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News Release

Shanghai

Domestic financial firms active in Pudong and Puxi CBD leasing markets; Loosening policies expected to spur residential sales recovery 

According to JLL Shanghai First Quarter Property Review


SHANGHAI, 20 April 2015 – Domestic financial companies continued to drive activity in both the Pudong and Puxi CBD markets. "In Pudong we observed retail banks from outside of Shanghai leasing space to set up their Shanghai offices," said Anthony Couse, Managing Director for JLL East China. Premium Grade A rents in Pudong rose at a stable pace this quarter, while Premium Grade A rents in Puxi were flat. In the retail market, mass market fashion and affordable luxury brands continued to expand, while top-tier luxury brands kept expansion plans on hold and some adjusted pricing strategies to spur sales.  High-end residential sales were down in 1Q15, but policy loosening announced at the end of the quarter indicates a recovery in the months ahead.  In the logistics market, vacancy fell as leasing activity was strong. Domestic enterprises and investors drove office investment activity in 1Q15, with firms acquiring office buildings for self-use. 

Office

Domestic financial companies remain active in both Pudong and Puxi CBD markets. Domestic financial institutions continued to be the main source of demand in Pudong. For example, Shanghai Life Insurance leased 3,000 sqm in Oriental Financial Center. Two retail banks headquartered outside Shanghai each took 1,000 sqm in Hang Seng Bank Tower to set up their Shanghai offices. "In Puxi, domestic companies were active in seeking opportunities for expansion," said James Allan, Head of Markets for JLL Shanghai. "For example, China Minsheng Investment in-house expanded by 20,000 sqm in 100 Bund Square in 1Q15." MNC professional service companies were also active in upgrading and expanding their office space.  Puxi CBD vacancy fell from 8.5% to 7.0% in 1Q15, while Pudong CBD vacancy remained tight at 3.4%. 

Large volume of new decentralized supply. The Place Tower C (23,500 sqm) in Changning District was the only Grade A office building completed in the CBD market in 1Q15. In the decentralised market, four new projects with a combined space of 133,715 sqm were completed in Puxi: The Hub Tower 5 (15,414 sqm) as well as HQ Green Valley Plaza Phase 2 (39,155 sqm) in Minhang District, KIC Corporate Avenue (53,269 sqm) in Yangpu District and North Bund Business Centre (25,877 sqm) in Hongkou District.

Rents in Pudong continued to grow faster than those of Puxi.  In 1Q15, Pudong Grade A rents rose 2.0% q-o-q to RMB 10.3 per sqm per day, while Pudong's Premium Grade A rents  increased by 2.3% q-o-q to RMB 11.8 per sqm per day. Competition from upcoming new supply meant that Puxi Grade A rents rose more slowly, edging up by 0.8% q-o-q to RMB 8.9 per sqm per day. Puxi Premium Grade A rents remained flat at RMB 10.1 per sqm per day. 

Strata-titled Office

Transaction volumes remain high in 1Q15 amid large volume of new supply.  Six high-end office projects with total GFA of 111,753 sqm were launched in Shanghai's high-end strata-titled office market. The Hongqiao Transportation Hub continued to be the most active submarket, with four projects totalling 75,377 sqm of GFA being launched. Domestic companies remained active in purchasing large space in the Hongqiao Transportation Hub. For example, China Cityguard Security Service Group purchased around 6,500 sqm in Hongqiao Sincere Center this quarter for self-use purpose. As some deals under negotiation in late last year closed in this quarter, transaction volumes reached 66,014 sqm in 1Q15, up 178.8% on a y-o-y basis. Of this quarter's transactions, 42% were contributed by deals with transaction volume exceeding USD 5 million.


Business Parks

Leasing momentum from hi-tech firms remains strong in 1Q15, driven by new start-up activity. In particular, the core market saw significant requirements from firms seeking to expand and consolidate existing space. For example, US-based Emerson Electric consolidated several office spaces and leased 8,000 sqm in Headquarter Park Ph 2 in Caohejing. In addition, new types of tenants were active in seeking office space in business parks. For example, one tenant specializing in cultural performances was in serious negotiations to lease a large amount of space in Jinqiao, while several serviced office operators initiated expansion plans in core business parks like Zhangjiang and Caohejing in order to meet rising requirements from start-up businesses. Regus, for instance, expanded into Zhangjiang by leasing 1,300 sqm in Chamtime Plaza. Going forward, leasing demand for business park space is expected to grow more diverse and will support strong net-absorption in the Shanghai market.

Rents grow a slight 0.5% q-o-q as supply remains large. Ongoing high levels of new supply made landlords cautious about raising rents, keeping overall rental growth slight. Looking ahead, strong leasing activities will continue to support rental growth, although sustained new supply will limit rental appreciation to a moderate pace. 

Capital Markets

Domestic players were the key drivers of office investment market activity in 1Q15. "Domestic enterprises and investors may command an increasing presence in the Shanghai office market," said Alan Li, Head of Investments for JLL East Hub, China.  "Whilst investment interests from foreign funds remain strong, the difficulty of procuring Grade A assets at attractive valuations has expanded their investment focus to look at grade B assets in core-CBD locations."

Domestic enterprises were active in the market, acquiring office buildings for self-occupation. For example, HK-listed AVIC Joy Holdings acquired a building in Shanghai Port International Cruise Terminal in Hongkou District for RMB 1.6 billion in 1Q15. In addition, domestic manufacturer OPPLE Light bought three buildings in the MixC development in Minhang District for RMB 538 million. Domestic investors also were active in the market.  Z River Real Estate Equity Fund acquired Sincere Space 1B for RMB 908.4 million from a local developer, Sincere Group. Going forward, active participation by domestic investors looking for core and core-plus investment opportunities may become a larger component of the investment activities in the market.

The retail market remained quiet, maintaining its status-quo. A wide price gap remains between buyer and seller, as evidenced by the fact there were virtually no en-bloc transactions this quarter. High-performing shopping centres with strong rental growth and low vacancy rates remained unavailable from the investment market.

Lack of investible assets channeled investor interest into entity-level investments in local warehouse developers. One major international investor spent RMB 220 million to acquire a 70% stake in a development project in Jinshan from a local developer, Ambition Mind Holdings. The two entities also plan to co-develop several projects in East China over the next two years.

Retail

Mass market fashion and F&B brands expand while luxury retailers shift pricing strategy. In the high-end market, while affordable luxury brands continued to look for space, top-tier luxury brands kept expansion plans on hold. "In the mid-range market, fast fashion brands sustained their pace of expansion as H&M and Pull&Bear committed new stores in Shanghai. While large banquet restaurants struggled with performance, smaller premium casual dining restaurants expanded aggressively," said Eugene Tang, Head of JLL Retail for Eastern China.

Non-core vacancy rises slightly as two projects open. Metro City in Putuo and Huizhi Life Plaza in decentralised Pudong opened in 1Q15, adding 210,000 sqm of retail GFA to Shanghai's retail market. Both projects are located in emerging submarkets, serving the neighbouring communities and dedicating much of their leasable space to F&B, entertainment and other lifestyle tenants. Vacancy edged up to 8.2% in the non-core market as the new malls entered the market with relatively low opening rates. Vacancy in the core area decreased slightly to 7.9% as several properties completed tenant adjustments. 

Rents rise in both core and non-core markets. In the core area, open-market ground floor base rents increased by 1.1% q-o-q to RMB 51.8 per sqm per day. Non-core rents gained 1.4% q-o-q to RMB 17.5 per sqm per day. Strong demand for space and rental growth were observed in key successful malls, while newly opened properties in emerging submarkets still struggled to fill their space.

Residential

Sales activity slows as homebuyers shift to wait-and-see attitude. Despite a further interest rate cut in February, market sentiment weakened in 1Q15, largely due to seasonal effects rather than a contraction in demand. Primary sales volumes in the mass market fell 43.6% q-o-q.

Primary prices for high-end apartments remain flat in 1Q15. After a supply boom in 2014, developers mainly focused on clearing up inventories. The high-end segment recorded 319 units sold in 1Q15, down 43% q-o-q. As sales activity remained low in 1Q15, most developers kept sales prices unchanged in the high-end segment.

Serviced apartment vacancy ticks up as three new projects open.  Leasing demand from expatriates remained weak as MNCs continued to localize new hiring instead of sending more expatriates to Shanghai, a result of China's moderating growth and the weak economic outlook in their home markets. As such, serviced apartment vacancy increased by 1.7 percentage points to 16.2% in 1Q15. Three new serviced apartment projects - Aroma Garden Serviced Suites by Lanson Place, Ascott Heng Shan Shanghai and Stanford Residences Jing An - opened in 1Q15, adding a total of 282 units to the market. Meanwhile, softening demand led several serviced apartment projects to be converted to other uses.

Accommodative policy stance will facilitate a sales recovery in 2015. At the end of the quarter on 30th March, the central government loosened mortgage policies for second homebuyers and eased taxation on home sales. "Under these supportive measures, we expect sales to recover in Shanghai over the following months in both the mass market and the high-end segment," said Joe Zhou, Head of Research for JLL Eastern China. High-end prices are likely to rise in 2H2015.

Logistics

Non-bonded leasing activities high as demand improves.  Net absorption reached 93,270 sqm in an active quarter for leasing. "Tenants who were cautious in 2014 returned to the market to take advantage of attractive incentives," said Stuart Ross, Head of Industrial for JLL China. Over 70,000 sqm of net absorption was recorded in projects that completed in 2014, vindicating our view that they would lease out in time, though at a slower pace than in the peak years of 2010-2012. 3PLs contributed to a large share of demand, with strong leasing activities across the city. In addition, inquiries from retailers and manufacturers were stable, and companies like IKEA and Blueair took significant amounts of space in West Shanghai.

Vacancy falls only slightly as one project is completed with no commitments. GLP finished the second phase of its Pudong Heqing project, adding 74,000 sqm of space to the Pudong submarket. It was the first high-quality warehouse completed outside of Pudong's airport and seaport clusters since 2008. As of the end of the quarter, there were no commitments. Non-bonded vacancy fell from 15.6% to 14.8% in 1Q15 - a small decline in light of the quarter's active leasing environment. Lack of leasing progress in the quarter's newly completed project limited the decline in non-bonded vacant space.

Rental levels flat for a second quarter, but project delays may create room for growth. Non-bonded effective rents were flat on a like-for-like basis at RMB 1.28 per sqm per day. Landlords continued to offer incentives and refrained from raising rents as they sought to lease out vacant space that had built up over 2H14. Several projects were delayed out of 2015.  Reduced supply pressure over the remainder of the year may give breathing room for vacancy to climb down and allow rents to rise later in 2015. 

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