Office market remains tenant-favourable; emerging tenant types shore up leasing demand in retail market

Shanghai, October 11 , 2019 – Shanghai’s office leasing market remained tenant favourable as a result of subdued demand and large available space. “In this environment we observed strong performance in high-quality new projects in decentralized clusters like Qiantan, which are attractive to cost sensitive tenants,” said Eddie Ng, Managing Director for JLL Shanghai and East China. In the retail market, four new completions in decentralized areas led decentralized vacancy to edge up, while vacancy in prime areas declined. New high-end residential launches increased as tight policy continued to constrain sales. Such investors made several transactions in Shanghai, showing they maintained a positive attitude towards long-term investment.

Grade A Office

Tenants leverage market conditions for cost-saving opportunities. CBD net absorption reached 34,000 sqm as occupancy in recent completions improved after the recent rental correction. Many companies remained cautious about leasing amid recent economic uncertainty. Cost-sensitive companies continued to move to decentralised submarkets or projects offering lower rents in the same submarket. Net absorption in  decentralised markets reached 123,000 sqm.  “TMT and manufacturing & trading companies continued to lead demand in the decentralized market,” said Anny Zhang, Head of Markets for JLL China. New quality projects in emerging areas such as Qiantan continued to receive strong interest from cost-sensitive tenants.

New supply in decentralised market adds to competitive pressure. CBD vacancy edged down by 0.5 pps q-o-q to 10.4% as occupancy improved in newly completed projects. Five projects with a total GFA of 306,000 sqm were completed in the decentralised market, helping vacancy to rise 1.3 pps q-o-q to 24.9%. New completions and upcoming supply intensified competition in certain decentralised submarkets while also putting pressure on older projects in the CBD.

Rents decrease in a tenant-favourable market. Pudong CBD rents decreased 2.8% q-o-q while Puxi CBD rent declined 0.6% q-o-q. Aging projects led the decline, as their landords became more negotiable on renewal rents in order to retain tenants. Decentralised rents dropped 1.7% q-o-q as a result of large supply and intense competition.

Business Parks

Overall rents remain stable while Zhangjiang rents outperform. In 3Q19, two projects with combined GFA of 119,600 sqm reached completion in Pujiang, while another project with 18,500 sqm was completed in Zhangjiang. Overall vacancy remained flat thanks to active demand in Zhangjiang and Caohejing. TMT companies continued to drive demand: Trueland leased 8,000 sqm in Shibei Centre One and OPPO leased 12,000 in the Zhang Run Building.

Retail

Emerging tenant types shore up leasing demand in cautious market.  Softer retail sales put pressure on retailer sentiment and leasing demand, though some new drivers emerged to stimulate leasing activities. “Growing pet ownership has allowed pet stores that provide pet supplies and pet care services to expand rapidly, especially in community malls,” said Ellen Wei, Head of Retail for JLL China. “In addition, landlords favour indoor sports studios that can enrich tenant mix and satisfy shoppers' growing preference to experience a variety of sports, such as skiing.” O2O brands continued expanding offline to engage shoppers and convert online popularity to offline footfall.

New supply continues to concentrate in decentralised market. Four decentralised projects entered the market, delivering a total retail GFA of 225,000 sqm. Crystal Plaza held a soft opening as the first mall in Qiantan submarket. Huajing Paradise Walk debuted with full occupancy. Lihpao Land and Starlight World both opened in Hongqiao Transportation Hub with opening rates below 60%. Vacancy in the prime market decreased from 9.1% to 8.6% due to a lack of supply pressure and projects completing tenant adjustments. Decentralised vacancy increased from 9.5% to 10.2%, a result of new some projects' higher-than-average vacancy rates and other projects' undergoing adjustments.

Rents continue to see more moderate growth. Rental growth continued to face headwinds as brands grew more cautious towards expansion. Prime open-market ground floor base rents rose 0.7% y-o-y to RMB 51.8 per sqm per day; decentralised rents increased 1.8% y-o-y to RMB 20.4.

Logistics

Lingang demand picks up on Free Trade Zone (FTZ) expansion. Net absorption rebounded to 101,624 sqm in 3Q19 thanks in part to strong demand from 3PLs and manufacturers, which accounted for approximately 60% of the quarter's leased space. “Lingang saw strong demand from 3PLs, trading companies, and automobile makers following the recent announcement of a new area of the Shanghai Free Trade Zone,” said Stuart Ross, Head of Industrial for JLL China. Significant leasing activity occurred in Baoshan, Fengxian, and Qingpu submarkets, where much of the city's vacant space is concentrated. Retailers leased space across the city on short-term contracts to prepare for "Singles Day" and other year-end online shopping events, while a cold-chain operator took space in Baoshan.

Pause in new supply extends to a second quarter. As was expected, no new projects were completed in 3Q19. So far 2019 has been one of the slowest years for new supply in recent memory, a trend that has been anticipated in light of Shanghai's increasingly tight land supply. Healthy absorption in submarkets like Baoshan and Qingpu allowed city-wide vacancy to decline from 6.8% to 5.2%. Vacancy in Qingpu fell despite stepped-up enforcement of tax policies that had slowed leasing in the submarket's newer projects, showing that the area's good location continues to draw tenant interest.

Rental growth stable. Rents rose 1.7% q-o-q to RMB 1.47 per sqm per day, stabilizing after two quarters of acceleration as a few landlords gave discounts to tenants seeking large spaces. Rents rose fastest in Lingang (6.8% q-o-q) as landlord sentiment improved in the wake of the FTZ expansion.

Residential

Tight policy continues to constrain sales. The central bank unveiled interest rate reform in August in order to lower real lending rates to support the economy. A market-based Loan Prime Rate (LPR) will replace the traditional benchmark lending rate and serve as the reference point for banks to price new loans. That said, mortgage rates are expected to remain stable under this reform. With policy still tight, sales volumes in the mass market were constrained at 2.2 million sqm in 3Q19, up 0.6% q-o-q or down 6.5% y-o-y. Although high-end sales increased 27.0% q-o-q to 625 units due to increased new supply, the sales rate actually dipped amid slow momentum.

New launches accelerate in high-end segment. There was 2.1 million sqm of new supply in the mass market, down 2.3% q-o-q. Continuing the trend of 2Q19, most newly launched projects experienced slower sales progress as purchaser sentiment moderated. Following limited new supply in 1H19, six high-end projects launched a total of 1,174 new units in 3Q19, including One Sino Park, Territory Shanghai, Venezia, Nove Mansion, Riverside Mansion, and Fuxing Royale. By the end of 3Q19, 411 of the newly launched units had been sold.

Primary prices flat while secondary prices stabilise. Under strict price caps, primary prices remained flat for another quarter at RMB 116,096 per sqm. Secondary prices began to recover after falling for nearly two years, rising 0.3% q-o-q. Cooling sentiment has been priced in and individual sellers are less willing to lower asking prices. In the high-end leasing market, steady demand from domestic renters and limited new completions allowed rents to increase 1.8% q-o-q, accelerating from last quarter's 0.5% q-o-q. In the land sales market, 24 plots for commodity housing and 9 for rental housing were transacted, mostly at reserve prices.

Tight housing policy will remain in place. We expect the LPR reform will have limited impact on the housing market in the near term, as real mortgage rates are expected to remain stable under the reform. It suggests the government remains reluctant to relax financial conditions for the housing market. Sales are likely to be subdued due to tight policy. “We expect primary prices to remain largely flat under price caps and secondary prices are likely to stabilise,” Stephenie Zhou, Head of Project Sales for JLL Shanghai. Developers will be more cautious in land acquisition under tightened financing channels.

Hotels

Shanghai inbound tourism market maintains moderate growth. Official statistics show that total overseas visitor arrivals to Shanghai reached 5.75 million in the first eight months of 2019, representing a year-on-year growth of 0.7%. The increase was largely driven by an uptick in travellers from South Korea (+9.7%), Hong Kong (+9.0%) and Malaysia (+7.7%). Shanghai also received 10.37 million visitors celebrating the country’s 70^th anniversary during the weeklong National Day holiday, similar to the same period last year.

Hotel supply pipeline slows after a flurry of openings in recent years. Following the opening of several iconic hotels such as the Bvlgari and Capella, this year Shanghai has seen a slowdown in new supply, particularly in the luxury category. The 515-key JW Marriott Marquis Shanghai Pudong is the only luxury supply among the 5,000+ new rooms that have come online this year. The majority of new projects continues to be concentrated in decentralised business districts such as Hongqiao and Qingpu. “Trading performance is likely to benefit in the medium term due to the moderating supply pipeline and delays of several projects as developers adopt a more conservative growth outlook,” said Ling Wei Tan, Vice President for Greater China with JLL’s Hotels & Hospitality Group.

Shanghai luxury hotel occupancy grows despite global economic uncertainty. As of August 2019, Revenue per Available Room (RevPAR) was up 2.7% y-o-y for luxury hotels, primarily boosted by a 4% increase in occupancy. That said, hotels’ average daily rate (ADR) has been moderately affected as the ongoing trade conflict impacts corporate travel budgets and demand. ADR across different sectors have edged down between 0.3% and 2.9% y-o-y.

Capital Markets

Shanghai capital markets enter consolidation phase. Investors' appetite slowed following a buying spree in the first half of the year. Total commercial real estate transactions in Shanghai in 3Q19 fell 42% y-o-y to RMB 18.3 billion. Several factors contributed to the decline in investment volumes, notably the slowdown in the office market that put pressure on rents and occupancy, which led investors to feel more risk averse. According to Jim Yip, the Head of Capital Markets, China and East China: “We see a significant slowdown in the market as the Shanghai office leasing market softens and the price gap  between sellers and buyers has widened. The situation may not be improved by end of the year, and as a result transaction volumes may come in lower than had been expected over the coming months.”

Cross-border investors show resilience. Such investors made several transactions in Shanghai, showing they maintained a positive attitude towards long-term investment. For example, US private equity firm KKR partnered with a domestic fund to acquire a commercial development near Shanghai’s historic Bund area. London-based property firm Chelsfield collaborated with real estate fund manager Pamfleet to acquire a commercial asset in the Daning submarket.

Shanghai, October 11 , 2019 – Shanghai’s office leasing market remained tenant favourable as a result of subdued demand and large available space. “In this environment we observed strong performance in high-quality new projects in decentralized clusters like Qiantan, which are attractive to cost sensitive tenants,” said Eddie Ng, Managing Director for JLL Shanghai and East China. In the retail market, four new completions in decentralized areas led decentralized vacancy to edge up, while vacancy in prime areas declined. New high-end residential launches increased as tight policy continued to constrain sales. Such investors made several transactions in Shanghai, showing they maintained a positive attitude towards long-term investment.

Grade A Office

Tenants leverage market conditions for cost-saving opportunities. CBD net absorption reached 34,000 sqm as occupancy in recent completions improved after the recent rental correction. Many companies remained cautious about leasing amid recent economic uncertainty. Cost-sensitive companies continued to move to decentralised submarkets or projects offering lower rents in the same submarket. Net absorption in  decentralised markets reached 123,000 sqm.  “TMT and manufacturing & trading companies continued to lead demand in the decentralized market,” said Anny Zhang, Head of Markets for JLL China. New quality projects in emerging areas such as Qiantan continued to receive strong interest from cost-sensitive tenants.

New supply in decentralised market adds to competitive pressure. CBD vacancy edged down by 0.5 pps q-o-q to 10.4% as occupancy improved in newly completed projects. Five projects with a total GFA of 306,000 sqm were completed in the decentralised market, helping vacancy to rise 1.3 pps q-o-q to 24.9%. New completions and upcoming supply intensified competition in certain decentralised submarkets while also putting pressure on older projects in the CBD.

Rents decrease in a tenant-favourable market. Pudong CBD rents decreased 2.8% q-o-q while Puxi CBD rent declined 0.6% q-o-q. Aging projects led the decline, as their landords became more negotiable on renewal rents in order to retain tenants. Decentralised rents dropped 1.7% q-o-q as a result of large supply and intense competition.

Business Parks

Overall rents remain stable while Zhangjiang rents outperform. In 3Q19, two projects with combined GFA of 119,600 sqm reached completion in Pujiang, while another project with 18,500 sqm was completed in Zhangjiang. Overall vacancy remained flat thanks to active demand in Zhangjiang and Caohejing. TMT companies continued to drive demand: Trueland leased 8,000 sqm in Shibei Centre One and OPPO leased 12,000 in the Zhang Run Building.

Retail

Emerging tenant types shore up leasing demand in cautious market.  Softer retail sales put pressure on retailer sentiment and leasing demand, though some new drivers emerged to stimulate leasing activities. “Growing pet ownership has allowed pet stores that provide pet supplies and pet care services to expand rapidly, especially in community malls,” said Ellen Wei, Head of Retail for JLL China. “In addition, landlords favour indoor sports studios that can enrich tenant mix and satisfy shoppers' growing preference to experience a variety of sports, such as skiing.” O2O brands continued expanding offline to engage shoppers and convert online popularity to offline footfall.

New supply continues to concentrate in decentralised market. Four decentralised projects entered the market, delivering a total retail GFA of 225,000 sqm. Crystal Plaza held a soft opening as the first mall in Qiantan submarket. Huajing Paradise Walk debuted with full occupancy. Lihpao Land and Starlight World both opened in Hongqiao Transportation Hub with opening rates below 60%. Vacancy in the prime market decreased from 9.1% to 8.6% due to a lack of supply pressure and projects completing tenant adjustments. Decentralised vacancy increased from 9.5% to 10.2%, a result of new some projects' higher-than-average vacancy rates and other projects' undergoing adjustments.

Rents continue to see more moderate growth. Rental growth continued to face headwinds as brands grew more cautious towards expansion. Prime open-market ground floor base rents rose 0.7% y-o-y to RMB 51.8 per sqm per day; decentralised rents increased 1.8% y-o-y to RMB 20.4.

Logistics

Lingang demand picks up on Free Trade Zone (FTZ) expansion. Net absorption rebounded to 101,624 sqm in 3Q19 thanks in part to strong demand from 3PLs and manufacturers, which accounted for approximately 60% of the quarter's leased space. “Lingang saw strong demand from 3PLs, trading companies, and automobile makers following the recent announcement of a new area of the Shanghai Free Trade Zone,” said Stuart Ross, Head of Industrial for JLL China. Significant leasing activity occurred in Baoshan, Fengxian, and Qingpu submarkets, where much of the city's vacant space is concentrated. Retailers leased space across the city on short-term contracts to prepare for "Singles Day" and other year-end online shopping events, while a cold-chain operator took space in Baoshan.

Pause in new supply extends to a second quarter. As was expected, no new projects were completed in 3Q19. So far 2019 has been one of the slowest years for new supply in recent memory, a trend that has been anticipated in light of Shanghai's increasingly tight land supply. Healthy absorption in submarkets like Baoshan and Qingpu allowed city-wide vacancy to decline from 6.8% to 5.2%. Vacancy in Qingpu fell despite stepped-up enforcement of tax policies that had slowed leasing in the submarket's newer projects, showing that the area's good location continues to draw tenant interest.

Rental growth stable. Rents rose 1.7% q-o-q to RMB 1.47 per sqm per day, stabilizing after two quarters of acceleration as a few landlords gave discounts to tenants seeking large spaces. Rents rose fastest in Lingang (6.8% q-o-q) as landlord sentiment improved in the wake of the FTZ expansion.

Residential

Tight policy continues to constrain sales. The central bank unveiled interest rate reform in August in order to lower real lending rates to support the economy. A market-based Loan Prime Rate (LPR) will replace the traditional benchmark lending rate and serve as the reference point for banks to price new loans. That said, mortgage rates are expected to remain stable under this reform. With policy still tight, sales volumes in the mass market were constrained at 2.2 million sqm in 3Q19, up 0.6% q-o-q or down 6.5% y-o-y. Although high-end sales increased 27.0% q-o-q to 625 units due to increased new supply, the sales rate actually dipped amid slow momentum.

New launches accelerate in high-end segment. There was 2.1 million sqm of new supply in the mass market, down 2.3% q-o-q. Continuing the trend of 2Q19, most newly launched projects experienced slower sales progress as purchaser sentiment moderated. Following limited new supply in 1H19, six high-end projects launched a total of 1,174 new units in 3Q19, including One Sino Park, Territory Shanghai, Venezia, Nove Mansion, Riverside Mansion, and Fuxing Royale. By the end of 3Q19, 411 of the newly launched units had been sold.

Primary prices flat while secondary prices stabilise. Under strict price caps, primary prices remained flat for another quarter at RMB 116,096 per sqm. Secondary prices began to recover after falling for nearly two years, rising 0.3% q-o-q. Cooling sentiment has been priced in and individual sellers are less willing to lower asking prices. In the high-end leasing market, steady demand from domestic renters and limited new completions allowed rents to increase 1.8% q-o-q, accelerating from last quarter's 0.5% q-o-q. In the land sales market, 24 plots for commodity housing and 9 for rental housing were transacted, mostly at reserve prices.

Tight housing policy will remain in place. We expect the LPR reform will have limited impact on the housing market in the near term, as real mortgage rates are expected to remain stable under the reform. It suggests the government remains reluctant to relax financial conditions for the housing market. Sales are likely to be subdued due to tight policy. “We expect primary prices to remain largely flat under price caps and secondary prices are likely to stabilise,” Stephenie Zhou, Head of Project Sales for JLL Shanghai. Developers will be more cautious in land acquisition under tightened financing channels.

Hotels

Shanghai inbound tourism market maintains moderate growth. Official statistics show that total overseas visitor arrivals to Shanghai reached 5.75 million in the first eight months of 2019, representing a year-on-year growth of 0.7%. The increase was largely driven by an uptick in travellers from South Korea (+9.7%), Hong Kong (+9.0%) and Malaysia (+7.7%). Shanghai also received 10.37 million visitors celebrating the country’s 70^th anniversary during the weeklong National Day holiday, similar to the same period last year.

Hotel supply pipeline slows after a flurry of openings in recent years. Following the opening of several iconic hotels such as the Bvlgari and Capella, this year Shanghai has seen a slowdown in new supply, particularly in the luxury category. The 515-key JW Marriott Marquis Shanghai Pudong is the only luxury supply among the 5,000+ new rooms that have come online this year. The majority of new projects continues to be concentrated in decentralised business districts such as Hongqiao and Qingpu. “Trading performance is likely to benefit in the medium term due to the moderating supply pipeline and delays of several projects as developers adopt a more conservative growth outlook,” said Ling Wei Tan, Vice President for Greater China with JLL’s Hotels & Hospitality Group.

Shanghai luxury hotel occupancy grows despite global economic uncertainty. As of August 2019, Revenue per Available Room (RevPAR) was up 2.7% y-o-y for luxury hotels, primarily boosted by a 4% increase in occupancy. That said, hotels’ average daily rate (ADR) has been moderately affected as the ongoing trade conflict impacts corporate travel budgets and demand. ADR across different sectors have edged down between 0.3% and 2.9% y-o-y.

Capital Markets

Shanghai capital markets enter consolidation phase. Investors' appetite slowed following a buying spree in the first half of the year. Total commercial real estate transactions in Shanghai in 3Q19 fell 42% y-o-y to RMB 18.3 billion. Several factors contributed to the decline in investment volumes, notably the slowdown in the office market that put pressure on rents and occupancy, which led investors to feel more risk averse. According to Jim Yip, the Head of Capital Markets, China and East China: “We see a significant slowdown in the market as the Shanghai office leasing market softens and the price gap  between sellers and buyers has widened. The situation may not be improved by end of the year, and as a result transaction volumes may come in lower than had been expected over the coming months.”

Cross-border investors show resilience. Such investors made several transactions in Shanghai, showing they maintained a positive attitude towards long-term investment. For example, US private equity firm KKR partnered with a domestic fund to acquire a commercial development near Shanghai’s historic Bund area. London-based property firm Chelsfield collaborated with real estate fund manager Pamfleet to acquire a commercial asset in the Daning submarket.