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According to JLL Shanghai First Quarter Property Review
SHANGHAI, 07 April 2016 – Domestic financial service firms and multinational retailers continued to be active in the CBD office leasing market. “New CBD supply was limited this quarter, but strong pre-leasing performance in upcoming projects is indicative of strong demand,” said Anthony Couse, Managing Director for JLL East China. Strong fundamentals continued to attract investor interest to both CBD and decentralized office properties. One core retail project and four non-core projects opened as fast fashion and trendy clothing brands drove demand. Quarterly take-up in the logistics market reached its highest level in nearly a decade as tenants leased space in both new supply and older projects. High-end residential sales were buoyant, though soaring prices provoked local policy tightening that is likely to impact the market going forward.
Strong pre-leasing in upcoming projects in core areas. Domestic financial services companies remained the leading source of demand. For example, domestic securities firm Bank of Chaoyang leased 1,400 sqm in DBS Tower in Pudong. MNCs remained conservative overall, but retailers were actively looking to expand or upgrade. While CBD net absorption was suppressed due to limited new supply in the first quarter, JLL Shanghai’s Head of Markets James Allan noted that “potential tenants show strong interest in upcoming projects in central locations, notably HKRI Centre.”
CBD sees one new completion, while decentralized areas get three. UOB Plaza (26,347 sqm) reached completion in the Pudong CBD with a majority of its space committed for self-use. Meanwhile, the Puxi CBD had no new supply for the second consecutive quarter. In the decentralised market, three projects with a total GFA of 185,745 sqm reached completion in Puxi. These included KEC III-Enterprise Centre Towers 1 and 2 (62,000 sqm), Poly West Bund Phase 1 (32,249 sqm), and Hongqiao Sincere Centre's southern site (91,496 sqm).
Tight vacancy and strong demand support CBD rental growth. Pudong Grade A rents increased by 1.7% q-o-q to RMB 11.3 per sqm per day. Puxi Grade A rents rose by 1.4% q-o-q to RMB 9.8 per sqm per day, with premium properties leading rental growth.
Self-use demand continues to support transaction volumes. Sales volume in Shanghai's high-end office market reached 69,129 sqm in 1Q16, rising 5.4% y-o-y. The buyers mainly came from the domestic private sector, and planned to self-use the space. The Hongqiao Transportation Hub and areas along Huangpu River continued to attract strong interest from corporate buyers. For example, domestic e-commerce company Vipshop purchased around 18,000 sqm in SCE Plaza in the Hongqiao Transportation Hub. Stable demand contributed to continued moderate price growth of 0.8 % q-o-q.
Strong pre-commitment performance in Caohejing and Linkong. Benefiting from expansion and upgrade requirements from existing tenants, projects in the Caohejing and Linkong submarkets that are scheduled to complete over the next two years have secured several major tenants and achieved high pre-leasing rates. For example, Caohejing SBP Phase 3-B Buildings 1 and 2 (40,000 sqm) are scheduled for 2017, and are in the final stages of negotiating an anchor tenant. Several major transactions were concluded over 1Q16, often involving tenants relocating to larger spaces within parks. For example, Yanfeng Automotive Trim System confirmed their expansion plan and signed a 16,000 sqm lease with the upcoming Kehui Tower (expected in 3Q16) in the Caohejing park. Urban development and official efforts to build new business clusters in emerging areas like the New Bund Business Centre helped improve transit connectivity and boost the market profiles of the Pujiang and Kangqiao submarkets. The improved conditions contributed to significant leasing progress in the two submarkets over 1Q16. Strong demand continued to support rental appreciation, though rates of growth remained moderate as supply is expected to be considerable over the remainder of 2016.
Sales buoyant as national policy remains loose. Market sentiment strengthened in 1Q16 as new loosening measures were rolled out at the national level. Sales volumes in Shanghai's primary market reached 4.4 million sqm in 1Q16, the highest first quarter total in ten years. The high-end segment also performed well, with 872 units purchased in 1Q16, up 173% y-o-y. Hysun Chairman in Huangpu District was the only project to launch new units in the quarter, with 216 units up for sale. The lack of new supply combined with strong sales led to a decline in inventories. As of the quarter-end, the inventory clear-up period for high-end units had fallen to 8.4 months, far below the peak of 30 months reached in 3Q14.
Prices soar as developers gain pricing power. “On the back of robust demand, developers in Shanghai raised prices aggressively over the first three months of the year,” said Stephenie Zhou, Head of Residential for JLL Shanghai. In the primary market, average prices for high-end apartments surged 10.5% q-o-q to RMB 99,231 per sqm. Due to limited new supply in the primary market, the secondary market heated up as well, with average prices soaring 14% q-o-q.
Serviced apartments rents rise despite uptick in vacancy. Demand from expatriates slightly weakened from 4Q15 as a number of expatriates returned home while their replacements had yet to arrive. No new projects opened or closed in the quarter, leaving the total stock of serviced apartments unchanged. With total stock stable and demand down slightly, vacancy in the serviced apartment market increased by 0.9 percentage points to 12.0% in 1Q16. Landlords generally foresaw costs increasing due to upcoming tax reform (which will install a new VAT regime). Popular projects in better locations started to increase rents in 1Q16, while others held rents stable. On average, rents for serviced apartments edged up by 1.0% q-o-q.
Rising prices trigger tightening measures late in the quarter. In an effort to rein in housing prices and cool down a market perceived at risk of overheating, on March 25 Shanghai’s government tightened regulations on buying second homes and raised requirements for non-Shanghai residents to purchase houses. We expect the measures will lead to significant drop in sales volumes as well as curb price growth over the remainder of 2016.
Luxury retailers close underperforming stores as fast fashion and trendy clothing chains drive demand. Top luxury retailers sought to optimize their portfolios by closing underperforming stores in key retail submarkets. Louis Vuitton and Dunhill respectively closed stores in Lippo Plaza and Plaza 66 in response to sluggish sales. “Even as high-end luxury slowed, affordable luxury brands continued to expand,” commented Rebecca Tibbott, Head of Retail Leasing at JLL Shanghai. For example, Michael Kors and Kate Spade committed to open stores in Joy City, and Furla committed to open in ifc Mall and CITIC Square. In the mass market, fast fashion brands sustained their pace of expansion, with Muji, Gap, Uniqlo and their sub-brands establishing presences in newly opened malls across the city. Meanwhile, trendy brands including Moussy, Sly, and brands under the IT Group (izzue, Aape and Chocoolate) expanded actively.
One core project and four non-core projects open in 1Q16. In Xintiandi submarket, Hubindao Phase II opened with a total GFA of 27,000 sqm, focusing on lifestyle and F&B offerings. Meanwhile, Joy City’s second phase, Zijing Plaza, Hopson One, and Sincere Starlight Plaza brought a combined GFA of 403,300 sqm to non-core submarkets. Located in relatively mature retail areas, these malls achieved moderate opening rates. Vacancy increased slightly to 8.5% in core areas as several malls went through tenant adjustment periods. Vacancy increased slight to 8.9% in the non-core market as new projects opened with vacancy levels above the market average.
Rental levels rose moderately amid supply wave. In the core area, open-market ground floor base rents increased by 0.3% q-o-q to RMB 52.7 per sqm per day. Non-core rents gained 2.0% q-o-q to RMB 21.1 per sqm per day. Supply pipelines are large in both core and non-core areas, and rental growth has slowed in submarkets where multiple new malls reach completion over a short time frame.
Non-bonded net absorption reaches highest quarterly level since 2007. Non-bonded net absorption reached 172,000 sqm in 1Q16, with new supply contributing to over half of the quarter’s take-up. 3PLs, e-commerce firms and manufacturers remained active, securing space mostly in West Shanghai. “Moreover, rising demand for whole-car storage benefitted submarkets near Shanghai's seaports,” said Stuart Ross, Head of Industrial for JLL China. Leasing in projects in West Shanghai outperformed those in the city's east, as exemplified by the quarter's two new completions: Goodman’s project in Qingpu district was nearly fully leased by completion, while a project near Pudong Airport in the east had more limited preleasing progress.
Two non-bonded projects reach completion. There were two new completions totaling 207,600 sqm: Goodman Qingpu (110,000 sqm) and Goodman Pudong Airport (PVG) Phase 3 (97,600 sqm). One non-bonded project in Baoshan and one bonded project in Waigaoqiao were delayed to next quarter. Non-bonded vacancy rose 0.3 percentage points to 9.5% in 1Q16, as a result of mixed performance in new completions. Shanghai’s non-bonded vacancy remained concentrated in the eastern Lingang and airport submarkets. Meanwhile, limited supply and stable demand allowed the bonded vacancy rate to decline slightly to 6.9%.
Spot rental growth accelerates amid strong net take-up. Spot rental growth accelerated in 1Q16 as the quarter’s two new projects entered with rents higher than the market average. Rental growth was more limited on a like-for-like basis, due to competition from nearby cities and landlords’ concerns about large future supply.
Appetite remains strong for office sector assets, particularly from domestic buyers. Although there were limited office transactions in 1Q16, demand for Shanghai office assets remained strong. “In particular, domestic capital is benefitting from looser regulation and greater access to financing instruments, and is seeking stabilized office assets,” said Johnny Shao, Head of Capital Markets for JLL Shanghai and East China. In addition to properties in the CBD, such buyers are giving attention to opportunities in decentralized office and business park locations, with a focus on high-quality properties with stable rents. For example, this quarter Waterfront Place – located in decentralized Puxi - was sold by ARA to Pramerica.
Retail market expected to see more portfolio deals. In the retail sector, both foreign and domestic institutional investors are expected to show greater interest for portfolio deals than single asset transactions. We thus anticipate more deals along the lines of Ivanhoe Cambridge’s investment last year into in Chongbang’s portfolio of “Life Hub” malls, which included properties in Shanghai as well as other cities.
Continued investor interest in logistics sector. En-bloc transactions remained limited in early 2016 as entity-level deals continued to be the logistics sector’s major investment activity. Mergers and acquisitions among existing developers have gaining traction, and Chinese logistics developers are planning initial public offerings to take greater advantage of the country’s demand for logistics space.
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