Demand remains solid across most sectors, with quarterly logistics take-up reaching a record high level

Shanghai market demand continued its recovery across most sectors. “Office leasing demand stayed strong, and CBD demand picked up, especially in core areas. Demand in the decentralised market was mostly driven by consolidation and expansion requirements,” said Anny Zhang, Managing Director for JLL East China and Head of Markets for JLL China.

Retail net take-up accelerated amid further leasing recovery and high occupancy in new projects. Strong demand in new projects and improved demand in existing projects have helped logistics to drive down vacancy rate and achieve a record-high net absorption. Demand from first-time buyers and upgraders remained strong in the residential market amid tightening policies, and sales volume declined moderately but remained at a high level. Shanghai’s investment volumes grew significantly year on year, supported by large portfolio transactions.

Grade A Office

With the steady release of pent-up demand, overall absorption reached 450,000 sqm in 2Q21, and 750,000 sqm in 1H21. “Domestic companies remained active, with domestic financial services and professional services companies driving demand in Pudong CBD,” said Stanley Jiang, Head of Project Leasing for JLL Shanghai Markets. Core areas in Puxi stayed resilient, with demand led by a range of sectors. Net absorption in the decentralised market reached 347,000 sqm, accounting for almost three-quarters of Shanghai's total net absorption. Demand in submarkets that recently received high levels of attention remained positive. Mid-market industries such as TMT and Manufacturing & Trading firms accounted for a large share of leasing activity as they are the main drivers of consolidation and/or expansion projects.

With no new supply in the CBD area, the vacancy rate continued to drop: Puxi's vacancy rate fell 1.5 ppts q-o-q to 9.5%, while in Pudong, demand from domestic financial companies helped vacancy decrease to 12.6%. In the decentralised market, SK Tower in Houtan and Lifestyle International Center in Daning reached completion and delivered approximately 207,000 sqm to Shanghai’s office market. Despite the new supply, the vacancy rate of the decentralised market continued to fall: 2.7 ppts q-o-q to 26.5%, benefitting from strong leasing demand in key submarkets.

CBD rents edged up 0.3% q-o-q. Puxi CBD rents increased 1.0% q-o-q driven by active leasing demand, while Pudong CBD rents remained largely unchanged as performance diverged across projects. Decentralised rents edged up 0.7% q-o-q mainly driven by strong growth in key submarkets like Qiantan and Xuhui Bund.

Business Parks

Accelerating demand recovery supported further rental growth. Net absorption reached 218,000 sqm in the second quarter of 2021. Semiconductor companies and life science industry were actively looking for leasing opportunities in Zhangjiang submarket. For example, Bright Power Semiconductor leased 6,000 sqm in Innov Star. Technology companies continued to lead demand in Caohejing submarket. For example, miHoYo Technology leased 12,000 sqm in Guangqi Park IV. Four projects with a total GFA of approximately 270,000 sqm reached completion in the second quarter, including two major completions: SBP Phase 4 of 115,000 sqm and Shanghai International Fortune Center of 110,000 sqm. Shanghai’s overall business park vacancy rate remained flat at 13.6%. Overall rents in business parks saw positive growth, rising 0.5% q-o-q to RMB 4.5 per sqm per day.

Retail

Shanghai's consumer market continued to release pent-up vitality, spurred by the "Double Five" shopping festival. Over January-May, Shanghai's retail sales surged 49.0% y-o-y, or 25.1% higher compared to the same period in 2019. Urban net take-up accelerated to 207,110 sqm due to further leasing recovery and good opening performance in new malls. “Upgrade leasing demand from upscale outdoor apparel and sporting gear, auto showrooms, designer toy stores, and jewelry and fashion accessories retailers all contributed to this quarter’s growth in net absorption,” said Paige Chuang, Director of Retail for JLL Shanghai.

Two decentralised malls debuted in 2Q, adding a total retail GFA of 184,000 sqm. CHJ InCity by SCPG opened as the first mall in the Caohejing area. Lalaport Jinqiao by Mitsui Fudosan was launched as the Japanese developer's first Lalaport shopping park overseas. Both malls had opening rates of over 90%. Overall vacancy continued to drop, with prime vacancy rate stabilizing at 10.0% while decentralised vacancy rate dropped 0.5 ppts q-o-q to 10.3% as leasing recovery accelerated in existing malls, and new projects debuted with above-average occupancy.

Prime ground floor rent grew 1.4% q-o-q to RMB 49.9 per sqm per day, primarily due to exceptional sales performance in high-end malls. Decentralised rents also edged up by 0.7% q-o-q to RMB 18.8, thanks to active tenant adjustment in many malls and stable growth of leading regional properties. Rents rose 0.6% in y-o-y terms, reversing the trend of urban y-o-y rental declines that began in 2Q19.

Logistics

Quarterly net absorption climbed to 286,324 sqm, the highest quarterly total observed in Shanghai in recent years. “This quarter’s improved take-up mainly came from leases from 3PLs,” said Richard Huang, Co-Head of Logistics & Industrial for JLL China. 3PLs were the key drivers of the quarter's leasing, with a large number of new leases and some renewals from domestic and international 3PL firms. Additional demand drivers that contributed to the absorption this quarter included e-commerce firms and manufacturers. Firms in these sectors leased significant amounts of space in Lingang and Fengxian submarkets.

Two projects reached completion this quarter, adding 243,000 sqm of new supply to Jinshan submarket, and making it the quarter with the largest amount of new supply since 3Q18. Overall vacancy rate decreased slightly from 6.8% to 5.9%, reflecting how strong demand balanced the effects of the quarter's large new supply. Most submarkets saw progress in leasing out available space, with Jinshan seeing the largest decline in vacancy rate thanks to the good performance of the newly completed projects.

Like-for-like rental growth rose slightly from 0.7% q-o-q to 0.8%, with rents reaching RMB 1.52 per sqm per day. Strong demand and decreasing vacancy helped the rents to continue growing, especially in mature and stable submarkets. Rents were up 2.0% in y-o-y terms, nearly flat with the quarter before.

Residential

Following Q1's wave of tightening measures, Shanghai imposed tougher policies to prevent potential buyers from pre-committing to multiple projects to further curb speculation. Tight policies led mass-market primary sales volume to fall 21.7% q-o-q from a record high last quarter, though it still posted an increase of 3.6% y-o-y. In the high-end segment, with pure investment demand facing tight curbs, demand from upgraders remained solid. In this quarter, 487 units were registered as sold. This was down from 1Q21's 892 units, as several projects launched near the end of the quarter, leaving some sales in process but not expected to finalize until early next quarter.

After developers postponed new launches last quarter, 2Q21 saw a total of 2.54 million sqm new supply reach the market, up 162.0% q-o-q. Among the first two batches of the new supply, 43% of the projects received large numbers of buyers and triggered the new score-based lottery system for home sales. In the high-end segment, three projects launched a total of 817 units with average selling prices ranging from RMB 127,000 to RMB 130,000 which were well received by buyers.

Tight price caps for primary projects meant high-end primary prices remained largely stable, edging up only 0.4% q-o-q. However, secondary price growth accelerated 0.3 ppts to 3.6% q-o-q as home buyers not eligible under the lottery system in the primary market turned to the secondary market, strengthening individual landlords' confidence. In the land sales market, 31 residential parcels were sold, of which 8 reached land premium rates over 9%, with 10% being the cap.

We expect housing policy to remain stringent in 2H21. The mass market is expected to maintain healthy sales momentum this year, underpinned by solid demand from first-time buyers and upgraders, while investment demand will continue to be curbed. We expect high-end supply to increase and sales to stay strong in 2H21, as the widening price gap between the primary and secondary markets leads buyers to prioritize primary projects.

Capital Markets

Total transaction volume in 2Q21 grew significantly y-o-y to RMB 46.6 billion, supported by large portfolio transactions. For instance, Ping An took a majority stake in CapitaLand’s Raffles City portfolio. Demand for shopping malls strengthened as retail accounted for 36.9% of the quarter’s en-bloc transaction value.

Office assets remained investors’ preferred asset class, making up 52.7% of the total transaction value. Investors were encouraged by signs of recovery in Shanghai’s office market as both rents and vacancy rates are stabilizing. Institutional investors preferred office and retail assets located in core/central CBD areas.

“While we expect investment sales of traditional asset classes to continue to dominate in the second half of 2021, interest in emerging sectors is growing – most notably in Multi-Family and Life Science sectors,” said Eric Pang, Head of Capital Markets for JLL China.