Leasing activity is gradually picking up with a significant increase in inspections. However, most tenants remained conservative in their leasing strategy, resulting in a slow leasing process. “Technology firms including integrated circuits and artificial intelligence, and high-end manufacturing firms such as new energy vehicles, showed active leasing demand,” said Stephen Yu, Head of Business Park Services for JLL Shanghai Office Leasing Advisory. In terms of new supply, one project reached completion in the first quarter and delivered a total GFA of 82,000 sqm, pushing the overall vacancy rate up slightly to 13.6%. Landlords adjusted expectations in line with tenants’ cautious leasing attitudes. Overall rents decreased slightly by 0.1% this quarter, remaining nearly flat at RMB 4.6 per sqm per day.

Shanghai's shopping malls saw an accelerating rebound in foot traffic over 1Q23, especially in F&B shops. Retail sales are undergoing a slow recovery, leaving brands cautious in expanding. Net absorption in overall market remained negative at -28,300 sqm in 1Q23. New leasing inquires mainly came from international skincare brands, sports & outdoor apparel and equipment, new energy vehicle (NEV) showrooms, and household goods and furniture brands. According to Neo Huang, Head of Retail Agency Leasing for JLL Shanghai, “The F&B recovery gave some fine dining and bakery chains confidence to expand, though brands remain selective about site selection.”

After approximately a year of renovation, two projects in the prime market reopened in 1Q23, adding a combined 35,000 sqm. Xintiandi Style II has been renovated into a destination for trendy and innovative designer brands, and Bailian ZX has been repositioned as an immersive space for ACGN (animation, comics, games, and novels) culture.

Retail performance further diverged between projects. Some projects faced more challenges, resulting in a slight increase in overall market vacancy. Prime market vacancy rose 0.2 ppts to 14.5%, while decentralized vacancy increased 0.1 ppts to 13.4%.

The slow recovery in retail sales weighed on tenants and landlords, and kept rents on a downward trend in 1Q23, though the pace of declines narrowed. Prime ground floor rents fell by 0.4% q-o-q on a chainlinked basis. Decentralized rents fell 0.9% q-o-q as some landlords offered concessions to retain tenants.

Mass market primary sales volume declined 4.2% q-o-q and 4.7% y-o-y to about 2.5 million sqm in 1Q23 as a result of the quarter's decline in new project launches. Nevertheless, Shanghai's sales momentum slightly improved as 47% of newly launched projects overperformed in terms of pre-commitment rates, up from 36% in 4Q22. Sales performance continued to diverge between high-end and mass-market projects in this quarter, with demand for high-end projects remaining strong. That said, the quarter's limited new high-end supply meant that high-end sales declined 33.0% q-o-q to 703 units.

Affected by the Spring Festival holiday in January and a slowdown in new project launches in early February, in this quarter only about 1.8 million sqm launched to Shanghai's housing market, down 56.3% q-o-q and 33.7% y-o-y. In the high-end segment, two projects supplied 209 units to the market in 1Q23.

Primary prices increased by 0.7% q-o-q to RMB 132,500 per sqm, with price caps remaining relatively loose. Meanwhile, limited new supply led many homebuyers to return to the secondary market, leading secondary prices to recover 0.2% q-o-q to RMB 107,200 per sqm, up from a 1.6% drop last quarter. High-end leasing activity saw a modest recovery driven by improving demand from non-local tenants returning to Shanghai, as well as resilient leasing demand from local upgraders. This helped average rents to rebound, rising 0.2% q-o-q following a 1.1% drop last quarter. Average rents ended the quarter at RMB 173.5 per sqm per month.

According to Sherril Sheng, Research Director for JLL China Residential Sector, “High-end supply is expected to remain substantial over 2023. Underpinned by solid upgrade demand, high-end residential sales are anticipated to continuously gain momentum throughout the year.” Primary prices will likely increase further, as loose price caps are expected to remain in place over the short term. On the other hand, following the gradual recovery of home sales in the secondary market, secondary prices are likely to recover further in the second half of 2023.

Shanghai’s total transaction volume for 1Q23 reached RMB 24.76 billion, an increase of 0.65% compared to the same period last year. Investment activities continued its pace of recovery following a strong showing in the last quarter of 2022. Investors were displaying an optimistic outlook for Shanghai’s investment market.

In the first quarter, 80% of the transaction completed this quarter were from institutional investors, an upsurge compared to last year's 40%. Business parks and multi-family assets remained the sought-after assets for institutional investors. This quarter saw two large-scale Business Park transactions with values over RMB 5 billion, pushing business park transactions to 72.4% of total volume. In addition, 23% of all the deals in 1Q23 are rental apartments, though the transacted volume is limited due to the relatively small deal size for each asset.

End-Users remain as the key buyers of office assets mainly for headquarters. All the four office assets transacted in the first quarter were sold to end-users. Self-use buyers show diverse profile, spanning various provisional or city-level SOEs, NGOs, and private enterprises etc.

Head of JLL Capital Markets East China Ling Sun remarked, “China continued to support the property sector through the introduction of various supportive policies. Such policies, including pilot scheme of private equity into real estate and expanding C-REITs asset types, extend financing channels in real estate market. in the meantime, these measures also help the investment market gain momentum, and restore investor confidence in the China market.”