national price record. In the land sales market, Lai Fung Holdings acquired a residential-use plot in Huangpu District for an accommodation value of RMB 59,859 per sqm, 62.5% higher than the reserve price.  As 30% of the buildable GFA will be used for social housing, the actual accommodation value of this land plot reached RMB 85,513 per sqm, making it the most expensive plot ever sold in China. This land transaction reflected the optimistic outlook developers still hold for Shanghai's high-end residential market despite the current weakness in the market.

Limited new supply and strata sales of existing properties reduce serviced apartment vacancy despite weak demand. Demand in the leasing market remained weak and showed little sign of recovery. However, thanks to a lack of new supply and some landlords deciding to strata sell their serviced apartment projects instead of holding them for lease only, the average vacancy rate of serviced apartments dropped by 0.6 percentage points to 14.5%. Although vacancy edged down, most landlords kept rents flat given the weakness in demand for serviced apartments. 

Logistics

Non-bonded vacancy rises as multiple projects reach completion.  Shanghai's non-bonded market slowed in 3Q14 as competition from Kunshan and other YRD cities continued to grow. Three projects reached the market this quarter with few pre-commitments: Blackstone, Vailog, and GLP all completed projects in Songjiang and Lingang this quarter, with total supply reaching 350,000 sqm. Pre-commitments in the new projects were limited as of the end of the quarter. In addition, new space became available in projects in Jiading, Fengxian, and near Pudong Airport. As a result, non-bonded vacancy climbed to 16.0% in 3Q14. "Inquiry levels were somewhat less pessimistic, as we observed increasing numbers of firms making site inspections and beginning serious lease negotiations," noted Stuart Ross, Head of Industrial for JLL China. The Songjiang projects are in good locations and are expected to fill up, albeit at a slower pace than during the market's peak. Non-bonded rental growth slowed slightly to 0.7% q-o-q, leaving non-bonded rents at RMB 1.27 per sqm per day. Developers are beginning to offer more generous incentives to compete for tenants, which could be a drag on effective rental growth looking ahead.

Vacancy falls and rents continue to rise in bonded market. Bonded vacancy declined from 9.9% to 8.7%, continuing a trend of strong take-up that began with the launch of the Shanghai Free Trade Zone (FTZ) in late 2013. The pace of absorption slowed this quarter as the initial wave of excitement for the FTZ began to pass, and companies awaited news of further trade-related reforms in the zone. Amazon.com announced plans to establish a presence in the FTZ, though details have yet to be released.  Bonded rents rose 1.6% q-o-q to RMB 1.20 per sqm per day.

Investment

Investors seeking opportunities beyond core Grade A properties. "Foreign funds continue to seek out opportunities in the Shanghai office market, although high asking prices for core properties have led some funds to seek out more affordable decentralised or Grade B opportunities," said Alan Li, Head of Investments for JLL Shanghai. "That said, high asking prices for core properties have led some funds to seek out more affordable decentralised or Grade B opportunities." For example, Alpha Investment Partners made an en bloc purchase of Shanghai ICP, a decentralized Grade A project in Hongkou District, for RMB 1.5 billion in 3Q14. Shanghai Industrial Investments in a JV with Nan Fung Group also purchased Shanghai Mart in Changning District for approximately RMB 3.5 billion this quarter, with plans to refurbish the office property. A portion of the Sky SOHO development in the same submarket was sold to Ctrip this quarter for RMB 3.1 billion for owner occupation. SOHO China has remained a net seller of property during the past year. While the office investment market was less upbeat than this time last year, it was the most actively traded sector in Shanghai this quarter and remains a top priority for investors that have raised funds to target commercial property in China. 

There were no major retail transactions this quarter. The healthy retail centres with high occupancy and strong rental performance remain largely unavailable in the sales market. The sector is still viewed with caution due to sellers' high asking prices and the weakened future outlook for retail given slowing sales growth, the impact of e-commerce, and strong competition from future developments.

Despite a lack of tradable assets, interest from investors in China's logistics sector remained upbeat. For example, Mitsui and Mitsubishi invested RMB 888 million into Beijing Properties Holdings Group, who bought the Shanghai's Phoenix Waigaoqiao Bonded warehouse in 2013 and is actively pursuing additional developments across China (including Shanghai). In addition, Ping An Real Estate and PAG signed a strategic agreement with commercial developer Wuzhou to commit RMB 1.5 billion to wholesale market and warehouse projects.