Leasing activities in Shanghai's office and retail sector see mild recovery

Shanghai, July 10, 2024 – Despite recent economic conditions, Shanghai’s commercial real estate sector experienced a mild recovery in leasing activities in 2Q24. Office leasing demand were mainly driven by cost considerations. “Though decentralisation trend continues, some larger occupiers are seizing the current window of opportunity to reassess their leasing strategies.” Said Daniel Yao, Head of Research for JLL China. Furthermore, retail leasing momentum showed slight improvement mainly in prime area. Certain sectors, such as sportswear, affordable dining, bakery and beverage, demonstrated resilience.

• Office Market: Tenant favourable market drove cost-saving and flight to quality demand.


• Retail Market: Net take-up turned positive thanks to the recovery in prime area.


• Logistics Market: Vacancy further edged up due to cautious decision-making and a surge in new supply.


• Residential Market: High-end primary sales rose as a result of an increase in new supply and solid pent-up demand from upgraders.


• Investment Market: The number of transactions has increased, with a shift in market focus towards small-scale investment projects.


• Hotels Market: Shanghai’s upscale-and-above hotel market is being bolstered by the ongoing recovery of the domestic tourism market.
   

Grade A Office

Shanghai’s net absorption saw a notable increase in the second quarter recording 115,700 sqm driven by leasing activities influenced by cost considerations. Stanley Jiang, Senior Director for JLL Shanghai Office Leasing Advisory stated, “In the CBD, tenants leveraged market opportunities to upgrade office quality by relocating to newer projects, while Cost-saving decentralisation trend continues.” In the decentralised submarkets, the influx of supply exerted downward rental pressure, prompting larger occupiers to seize the opportunities. Also, Cost-saving decentralisation trend continues with some companies originally located in suburban areas are capitalising on the narrowing rental disparity to relocate to decentralised grade A projects.

Four projects deliver 261,000 sqm in the second quarter. In the CBD, a new project with 40,400 sqm of space entered the Xintiandi submarket, generating significant pre-leasing and inquiries. However, a combination of decentralisation and small-scale terminations led to a 0.3ppts q-o-q rise in vacancy to 15.6%. In the decentralised submarkets, three projects reached completion totalling 220,700 sqm, intensifying market competition. The new completion offset the relatively active leasing observed in the decentralised submarkets and pushed up vacancy by 0.5 ppts q-o-q to 30.1%.

Rents further decline and are expected to remain in the downward cycle as the market competes for cost-driven relocations. The current market environment stimulates upgrade demand or flight to higher-quality decentralised projects, alongside the possibility of favourable renewal deals for some tenants. Some large-sized anchor tenants with expiring leases may also consider leveraging current market conditions to adjust their leasing strategies. Rent adjustments within the current market are expected to drive net absorption to gently recover.

Business Parks

In the second quarter, the net absorption of the Shanghai business park market recorded 178,000 sqm. The recent completion of high-quality projects and increased negotiation margin attracted some tenants to relocate and upgrade. Furthermore, relocation from some large-size tenants emerged after a lengthy and thorough decision-making process. “We are witnessing more tenants seizing opportunities to reassess their leasing strategies. Key drivers of demand include companies in the integrated circuits sector and those along the NEV industry chain. Additionally, demand from public incubators (a type of government platform) and research institutions increased as business parks have been essential vessels of industrial development.” said Stephen Yu, Head of Business Park Services for JLL Shanghai Office Leasing Advisory. A total GFA of 237,000 sqm of new completions were recorded this quarter. The overall vacancy rate of the Shanghai business park market slightly increased by 0.1 ppts q-o-q, reaching 19.9%. Rental growth remained under pressure due to slow market recovery and a large supply pipeline. Overall rents fell by 2.0% q-o-q to RMB 4.3 per sqm per day.

Retail

Shanghai’s retail leasing momentum demonstrated a slight improvement in 2Q24, with overall net take-up reaching approximately 2,300 sqm. This is mainly contributed by the recovery in leasing demand, particularly within the prime areas. According to JLL East China Head of Retail Agency Leasing Neo Huang, “New leases primarily came from affordable dining, bakery and beverage, sportswear, fast fashion, local womenswear and discount stores.” Notably, leading sports brands continue to expand their presence in China, while an increasing number of niche brands made their debut in Shanghai.

One project opened in Shanghai's decentralised market - Xuhui Vanke Plaza, delivering a retail GFA of 90,000 sqm to the South Railway Station submarket. The prime market vacancy rate saw a slight decrease from 10.3% to 9.2%, while the decentralized market vacancy rate continued to rise from 12.5% to 13.2%. Mall performance showed further divergence, with regional malls covering a larger number of surrounding residents and showing greater resilience.

Rental decline decelerated this quarter with the average ground floor rents in the prime area falling 0.4% q-o-q, while decentralized rents declined 0.9% q-o-q in 2Q24. Challenges persist for retail projects due to intense competition and a decrease in rental affordability for brands.

We expect sectors such as affordable dining, domestic fashion brands, and discount stores to be relatively active in expansion as consumers increasingly prioritize value-for-money products. Moreover, as consumers increasingly lean towards experiences that connect them with nature and arts, we expect to see a rise in projects that blend retail spaces with culture, art, and nature.

Logistics

Shanghai’s logistics demand was relatively subdued in 2Q24. Despite some leasing activities from tenants such as 3PLs, cautious decision-making prevailed due to uncertain economic conditions. Tenants showed hesitancy towards expansion and considered downsizing when leases approached expiry. Combined with the continued supply wave, vacancy increased to 23.2% in 2Q24.

Supply continued to grow in 2Q24 with the addition of two new projects combining for 726,000 sqm. This marked the fourth consecutive quarter with over 200,000 sqm of new supply. The completion of the largest phase of the DNE Galaxy project resulted in the Jinshan submarket witnessing the majority of supply this quarter. “Submarkets in west Shanghai continued to feel the bulk of the market's supply pressure,” said Richard Huang, Senior Director of Logistics & Industrial for JLL China. Over the past 12 months leading up to June 2024, around 90% of the new spaces were completed in west Shanghai submarkets, namely Jinshan, Qingpu and Songjiang.

Overall rents declined by 1.0% q-o-q on a like-for-like basis, reaching RMB 1.52 per sqm per day. Landlords became aggressive in establishing rents, especially in new projects. Hence, submarkets that faced intense supply pressure experienced the most significant rental decline. 

Residential

Shanghai further loosened its home purchase restrictions and housing credit policies in May in its ongoing efforts to boost homebuyers' confidence and stabilize the housing market. Notable measures include easing homebuying curbs for non-local residents and reducing minimum mortgage rates and down payment ratios for first-home and second-home buyers. As new supply remained limited during this quarter, Shanghai’s primary home sales volume recorded 1.89 million sqm, reflecting a 30.2% y-o-y decline. In the high-end segment, however, pent-up upgrading demand coupled with a surge in new supply allowed high-end sales to total 1,786 units, up 71.6% q-o-q.

New home supply remained tight in 2Q24, as the market only saw a total supply of 2.27 million sqm reaching the market, down 18.3% y-o-y. Shanghai's high-end residential market saw a surge in new supply this quarter. Nine new high-end residential projects comprising 2,019 units were launched to the market, representing a 66.3% q-o-q increase and a 45.4% y-o-y increase. The average prices for the newly launched high-end projects ranged between RMB 133,000 per sqm and RMB 178,000 per sqm.

Amid the loosening of price caps, high-end primary prices rose a further 1.2% q-o-q to an average of RMB 143,000 per sqm. Supportive policies facilitated increased sales activities on the secondary market, resulting in narrower price declines for secondary projects. However, average secondary prices still decreased by 2.7% q-o-q to RMB 149,000 per sqm.

“We expect the policy stance to remain relaxed, with the possibility of additional supportive policies being implemented in the next 12 months. The recent supportive policies will help restore homebuyers' sentiment and facilitate steadier recovery in home sales momentum in both primary and secondary markets in 2H24,” said Sherril Sheng, Research Director for JLL China Residential Sector. Furthermore, high-end primary prices are expected to rise further amid looser price caps. As Shanghai's secondary home sales momentum continues to recover, we expect a deceleration in the decline of secondary prices.

Capital Markets

In the second quarter of 2024, the total transaction volume in Shanghai's investment market reached RMB 15.1 billion, marking a 10.3% q-o-q decline. The number of completed transactions increased from 23 in 1Q24 to 27 in 2Q24, indicating an improvement in market activities. A total of 50 transactions were completed in the first half of this year, representing a 35.1% increase compared to the same period last year. The market focus has shifted towards small-scale investment projects, with 74.1% of them having a total value of less than RMB 1 billion.

Various types of private enterprises have actively expanded their presence in Shanghai by pursuing en-bloc or multiple floor projects this quarter. Investors are ready to allocate resources to high-value, cost-effective assets. It is anticipated that large institutions will enter the investment market in the second half of the year, which will boost up the total transaction volume.

In 2Q24, office properties accounted for the highest transaction amount (74%), followed by apartments (18%) and hotels (6%), indicating a market trend of concentrated investment in specific asset categories. Among office transactions, 65% comprised self-use projects for standalone or whole-floor properties, with a total transaction value of less than RMB 500 million. Additionally, rental housing continues to be highly sought after by investors.

Ling Sun, Head of JLL Capital Markets East China, commented, “Looking back at Shanghai's investment market in recent years, domestic investors, including both private and state-owned enterprises, have taken the lead and demonstrated strong momentum in their investment activities. Foreign institutional investors have also shown continued interest in the rental housing sector. With the anticipated correction in asset prices, we expect to witness more projects being transacted in the future."

Hotels

The domestic tourism market continues to recover, boosting the upscale-and-above hotel market in Shanghai. As at YTD May 2024, the Shanghai upscale-and-above hotel market achieved an occupancy rate of 65.8% and an average daily rate (ADR) of RMB 1,058. Occupancy and ADR increased by 3.1 percentage points and 5.2% respectively. As a result, the revenue per available room (RevPAR) reached RMB 696, showing a year-on-year growth of 10.3%. It has recovered to 93% of the same period in 2019. The ADR and occupancy rate have recovered to 98% and 95% of the same period in 2019 respectively.

Shanghai’s upscale-and-above hotel market has welcomed around 560 new rooms in the first half of 2024, and it is expected to welcome another 1,650 new rooms in the second half of the year. Those new entries include multiple rebranding assets. Sofitel on the North Bund (315 rooms, rebranded from Jiulong Hotel) and Hyatt Centric Zhongshan Park (249 rooms, rebranded from New World Hotel) officially opened in Q2. Alila Shanghai (188 rooms, rebranded from Four Seasons) and Zhangjiang voco (240 rooms, rebranded from Ramada) are expected to open in the second half of 2024.

According to Tao Zhou, Managing Director, Head of Hotels and Hospitality Group for JLL Greater China, “The relaxation of inbound policies has released more positive signals. Shanghai received around 2.47 million international tourists in the first five months of 2024, increasing 168.7% from the same period last year. We expect hotel performances to continue to recover in 2024. As another emerging market trend, the importance of renovating existing hotel assets is growing. In the near future, repositioning, rebranding, renovation, and rejuvenation of hotel assets will become the mainstream trends of China’s hotel market.”