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According to JLL Shanghai 2018 Second Quarter Property Review
Shanghai, July 10, 2018 – CBD rents edged up as office leasing demand remained active. "Co-working operators' aggressive expansion as well as demand from TMT and financial services companies continued to support the overall office market," said Eddie Ng, Managing Director of JLL East China. Retail landlords are welcoming a wider range of tenants to help malls become social destinations. In the logistics sector, strong demand from manufacturing companies contributed to the quarter's absorption. Residential sales rebounded as increased supply partially released pent-up demand. Retail transaction volumes remained large as investors continued to seek value-added opportunities from under-performing retail assets.
CBD landlord sentiment improves as market vacancy decreases. Grade A net absorption reached 355,000 sqm this quarter, one-third of which was in the CBD. "Co-working operators continue to expand in the CBD of both Pudong and Puxi, which keeps boosting the market. "In addition to co-working demand, TMT and financial services companies remained active in the CBD," said Anny Zhang, Head of Markets for JLL Shanghai. In the decentralized market, TMT firms and manufacturing companies were the main demand drivers, alongside expansion by co-working operators.
Seven projects add 446,737 sqm. There were no new projects completed in the CBD, where vacancy declined 1.7 ppts q-o-q to 10.8%. In the decentralized market, two projects in Pudong and five projects in Puxi reached completion, and vacancy increased 2.4 ppts q-o-q to 26.1%. A few new decentralized submarkets such as Xuhui Bund, Qiantan, and Dalian Road are seeing improved leasing momentum as new projects emerge. For example, Xuhui Bund has captured strong demand from TMT companies looking to upgrade and expand.
CBD rents edge up 0.5% q-o-q. After a year of rental correction, CBD rents have stabilized, rising 0.2% q-o-q in 1Q18 and 0.5% in the second quarter. Landlord sentiment improved in older Grade A projects that have refilled much of the space that was vacated as firms decentralized. In the decentralized market, rents edged up 0.7% q-o-q. Rents rose significantly in more mature submarkets such as the North Bund and Hongqiao Transportation Hub. Meanwhile, rents remained flat in newer clusters such as Qiantan where only a few projects have reached completion.
Strata-titled sales volume remains low. Total sales volumes reached 96,954 sqm in 2Q18, representing a 39.7% decline y-o-y. The quarter's limited transaction volume can be attributed to the limited availability of quality assets for sale as well as tighter lending policies, which have narrowed financing channels for investors and self-use buyers. The majority of 2Q18's sales volume was transacted in the Hongqiao Transportation Hub area, where stable demand allowed landlords to raise average sales prices by 1.0% q-o-q. Overall prices rose by 0.4% q-o-q. Looking ahead, we expect a large supply wave to hit the market in 2019, which should trigger more buying enquiries and boost transaction volumes in that year.
Leasing momentum remains strong as TMT companies expand. Three new projects were completed in Caohejing and Zhangjiang, adding a combined 134,100 sqm to the market. Given high pre-commitment rates in the quarter's new projects, overall vacancy improved 0.8 ppts q-o-q to 13.2%.
Rents continue rising. Average business park rents increased 0.8% q-o-q to RMB 4.4 per sqm per day. In particular, core business parks such as Caohejing and Zhangjiang received strong interest from TMT companies seeking space for expansion or consolidation. For example, Beijing-based tech unicorn Toutiao leased one 33,000 sqm en-bloc office building in Caohejing's SBP Phase 3 to accommodate its upgrading and expansion needs.
Landlords continue to seek unique tenants to drive foot traffic. A Peppa Pig Indoor Theme Park operated by Merlin will open in LC Mall, highlighting the trend of new community malls drawing foot traffic with large-format children's concepts. "Culture tenants such as bookstores have joined sports and gym brands as favored tools for malls to distinguish their offerings and build loyalty with specific interest groups," said James Hawkey, Head of Retail for JLL China. Backed by investor capital, casual dining and beverage brands are occupying prime locations in major malls. Tea chain Nayuki leased significant spaces in Hongyi Plaza and Changfeng Joy City. In addition, landlords continue to sign furniture stores and specialty shops carrying multiple brands to diversify product offerings and prolong customer dwell time.
One prime project and three decentralized projects deliver 234,000 sqm. The Central opened on East Nanjing Road with a sports and cultural theme. In the decentralized market, Putuo Changfeng Joy City was refurbished into a shopping and social destination targeting white-collar women and families. Greenland Being Fun Plaza opened in Zhangjiang with a focus on tech, sports, and fashion. The community mall Shenya Joy 18 Plaza debuted in Changning. Vacancy slightly increased to 10.2% in prime markets due to tenant adjustment of existing projects in East Nanjing Road and Xujiahui. Decentralized vacancy stabilized at 9.6%, as significant market absorption in Minhang and Changning was offset by increased vacancy in submarkets like Hongkou.
Rental growth recovers. Prime open-market ground floor base rents increased by 1.8% y-o-y to RMB 52.0 per sqm per day. Decentralized rents rose 2.5% y-o-y to RMB 20.4 per sqm per day. Rental growth in prime areas was mostly driven by East Nanjing Road, while Minhang supported growth in the decentralized market.
Net absorption reaches 56,000 sqm. "East Shanghai contributed the most net absorption this quarter, as most of Shanghai's vacant space is still concentrated there," said Stuart Ross, Head of Industrial for JLL China. By contrast, West Shanghai has almost no space available for lease, contributing to its more limited absorption this quarter. 3PLs and manufacturing firms were the quarter's main demand drivers, with particularly strong leasing demand from manufacturers. For example, automobile companies leased over 10,000 sqm in GLP Park Lingang for auto parts storage.
One warehouse reaches completion, ending a year-plus period of no new supply. GLP completed a 20,000 sqm built-to-suit project for an automobile manufacturer at its Lingang park. It was Shanghai's first new completion since 1Q17. The small size and built-to-suit status mean it will do little to alleviate the market's supply drought. Limited vacancy in West Shanghai forced tenants seeking larger space to look to East Shanghai instead. As a result, vacancy in East Shanghai declined from 8.1% to 5.6%.
Rental growth continues to accelerate. Rents increased 1.0% q-o-q to RMB 1.36 in 2Q18, accelerating 0.3 percentage points compared to last quarter. Rents were up 3.4% in y-o-y terms, the fastest rate in four years. Increases were strong across most submarkets, with Minhang and PVG landlords achieving particularly strong increases thanks to strong demand and low or falling vacancy.
MICE demand drives Shanghai hotel market. Official statistics showed approximately 1.48 million overnight overseas visitors in the first quarter of 2018, a steady 0.7% climb compared to the same period in the year before. "Largely driven by MICE demand, we expect Shanghai's tourism arrivals to grow between 7% and 9% this year," said Ling Wei Tan, Vice President for Greater China with JLL's Hotels & Hospitality Group, "Hotel demand will continue its upward trend as a result." Reflecting rising MICE activity, the number of exhibitions held at the National Exhibition Convention Centre (NECC) rose to 48 compared to just 30 in 1H17.
Supply surge leads to slightly reduced occupancy rates. Despite strong demand generated by increasing visitor arrivals, an influx of new supply put downward pressure on hotel occupancy. Over 55% of this year's supply pipeline was delivered in the first half of the year with notable 2Q18 openings including: Bulgari Hotel Shanghai (82 rooms), Sukhothai Shanghai (201 rooms), Middle House (111 rooms), and Anandi Hotel & Spa Shanghai (333 rooms). At end-May 2018, the occupancy rate of 5-star and 4-star hotels declined by 0.9 ppts and 0.7 ppts y-o-y respectively to 69.1% and 66.8%.
Average ADRs continue rising despite slip in occupancy. Through the first five months of 2018, 5-star and 4-star hotels' average ADR increased 1.9% and 4.0% y-o-y, respectively. RevPAR grew at a slightly slower pace, recording 1.9% y-o-y growth to RMB 746 for 5-star hotels, and growth of 3.2% to RMB 411 for 4-star hotels. "New luxury hotel completions with high positioning continue to lift the market's average ADR," said Angel Chen, Vice President of Hotels for JLL Shanghai, "Additionally, with ongoing growth in tourist arrivals, 4 and 5-Star hotel ADRs are expected to continue growing through end-2018."
Sales continue rebound with increase in supply. In the mass market, sales volumes continued to recover in 2Q18 with 12,251 units sold, rising 21% q-o-q thanks in part to an increase in supply. Although HPRs and tight mortgage conditions remained in place, new launches were well received as buyers looked to scoop up new units that were sold at below-market value, thanks to government-imposed price caps. In the high-end segment, One Sino Park on Huangpu district's riverfront and Lakeville Luxe in the Xintiandi area respectively launched 225 and 118 units. Increased supply partially released the pent-up demand, with several newly launched projects being snapped up in one day, leading to 202 high-end units sold in 2Q18, up 19% q-o-q.
Primary prices remain flat while secondary prices dip. In the high-end segment, primary prices stayed largely flat as government price caps remained in place. However, secondary prices edged down another 0.1% q-o-q in 2Q18 after last quarter's price dip, as more individual landlords lowered prices to entice buyers. In the leasing market, rents held up well as leasing demand remained stable.
Prices to see slight downward pressure in 2018. "Tight housing policies including price caps are expected to remain in place over the next few quarters, as local authorities continue their efforts to curb housing prices and promote market stability," said Stephenie Zhou, Head of Project Sales for JLL Shanghai. More developers are likely to speed up new launches in 2H18, due to heavier cash flow pressure amidst a tight monetary environment. We expect a moderate rebound in sales in the rest of 2018 as new launches accelerate. However, prices are likely to see downward pressure in 2H18 thanks to continued government price caps.
Higher financing costs in China lead to decline in en-bloc transaction volumes. In early 2018, China introduced a series of new restrictions on asset management, trusts, and entrusted loans, resulting in a narrower range of financing channels. Coupled with simultaneous increases in borrowing costs, these new rules left investors in a tighter financing environment than last year, resulting in a decline in en-bloc transaction activity. Total transaction volume in China decreased 48.2% y-o-y to RMB 30.0 billion in 2Q18. Shanghai was the country's top investment destination, accounting for 56.4% of the total. Total 2Q18 investment volume in Shanghai reached RMB 16.9 billion, down 50.7% y-o-y.
Retail investment strong in 1H18 with total transaction volumes of RMB 7.5 billion. The retail environment benefited from a rebound in sales, particularly in the luxury goods sector. While growing online sales penetration is a rising concern, brick-and-mortar retail still accounts for more than 80% of Shanghai's total retail sales. Operators' adoption of 'new retail' strategies is helping to fend off competition from online retail and is attracting investor interest. In addition, demand for office buildings remained strong in 1H18. "Deep-pocketed investors like pension funds and sovereign wealth funds are stepping up to capture these investment opportunities," said Reeve Wang, Head of Capital Markets for JLL Shanghai. In May 2018, Singapore's sovereign wealth fund GIC established a partnership with NOVA to invest in China. With these investors increasing their capital allocations to China, we expect 2018 to see more large-scale en-bloc transactions, which are likely to push up commercial property investment.
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