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News Release

Shanghai

Office rents grow robustly, spurring strong investment activity

According to JLL Shanghai Third Quarter Property Review


​SHANGHAI, 15 October 2015 – Domestic financial services firms, multinational retailers, and professional service providers were active in the CBD office leasing market. "Strong rental growth boosted sentiment among investors, helping investment volumes remain resilient in the face of economic headwinds," said Anthony Couse, Managing Director for JLL East China. Reflecting the retail market's ongoing reorientation from department stores to shopping malls, three new malls opened while two department stores closed with plans to re-open as malls.  High-end residential volumes remained strong, contributing to a wave of new launches and further growth in sales prices. In the logistics market, no new projects were completed, but strong demand from 3PLs fuelled an increase in net absorption and helped reduce vacancy to its lowest level in more than a year.

 

Office

Growing new-setup demand from domestic financial services firms. "Domestic retail banks and wealth management companies were active in setting up branch offices in Pudong," said James Allan, Head of Markets for JLL Shanghai.  For example, Changchun Rural Commercial Bank set up its Shanghai branch office in Jin Mao Tower (500 sqm), and a domestic wealth management firm set up a new branch office in Hong Jia Tower (1,800 sqm). Domestic financial services companies sought space to set up new branches in the Puxi CBD as well. A Beijing-based private equity firm leased around 2,600 sqm in 3 Corporate Avenue to set up its Shanghai office. Meanwhile, MNC companies in retailing and professional services also were active in Puxi.

Pudong supply remains tight as new supply concentrates in Puxi CBD and decentralized markets. For the fourth consecutive quarter, no new supply was delivered in the Pudong CBD. In the Puxi CBD, SOHO Bund (87,248 sqm) in Huangpu District was the only project to reach completion. In the decentralised market, three Grade A projects with a total GFA of 151,220 sqm were completed, including Oriental One Tower #3 (30,831 sqm) in Pudong, as well as Hongqiao Vanke Center Phase 1 (58,385 sqm) and SOHO Hongkou Plaza (62,004 sqm) in Puxi. Vacancy in both the Pudong and Puxi CBDs remained nearly flat at 1.6% and 6.1%, respectively.

 

Strong demand fuels rental rises in Pudong and Puxi. Pudong Grade A rents increased by 2.2% q-o-q to RMB 11.0 per sqm per day, and Puxi Grade A rents rose by 2.3% q-o-q to RMB 9.4 per sqm per day. Positive sentiment about rental growth prospects in the CBD market led domestic and foreign institutional investors to become increasingly active in seeking en-bloc investment opportunities.       

 

Strata-titled Office

Recently launched projects continue to see strong self-occupation demand.  Launched in 1H15, Vanke Center Xuhui Tower 1 and Tower 3 have achieved a combined average sales ratio of 85%, due in most part to corporate buyers seeking large spaces for self-occupation. For example, Hong Kong-based food company Lee Kum Kee International Holdings purchased 18,200 sqm in Vanke Center Xuhui Tower 1.  In addition, the Shanghai-listed decoration firm Trendzone Decoration acquired 6,400 sqm in Vanke Center Xuhui Tower 3. The only new launch in Shanghai's high-end strata-titled office market this quarter was Hongqiao Zhenro Center (30,164 sqm) in the Hongqiao Transportation Hub. One office building in this project with a GFA of 2,593 sqm was bought by a company for self-use this quarter. As of 3Q15, transaction volumes for the year to date had reached 258,433 sqm, up 94.2% y-o-y. Around 70% of the transaction value for the past three quarters has been contributed by deals with transaction values exceeding USD 5 million. 


Business Parks

Strong demand pursues available space in top locations and contributes to mild increase in rents. Projects offering small stand-alone buildings with easy access to public transportation were highly sought by tenants. For example, SBP Phase 3 (124,037 sqm) is planning to deliver 15 small buildings adjacent to Metro Line 9 this year and has achieved a commitment rate of 80%, up from 20% in 2Q15. Art collection e-commerce firm Zhaoonline.com leased 5,500 sqm to commit one building in SBP Phase 3.  In Zhangjiang Hi-tech Park, non-traditional financial tenants continued to expand their presence, attracted by the area's reputation as one of Pudong's rising business clusters as well as an undersupply of traditional office space nearby.  For example, Shanghai-based internet finance company Shan Lin Financial set up two new offices respectively in Chamtime Plaza and Starcrest Corporate Plaza. In addition, responding to government calls to boost innovation with business incubator services, two government-backed business incubator firms respectively leased 9,000 sqm and 7,000 sqm in Caohejing and Daning. As a result, rents in the core business park market edged up a further 0.9% q-o-q, driven by strong-performing assets in Zhangjiang and Caohejing.

 

Capital Markets

Strong investment market despite market noise.  "This quarter's investment volume illustrates that investment appetite is resilient in the Shanghai market," said Alan Li, Head of Capital Markets for JLL China.  Alan went on: "Despite recent negative headlines about China's economy, strong market fundamentals and bullish outlook led several investors to complete several major office transactions. JLL helped major clients Gezhouba Group and a JV of Carlyle and CLSA Capital Partners sell their fully occupied assets to other institutional investors, reflecting strong demand by investors looking for the right assets."

Off-shore listed REITs were the major purchasers of assets. The largest stabilized en-bloc investment deal in Shanghai's history occurred this quarter.LINK REIT bought Corporate Avenue 1&2 from Shui On, for RMB 6.6 Billion, reaffirming its commitment to investing in China. This transaction underscored the heated interest for high quality, stabilized assets in core CBD locations in Puxi.  Meanwhile, Yuexiu REIT made its maiden investment outside of southern China by acquiring Hongjia Tower in Pudong from a JV between Carlyle and CLSA Capital Partners for RMB 2.6 Billion. Given the low cost of capital as well as the ability to obtain low cost off-shore financing, REITs are seen to be strong contenders for highly competitive deals in Tier 1 cities in China such as Shanghai.

Pudong locations beyond Lujiazui prove popular investment destinations.  Strong rental growth rates, high rates of take up, and limited investible stock all contribute to the high level investor interest. Around a similar period in which Hongjia Tower was transacted in Pudong's Zhuyuan CBD, Beijing-based Gezhouba group sold GC Tower to Ping An. High quality assets located in Pudong's other CBDs will increasingly be in demand from both domestic and foreign investors alike, as they share a positive market outlook for Pudong.

Logistics investment market active despite lack of en-bloc transactions.  Entity level investment continued to be active, with APG and E-Shang jointly committing an additional USD 285 million to their ventures in China. In addition, investors in strategic partnerships with local developers acquired land through secondary markets. Although there were no en-bloc transactions in Shanghai in 3Q15, LOGOS acquired two logistics projects in the northern satellite market of Taicang. 

 

Retail

Luxury retailers shift strategy to broaden customer bases. Luxury brands expanded their reach by embracing experience-oriented offerings and other non-traditional approaches. Gucci opened 1921Gucci – its first restaurant in China - in iapm. Meanwhile, Burberry and Chanel opened new cosmetic boutiques. "Spending per customer tends to be lower in the new stores, allowing brands to appeal to a wider range of consumers," said Eugene Tang, Head of JLL Retail for Shanghai and Eastern China. Meanwhile, luxury watch and accessory brands responded to stagnating sales by shrinking the operating space of their existing stores. In Q3, several high-end watch retailers such as Chopard and Piaget trimmed their operating space in ifc Mall, while Loewe left the second floor of Kerry Centre.

Three new shopping malls open, while two department stores close. SOHO Fuxing Plaza in Xintiandi, The Place North in Hongqiao (third phase of The Place project) and Hall of the Stars in Hongkou added a total of 94,400 sqm to the market. All three properties are small-sized malls that have mid-range positioning. Reflecting recent weakness in the department store segment, Oriental Department Store on Huaihai Road and the Tianshan Parkson closed; both properties will be renovated into boutique shopping malls. Vacancy decreased slightly to 9.5% in the core areas as several existing malls in East Nanjing Road and Hongqiao made progress filling space. Non-core vacancy also fell, declining to 6.8% as several malls filled empty spaces on upper floors with experience-oriented tenants.

Rents edge up in both core and non-core markets. In the core area, open-market ground floor base rents increased by 4.6% y-o-y to RMB 51.8 per sqm per day. Non-core rents rose 6.0% y-o-y to RMB 20.6 per sqm per day. In both markets, successful malls undergoing tenant adjustment outperformed the market and drove rental growth.

 

Residential

Overall residential sales momentum remains strong.  Accommodative policy and robust upgrade demand allowed strong sales momentum to continue into 3Q15. After surging 104% q-o-q in 2Q15, sales volumes in the primary market stayed high in 3Q15 with 4.0 million sqm sold, down 0.1% q-o-q but up 81.% y-o-y.

High-end residential developers accelerate new launches amid strong sales and rising prices.  The high-end segment saw 761 units sold in 3Q15, down 2% q-o-q, but up 122% y-o-y. A total of 1,860 units were sold in the first nine months of 2015, a surge of 130% compared to the same period last year. Buoyant buying sentiment led developers to accelerate new launches: a total of 1,241 units from 7 projects were launched for sale in 3Q15, the highest quarterly total since 4Q08. Developers also continued to raise their prices in 3Q15, primary prices for high-end apartments on average growing 1.5% q-o-q to RMB 82,207 per sqm.

Vacancy falls and rents edge up in serviced apartment market.  Leasing demand improved slightly in 3Q15 as some MNCs in the automotive sector deployed additional expatriates to Shanghai to support expansion plans. With no new projects opening in the quarter, vacancy in the serviced apartment market fell by 1.2 percentage points to 12.2% in 3Q15. Average rent for serviced apartments edged up by 0.2% q-o-q, boosted by improving demand in the presence of limited new supply. 

2015 likely to end on a strong note.  We expect the current strong sales momentum to carry over through the next three months, given the government's continued accommodative policy stance. "With sales volumes likely to reach a six-year high this year, Shanghai's high-end prices will be on the rise going into 2016," said Joe Zhou, Head of Research for JLL China.

 

Logistics

Leasing activities improve due to strong demand from 3PLs.  Non-bonded net absorption rose from 2Q15's 67,000 sqm to over 90,000 sqm, stronger than had been expected given the quarter's lack of new supply. 3PLs contributed almost 90% of non-bonded absorption, leasing space in both the highly sought-after west Shanghai submarkets as well as the traditionally less popular Fengxian and Lingang. In addition, traditional retailers such as IKEA were also active. Strong absorption along with an absence of new completions contributed to a fall in non-bonded vacancy, which fell 2.1 percentage points to 11.2% in 3Q15.  "Non-bonded vacancy in Shanghai now sits at its lowest level since 2Q14," said Stuart Ross, Head of Industrial for JLL China, "Much of the vacancy that had accumulated over 2H14 has now been committed."

Bonded vacancy rises on new supply. Bonded absorption reached 10,000 sqm, due in part to recent rise in cross-border ecommerce as well as automobile business. Bonded vacancy rose to 17.1%.

Landlords keep non-bonded rents flat to reduce vacancies. Non-bonded rents were flat for a fourth consecutive quarter. Landlord sentiment showed some improvement this quarter as strong demand continued to chip away at lingering vacancies, but most landlords continued to prioritize reducing vacancy over raising rents.