Skip Ribbon Commands
Skip to main content

News Release

Shanghai

JLL: Shanghai 2014 Fourth Quarter Property Review

Domestic financial firms and MNC retailers active in CBD leasing market; Shanghai office sector is standout performer in China’s property investment market in 2014


​SHANGHAI, 14 January 2015Domestic and JV financial institutions were active in the Pudong CBD office market this quarter. "We also observed MNC retailers actively seeking opportunities for upgrading and expanding their office space," said Anthony Couse, Managing Director for JLL East China. Grade A office rents in Puxi resumed rising this quarter, while Pudong CBD rents continued to increase steadily. In the investment market, two large transactions by Gopher and Oceanwide underscored the attractiveness of Shanghai's office sector, which accounted for 78% of investment volume in Shanghai this year and remains a standout in China's property investment landscape. In the retail market, vacancy rose slightly as a number of new projects opened, though stable demand from fast fashion brands and other tenants allowed rents to continue rising. Supportive policies and a quarterly rise in sales supported a slight increase in high-end residential sales prices. In the logistics market, leasing activity from retailers, manufacturers, and 3PLs contributed to a rise in net absorption.

 
Office

 Domestic financial services companies and MNC retailers active in the CBD market in 4Q14. In Pudong, domestic and JV financial institutions were active in seeking Premium Grade A office space. For example, the New Development Bank, a multilateral development bank operated by the BRICS states, leased approximately 6,000 sqm in Oriental Financial Center as it set up its office in Shanghai. In Puxi, domestic finance companies continued to demonstrate strong demand in the leasing market. Many new enquiries for office space continued to come from domestic companies in internet-based financial services. Additionally, MNC retailers were active in seeking opportunities for upgrading and expanding their office space. For example, American retailer VF Corporate leased 8,000 sqm in Henderson 688 this quarter.

Three projects delivered in the decentralized market; no new completions in the CBD market in 4Q14. In the decentralised market, three new projects with a combined office space of 238,998 sqm were completed this quarter. One project, HQ Green Valley Plaza Phase 1(89,373 sqm), is located in decentralized Puxi, while the other two, Lujiazui Century Financial Plaza Bloc 3 (62,125 sqm) and Chamtime Plaza (87,500 sqm), are located in decentralized Pudong.

Puxi rents edge up from a downward trajectory. Pudong Grade A rents continued to increase steadily, up by 0.9% q-o-q to RMB 10.1 per sqm per day. After trending downward for much of 2014, Grade A rents in Puxi increased by 0.6% q-o-q to RMB 8.8 per sqm per day in 4Q14. In the Premium Grade A market, landlords in both Pudong and Puxi became more willing to negotiate on renewal rents in order to retain high-quality tenants in their buildings. As a result, Pudong Premium Grade A rents grew by just 0.2% q-o-q to RMB 11.5 per sqm per day, while Puxi Premium Grade A rents rose slightly by 0.1% q-o-q to RMB 10.1 per sqm per day.

Rental growth expected to slow in Pudong in 2015, while Puxi rents remain flat. Looking forward to 2015, domestic companies will remain the main source of demand in the CBD leasing market. Anny Zhang, Head of Pudong Markets for JLL Shanghai said, "Although Pudong and Puxi will witness a large volume of new supply, rising demand from domestic tenants is expected to prevent a decline in rents in both markets." We expect that rents will continue to grow in Pudong, although at a slower pace compared to 2014. In Puxi, rents are projected to remain flat throughout 2015.

Strata-titled Office

High-end strata-title transaction volumes in 2014 reached their highest level since 2011. In 4Q14, two new projects - Henderson CIFI Center in the Hongqiao Transportation Hub cluster and Shanghai International Shipping Service Center Bloc 1 and 2 in North Bund – respectively added 20,833 sqm and 29,333 sqm onto Shanghai's strata-titled high-end office market. Corporate buyers continued to show strong interest in purchasing large amounts of high-end office space for self-use. For example, Media Tek, a well-known integrated circuit (IC) design company, purchased around 12,500 sqm in Poly West Bund Center this quarter for self-use. Annual transaction volumes reached 230,065 sqm in 2014, up 22.5% on a y-o-y basis. Deals with transaction values exceeding USD 5 million accounted for around 52% of the year's transaction volume.


Business Parks

Leasing demand was robust, with consolidation and expansion requirements driving up net take-up in core business parks. Several major leasing transactions concluded negotiations this quarter, finishing a strong year for net absorption in the core business parks. For example, American manufacturer Danaher Corporation consolidated several business units and leased 45,000 sqm in IBP Phase 3 in the Linking Economics Park. Companies from the advanced manufacturing and trading sectors as well as hi-tech and IT continued to propel the leasing market in Zhangjiang, Caohejing and Linkong. Despite the large amount of new supply completed this year, strong demand allowed average rents to continue rising, up 3.6% y-o-y. Rental growth was driven by projects like SBP, Jinqiao Office Park and Sandhill Plaza. In the investment market, interest from foreign investment funds for projects in core business parks continued to rise, as prospects for core assets are positive.

Looking forward to 2015, demand for top-quality projects in good locations will remain robust, especially in the Caohejing and Zhangjiang submarkets, which have mature business clusters and clear industrial orientations. Hi-tech and IT as well as chemical and pharmaceutical companies in particular are likely to continue their office expansion, which will support moderate rental growth in core business parks. However, new supply is expected to reach record high in 2015, which will lead to slower rental growth than in 2014.


Capital Markets

Investment rebounds in Q4 as domestic investors help prop up the market. The full year 2014 saw a decline in the volume of commercial property transactions across China as the slowing economy and large supply volumes led to more caution from investors. Full year transaction volumes were approximately RMB 106 billion, a decline of 27% from the record high of RMB 145 billion last year. Following a slow first half, the market saw a recovery towards the end of the year, however, and 4Q14 recorded the strongest transaction volume since the same period in 2013. This transaction volume was largely supported by domestic Chinese buyers who, in addition to aggressively pushing into overseas markets, have also stepped up their activity in key Chinese markets like Shanghai and Beijing. Chinese investors thus accounted for more than 74% of transactions in China this year, up from 65% in 2013.

Shanghai remains the most popular investment market in China in 2014. Despite an overall slowdown in China's commercial investment market, Shanghai continued to dominate the market and was the clear favourite for investors this year. Total transaction volumes in the city reached RMB 42.1 billion, accounting for approximately 40% of China's total investment volume. As in previous years, the office market accounted for the most significant share of commercial transactions, with 49% of total deals in China and more than 78% of the transactions completed in Shanghai. "The Shanghai office sector has therefore remained a clear winner in the investment market in China as most potential buyers, most notably domestic players, continued to see this as a strong long-term investment environment and a safe haven in a more volatile property market in China. The recent announcement of the expansion of the Free Trade Zone in Pudong should help to maintain positive sentiment for the long-term potential of this sector", said Alan Li, Head of Capital Markets for JLL East China.

Two key office transactions close out the year in Shanghai.  Two large transactions in the fourth quarter exemplify the consistently strong interest from domestic investors in key Shanghai office properties. In the first, JLL acted on behalf of the developer Sunac Greentown to help sell a large office building along the Huangpu riverfront – Suntown Plaza – to Gopher Asset Management, a domestic real estate fund for approximately RMB 3.1 billion. In addition, Oceanwide Real Estate purchased two Grade B office properties in Huangpu District, Harbour Ring Plaza and Harbour Ring Huangpu Centre from Hutchinson Whampoa this quarter for a total of RMB 3.0 billion.

We anticipate that 2015 will continue to see a large number of office transactions in Shanghai. In addition, several large shopping mall transactions in other parts of China including Beijing suggest that the retail market may be warming and investors are becoming interested again in well-located, stabilized properties. Should suitable assets become available, the retail market in Shanghai may move out of the doldrums next year and start to see stronger transaction volumes. Direct investment in industrial properties remained limited in 4Q14 as most investors continued to focus on committing funds to logistics developers themselves.  Although there were no new major commitments to developers announced in 4Q14, this is likely to be a temporary pause.

 

Retail

Core and non-core areas each saw two new projects open in 4Q14. In the core market, the south section of The Place - formerly known as The HQ - opened in Hongqiao.  The first two floors of the mall were occupied by fast fashion tenants, including Uniqlo, Zara, H&M and Urban Revivo. Nearby, Arch Walk held a soft opening. The mall features an open-air garden theme with a large scale Japanese supermarket, Apita, in the basement. In the non-core market, Chamtime Plaza opened next to Line 2 Jinke Road Station in Pudong, anchored by Uniqlo and H&M. Bailian Group opened a new shopping mall called Bailian Binjiang Shopping Centre in Yangpu district, featuring a variety of F&B options and a large LED screen extending between the second and fifth floors. This mall is anchored by Shanghai Gecheng KTV in the basement and Shanghai International Cinema City on the top floor, and ground floor tenants include Nautica, Scofield, Starbucks, and Pizza Hut.

Fast fashion brands expand their footprint with new mall openings. In the mid-range market, fast fashion brands accelerated their pace of expansion. In the past quarter, Zara replaced the Li Ning store on East Nanjing Road, opening its largest Shanghai flagship store with a total GFA of 5,000 sqm spanning four floors. Popular fast fashion brands established a presence in many of Shanghai's newly opened shopping malls. Uniqlo opened 3 new stores in Injoy Plaza in Qingpu as well as The Place and Chamtime Plaza. In addition, H&M opened one new store in Chamtime Plaza and is scheduled to open another in The Place by May. Spao, a sub-brand of E-Land Group, opened a 2,700 sqm store in Daning Life Hub. In the high-end market, affordable luxury brands continued to expand. Michael Kors, for instance, has committed to open two new stores in River Mall and Grand Gateway.

Vacancy rose this quarter, but stable demand enabled rents to rise slightly. In the core area, vacancy increased slightly to 8.7% as several properties had upper floor banquet style restaurants close down. Vacancy also increased to 7.3% in the non-core market as new malls entered the market with relatively high vacancy. In non-core areas, a large disparity exists between mature regional centres and newer properties, which have little pricing power. Landlords of recent openings are becoming increasingly generous on rental terms in order to achieve high occupancy. In the core area, open-market ground floor base rents increased by 1.3% q-o-q to RMB 51.2 per sqm per day. Non-core rents rose a slower 0.7% q-o-q to RMB 17.4 per sqm per day. There were no en-bloc transactions this quarter.

Spike in supply to pressure rental performance for some new projects in 2015. Retailers will maintain steady momentum in looking for expansion opportunities in Shanghai. At the same time, a large supply pipeline is expected for the non-core market in 2015. Several future projects are located in some already-crowded submarkets. "As cautious sentiment is predicted to become a new normal, landlords have become more generous on rental terms especially in immature areas," said Eugene Tang, Head of JLL Retail for Shanghai and Eastern China. Higher quality suburban malls continue to emerge, attracting local residents who used to shop at malls closer to the city centre and imposing challenges on newly opened non-core properties. While such non-core projects will experience longer stabilization periods, mature properties in key retail submarkets will continue to enjoy strong bargaining power.

 

Residential

Sales volume recovers in 4Q14 under supportive policies. Following the announcement of mortgage policy easing by the People's Bank of China (PBOC) on 30 September, 4Q14 saw additional supportive measures implemented at the local level. Starting on 20 November, Shanghai relaxed its definition for ordinary commodity housing, effectively reducing transaction costs for potential homebuyers. In addition, the PBOC cut the one-year benchmark lending rate by 40 basis points to 5.6%, further enhancing home buyers' affordability. The loosening policies largely improved market sentiment, fuelling a sales recovery towards the end of the year. Sales volumes of commodity housing in the primary market surged 58% q-o-q to 3.5 million sqm in 4Q14, the highest level seen this year. However, due to the weak sales in the first three quarters, 2014 concluded with 9.9million sqm sold, down 23% from a year ago.

High-end prices edge up as developers limit price discounts. Developers put a total of 678 new units onto the sales market in 4Q14. The fourth quarter saw 558 units of high-end apartments sold, up 63% from 3Q14. The year concluded with 1,336 units sold, down 3% y-o-y. As market sentiment improved this quarter, some developers reduced their price discounts, although most projects' prices remained largely unchanged.  As a result, primary prices for high-end apartments edged up by 0.3% in 4Q14.

Land sales achieve high transaction prices and land premiums towards the end of the year. China Minsheng Investment Group acquired a mixed-use plot in Dongjiadu area in Huangpu District at a record high price of RMB24.8 billion in November. In addition, Gree Real Estate acquired a residential parcel in Qiantan area in Pudong District at an average accommodation value of RMB 65,832 per sqm, 127% higher than the reserve price. "Developers' reviving appetites for residential land acquisitions reflected their optimism towards Shanghai's high-end residential market over the medium and long term," commented Joe Zhou, Head of Research for JLL Eastern China.

Serviced apartment rents stay flat due to weak demand. In the leasing market, demand from expatriates remained subdued in 4Q14 due to a combination of the holiday season and MNCs' hesitation to send new expatriates to China around the end of the year. However, as total stock was reduced due to a lack of new supply and the withdrawal of Savills Residence Century Park in Pudong District, the overall vacancy rate in the serviced apartment market edged down to 14.4% in 4Q14. Most landlords kept rents unchanged in order to retain their existing tenants as leasing demand continued to be soft. As such, average rents for serviced apartments remained flat in 4Q14.

HPRs expected to limit recovery of the high-end segment. Under the supportive policy environment, the recovery in demand is likely to extend into 2015.However, the sales recovery in the high-end segment will be more moderate than the mass market as HPRs - which remain in place in Shanghai - will continue to curb investment demand. As such, we expect average prices for the high-end segment to increase only moderately in 2015. In the leasing market, demand is unlikely to see a quick upturn given a weaker economic outlook for China next year. With several serviced apartment projects in the pipeline, vacancy will be pushed up while rents will feel downward pressure in 2015. 

 

Logistics

Net absorption rises but non-bonded vacancy remains elevated. The non-bonded market was active this quarter, with net absorption rising to over 100,000 sqm, up from 27,000 sqm in 3Q14. "Manufacturers, retailers and 3PLs all took considerable space in either new completions or existing projects," commented Stuart Ross, Head of Industrial for JLL China, "Other players such as e-commerce firms and hypermarkets were active as well." Two new non-bonded projects were completed in Shanghai this quarter. Vailog finished a three-storey warehouse in Minhang, adding about 46,000 sqm space to West Shanghai. GLP completed a 55,000 sqm built-to-suit project for BMW, who will use the space for its after-market services covering the Asia-Pacific region. Existing projects put a combined 70,000 sqm of space back onto the market this quarter when tenants failed to renew leases, while a large project in Songjiang that launched unoccupied last quarter failed to make leasing progress. These movements led total non-bonded vacancy to decline only slightly from last quarter's peak of 16.0% to 15.6%. 

New supply slows momentum for non-bonded rents; Kunshan continues to outperform. Effective non-bonded rents were flat on a like-for-like basis this quarter, at RMB 1.27 per sqm per day. As a large supply wave reached the market this year and vacancy rose significantly in some submarkets (notably Songjiang), landlords felt pressure to offer better incentives to their tenants. Coupled with a slowdown in asking rents, this led to a continuous deceleration of effective rental growth over 2014. Meanwhile, Shanghai's satellite city Kunshan had a banner year in 2014, with rents rising 11.5% y-o-y on strong demand, limited supply, and a comfortable rental gap with Shanghai.

Bonded rents continue to rise, though at a slower rate. Vacancy in the bonded market remained flat in 4Q14 as no new major leases were signed. Demand was stable, however, with manufacturers and 3PLs making inquiries for bonded space. Bonded rental growth slowed to 0.8% q-o-q as the one-off effects of 2013's FTZ launch continued to pass.

Non-bonded rental growth to remain moderate in 2015. Rental growth in 2015 is expected to hew close to its 2014 level, as demand remains stable and another wave of over 500,000 sqm of non-bonded space will be delivered. There may be some upside potential, given that 2015's supply is relatively well-distributed around the city, and there is unlikely to be a repeat of the glut seen in some submarkets in 2014. Rental growth in Kunshan is expected to slow down in 2015, as rents in popular districts approach those of their Shanghai neighbours, and the city sees a record of over 300,000 sqm of new supply.