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News Release

Shanghai

Office rents rise in both Pudong and Puxi CBDs; High-end residential sales rebound strongly

According to JLL Shanghai Second Quarter Property Review


SHANGHAI, 8 July 2015 – Domestic financial companies and multinational retailers were active in the CBD office leasing market. "Strong leasing activity contributed to rising rents in both the Pudong and Puxi CBDs," said Anthony Couse, Managing Director for JLL East China. New office supply in decentralized areas reached a record level t​his quarter, but vacancy fell as demand was strong. In the retail market, four new projects opened in core areas while fast fashion chains and children-related brands continued to expand. High-end residential sales volumes and prices rebounded as March's policy loosening brought buyers back to the market. In the logistics market, vacancy fell this quarter amid steady leasing and a lack of new completions. Foreign institutional investors were active this quarter, concluding transactions for Grade B office assets and assets in decentralized locations.

Office

Demand from domestic financial services industry on the rise in Puxi CBD. Domestic financial services companies continued to pursue the limited available space in the Pudong CBD. Major commitments include The New Development Bank's in-house expansion in the Oriental Financial Center (6,700sqm) and Wanjia Fund's in-house expansion in Lujiazui Investment Tower (5,400 sqm). "While domestic financial services firms continued to drive demand in the Pudong CBD, such companies also became increasingly active in the Puxi CBD," said James Allan, Head of Markets for JLL Shanghai. A domestic P2P lending company, for instance, leased around 5,000 sqm in 3 Corporate Avenue this quarter. In addition to domestic financial services, MNC retail companies also stood out as a major source of office demand this quarter. 

Decentralized supply hits a record high. In the decentralised market, eleven Grade A projects with a total GFA of 669,354 sqm reached completion, including three projects in Pudong (181,482 sqm) and eight projects in Puxi (487,872 sqm). In the CBD market, two projects were completed in Puxi: 3 Corporate Avenue (56,118 sqm) in Huangpu District and Raffles City Changning Tower 3 (27,956 sqm). The Puxi CBD shrugged off the impact of the new supply, with vacancy dropping from 8.4% in 1Q15 to 5.7% this quarter. There were no new completions in the Pudong CBD, where vacancy further tightened from 3.4% to 1.6% this quarter.

Rental growth accelerates amidst strong leasing activity. Supported by strong leasing, Pudong CBD Grade A rents increased by 3.9% q-o-q to RMB 10.8 per sqm per day, while Premium Grade A rents there increased by 4.1% q-o-q to RMB 12.2 per sqm per day. Puxi Grade A rents were also up, though at a slower pace, rising 1.8% q-o-q to RMB 9.1 per sqm per day. Premium Grade A rents in Puxi increased by 2.7% q-o-q to RMB 10.4 per sqm per day. 

Strata-titled Office

Underpinned by strong demand from domestic corporate buyers, transaction volume hits a record high in 2Q15. Four high-end office projects with GFA totalling to 93,418 sqm launched in Shanghai's high-end strata-titled office market, achieving an average sales ratio to 61% by the end of the quarter. Well capitalized domestic corporate buyers continued to acquire large spaces in high-end strata-titled office buildings this quarter. For example, a domestic commercial real estate developer purchased all of the space in Vanke Center Xuhui Tower 3 (38,180 sqm). In addition, a domestic high-tech company purchased around 13,100 sqm in Hongqiao Sincere Center for self-use. Driven by strong demand from corporate buyers, 2Q15's transaction volume reached historic high of 126,116 sqm, up 131.5% y-o-y. About 85% of this quarter's transactions were contributed by deals with transaction values exceeding USD 5 million. 


Business Parks

Demand in core business parks rises, driven by strong expansion and consolidation activity. Companies from the manufacturing, trading, high tech and IT sectors remained the main source of demand in core business park markets. Such tenants sought contiguous spaces that could accommodate multiple functions in a single office location. For example, French firm Michelin Tweel Technologies leased 11,000 sqm in the Linkong area's IPB Phase 2 in order to consolidate R&D and training functions in one location. High tech and IT companies continued to drive the leasing markets in Zhangjiang and Caohejing. For example, US-based Lattice Semiconductor Corporation expanded to the recently completed SBP Phase 3 in Caohejing with a 6,000 sqm lease. Looking ahead, leasing demand is expected to diversify beyond traditional sectors like manufacturing, trading, and technology. For example, business incubators – many associated with private equity firms - have begun seeking large spaces to support their start-up cultivation efforts. Despite ongoing high levels of supply, rents edged up by 0.8% q-o-q in 2Q15.  Looking ahead, strong leasing activity will continue to support rental growth, although large upcoming supply will hold rental increases to a moderate pace.  

Capital Markets

Foreign institutional investors more active in 2Q15.  "Investment market sentiment has improved, and foreign investors have been quite active and even aggressive in the core office market in Shanghai," said Alan Li, Head of Investments for JLL East Hub, China. 686 Jiujiang, an office building in a CBD location, was sold to a foreign institutional investor this quarter. Sandhill Plaza, a cluster of office buildings located in the business park area of Pudong's Zhangjiang Hi-Tech Park, was sold to Mapletree China Commercial trust for RMB 1.88 billion. Morgan Stanley purchased the buildings in 4Q13 and sold the assets after less than a year and a half in holding. Stabilized, high-quality assets in core business park areas are increasingly sought after by investors. While there is considerable interest and capital waiting on the sidelines to acquire fully stabilized Grade A office buildings in core CBD locations, the intense competition for these assets means that those investors who possess the most optimistic and long term view of the market would most likely prevail in the bidding process.

Investors gain access to retail market through entity-level investment in a local retail developer. APG and Ivanhoe Cambridge invested USD 920 million to acquire a significant stake in Chongbang, a well-known retail developer that owns the "Life Hub" malls. Given the lack of asset-level deals in the retail sector in the past few years, entity level deals may become popular as they allow foreign investors to acquire portfolios of assets, gain access to pipelines of deals, and acquire local operational platforms.

Ivanhoe Cambridge and CBRE Global Investors invest in logistics developer.  The two firms committed to invest capital in the LOGOS China Logistics Club, which is managed by the Shanghai-based unit of logistics developer LOGOS Property. The specific amount invested was not disclosed, though the commitments reportedly will permit investments worth up to $400 million, focused on developing and owning logistics properties in major Chinese cities, especially Shanghai. The deal is the latest in a series of entity-level investments in China's logistics property market. 

 

Retail

Fast fashion and children-related brands show strong demand.  In the mid-range market, fast fashion retailers led leasing in Q2. Forever 21 opened two stores and is committed to open a 4,300 sqm flagship on Huaihai Road. Meanwhile, children-related brands expanded at an accelerated pace: Legoland Discovery Centre is committed to open in Parkside Plaza in Putuo, and Disney opened its global flagship store in Lujiazui. Tier 1 luxury retailers remained cautious about opening new stores. After Chanel adjusted prices in Q1, Gucci slashed prices by 50% in a nation-wide sales event and triggered a rush of buyers to its stores. "Additional luxury brands are reported to be considering their own price cuts in hopes of reversing consumers' habit of shopping overseas," said Eugene Tang, Head of JLL Retail for Shanghai and Eastern China.

Four new projects open in the core market. New World Daimaru Department Store, Crystal Galleria, Star Live Plaza, and Xinlin Station opened with a total GFA of 366,000 sqm. The department store is anchored by luxury brands on the ground floor; the other three shopping malls have a mid-range positioning and satisfy local communities' demand for lifestyle shops. Vacancy rose to 11.5% in core areas as new projects opened with vacancy rates above the market average, due in part to excessive rental expectations. Vacancy decreased to 7.5% in non-core areas as several malls filled empty space on upper floors with entertainment and other experience-oriented tenants.​

Successful tenant adjustment contributes to rental growth. In the core area, open-market ground floor base rents increased by 1.9% q-o-q to RMB 52.3 per sqm per day. Non-core rents rose 1.1% q-o-q to RMB 20.6 per sqm per day. In both markets, strong performance in successful malls that were undergoing tenant adjustment contributed to overall rental growth.

 

Residential

Accommodative policies boost sales in 2Q15.  March's mortgage policy easing and the series of interest rate cuts since November helped to release pent-up demand from upgraders, fuelling a strong sales recovery in 2Q15. Total sales volume in Shanghai's primary market surged 104% q-o-q in 2Q15.

Developers raise prices for high-end apartments as sales increase. Sales in the high-end segment reached a five-year high of 780 units in 2Q15, up 145% q-o-q. With sales momentum substantially improving, developers started to regain pricing power. Over the quarter, some developers raised their sales prices by as much as 5-10%. On average, primary prices for high-end apartments increased 2.6% q-o-q in 2Q15, accelerating from last quarter's 0.1% gain.

Serviced apartment vacancy improved with no new completion in this quarter.  Demand for serviced apartments improved in 2Q15 as some MNCs – particularly those in the automotive industry - deployed new expatriates to Shanghai. With no new projects reaching completion in the quarter, vacancy in the serviced apartment market fell by 2.8 percentage points to 13.4%.

Upgraders to drive further high-end sales recovery in 2H15.  "This quarter's strong sales momentum will carry over into 2H15, likely resulting in accelerating price growth," said Joe Zhou, Head of Research for JLL Eastern China. Sales volumes are likely to continue rebounding over the remainder of 2015 as an accommodative policy stance taps into strong upgrade demand. With sales activities further picking up, we expect more developers to raise prices in the second half of 2015. 

 

Logistics

Traditional retailers contribute bulk of demand.  Non-bonded net absorption reached 67,000 sqm in the quarter. "Though down somewhat from last quarter's 93,000 sqm, this quarter's take-up remained impressive given the lack of new supply," said Stuart Ross, Head of Industrial for JLL China. Traditional retailers were active this quarter. E-Land, for instance, took 42,000 sqm in the Minhang submarket. 3PLs and manufacturers leased space in the Pudong sub-markets, with automobile firms notably active in Lingang.

Vacancy drops as new supply concentrates at year's end. There were no new completions this quarter. Some developers acquired land on the secondary market with an eye to future developments. With supply tight, the quarter's take-up contributed to a decline of 1.5 percentage points in total non-bonded vacancy, to 13.3%. 

Rents flat for third consecutive quarter.  Vacancies that had built up over 2H14 remained considerable and landlords focused on leasing space by holding rents stable. No new supply in the third quarter may create room for landlords to raise rents as vacancy falls further, but limited pre-leasing demand for projects delivering late in the year indicates landlords will need to be cautious in raising rents. As a result, rental growth in 2015 will have difficulty matching the level of the previous year.​