Co-working operators emerge as a significant source of demand
Shanghai, January 10, 2018 – Shanghai's office market was active with co-working operators, domestic financial services, retail and TMT companies driving demand. "Fringe CBD continued to gain momentum," said Eddie Ng, Managing Director for JLL East China, "Thanks to improving metro accessibility and high project quality, rental growth in fringe CBD areas outperformed that of other submarkets." Restrictive policies led high-end residential sales to decline, while prices remained flat.
According to JLL Shanghai Fourth Quarter Property Review
Shanghai, January 10, 2018 – Shanghai's office market was active with co-working operators, domestic financial services, retail and TMT companies driving demand. "Fringe CBD continued to gain momentum," said Eddie Ng, Managing Director for JLL East China, "Thanks to improving metro accessibility and high project quality, rental growth in fringe CBD areas outperformed that of other submarkets." Restrictive policies led high-end residential sales to decline, while prices remained flat. Overall retail vacancy declined despite large supply as occupancy improved in recently completed projects. In the logistics sector, limited supply and strengthening leasing momentum led to an acceleration in rental growth. Shanghai remained China's top investment destination as foreign investors became more active in 2017.
Net absorption for 2017 doubles that of 2016. Grade A net absorption exceeded 1.3 million sqm over 2017, with the majority in the decentralised market. Financial services (especially domestic firms), retail, and TMT were the most active sectors in the CBD. "Co-working operators also became significant demand drivers in both the CBD and fringe CBD locations as they aggressively expanded", said Anny Zhang, Head of Markets for JLL Shanghai. The year's large amount of new supply satisfied firms' requirements for space for consolidation, upgrade, and expansion. The CBD continued to feel the pressure from the decentralised market in general and in particular from fringe CBDs such as the Railway Station and the North Bund, which attracted companies seeking cost saving options.
Vacancy rises in 2017 on record supply. Over 2.2 million sqm of new supply entered the market in 2017, with 1.6 million sqm in the decentralised market and 0.6 million in the CBD. There were no new CBD completions in the fourth quarter. In the decentralised market, Puxi saw two new completions while Pudong had three. With the market still digesting the year's new supply at the end of the fourth quarter, vacancy increased 2.0 pps y-o-y to 10.2% in the CBD and 8.8 pps y-o-y to 26.8% in the decentralised market.
Rents in fringe CBDs continue to rise despite large supply. Decentralised rents rose 4.4% y-o-y in 2017. Fringe CBDs drove leasing demand thanks to good metro access and the completion of higher quality projects. On the other hand, CBD landlords lowered rental expectations as they faced supply pressure and competition from both other CBD projects as well as nearby fringe CBD markets.
Transaction volume limited due to lack of new supply. As the government tightened policies on issuing pre-sale certificates, only four high-end strata-titled projects with a total GFA of 106,456 sqm were launched in 2017, down 88% y-o-y. Limited supply led to a decline in annual sales volume, which fell 51% y-o-y to 526,750 sqm. Purchase inquiries remained active despite lower sales figures. Corporate buyers with self-use or investment interests remained the strata-titled market's primary source of demand. Hongqiao Transportation Hub continued to attract both self-use buyers and investors, and assets in Yangpu district started to draw attention from potential buyers. As a result, capital values rose 1.2% y-o-y to 42,362 RMB per sqm. Looking forward, sales prices are expected to increase moderately in the short-term as the volume of salable properties remains constrained.
TMT sector sees strong year with expansion and consolidation requirements, driving net absorption in the core business park market. New supply continued to grow, satisfying firms' requirements for expansion and consolidation. Demand from the TMT sector remained strong, and several major lease transactions concluded negotiations in 4Q17. Robust demand continued to drive rental growth, with rents rising 1.5% in 4Q17, or 6.1% y-o-y. In the investment market, interest from domestic and foreign investment funds for projects in core business parks remained high, given positive prospects for such assets.
Strong leasing momentum is anticipated for 2018. The goal of developing Shanghai into a technology and innovation center will catalyse more business opportunities for cutting edge science firms, and lead to greater demand for space in core business parks. Looking forward to 2018, demand for top-quality projects in good locations will remain robust, especially in mature submarkets with strong tenant profiles such as Caohejing Hi-tech Park and Zhangjiang Science City.
Shanghai remains China's top investment destination. In 2017, China's total transaction volume reached RMB 208 billion, on par with last year's record-high volume. Shanghai again topped the list, with total investments for the full year increasing by 1.6% y-o-y to RMB 94.2 billion, or 45.3% of China's total. In 4Q17, total investments in Shanghai reached RMB 51.1 billion, up 4.7% from the year before.
Foreign investors become more active in 2017. In Shanghai, offices continued to dominate the investment market in 4Q17 with transaction volumes reaching RMB 39.5 billion, or 77.4 percent of the city's total. "Compared with last year, foreign investors were active in 2017. The decentralised market saw more activity, causing cap rates to compress through the year," said Johnny Shao, Head of Capital Markets for JLL Shanghai and East China. Notable deals this quarter included transactions for SOHO Linkong and Cross Tower. Mixed-use assets were the second most active sector, with a total of RMB 7.9 billion transacted representing 15.6% of the total. Industrial and hotel investments respectively accounted for 4.0 percent and 2.7 percent of Shanghai's total.
Sales volume contracts further. Higher mortgage rates and down payment requirements continued to rein in demand in both the mass and high-end markets. Combined with limited supply, the restrictive policies helped limit mass market sales to 8,851 units, down 47% y-o-y, while high-end sales fell to 150 units, down 19% q-o-q and 80% y-o-y. Despite slow sales through the year, inventory remained low at end-2017 due to limited supply. In 4Q17, high-end inventory fell about 6% q-o-q and 27% y-o-y. As a result, prices stayed firm even with the slowdown in sales.
Pre-sale permit controls continue to curb supply. New supply hit record lows in both the mass and high-end markets. There were no new high-end launches for a second consecutive quarter, owing to strict controls on pre-sale permits. Developers also delayed new launches in hopes of a more favorable policy environment in the future. Developers remained cautious in the land market, with most residential-use land plots sold at the reserve price. In an effort to diversify housing products, Shanghai sold twenty-one land plots of a new land use type focused on developing rental-only housing to SOEs over the past five months.
High-end prices stay flat in primary market. Secondary prices were also flat in the fourth quarter. Developers and sellers were unwilling to offer price discounts as supply remained low. In the leasing market, rents remained level due in part to seasonality as well as stable demand from senior executives.
Sales market to rebound slightly in 2018. Under the expected tight monetary policy, developers are likely to accelerate new launches in 2018 in order to ease rising cash flow pressures. "Combined with pent-up demand, this is likely to spur sales to have a slight rebound." said Stephenie Zhou, Head of Project Sales for JLL Shanghai. "However, prices are likely to be largely flat as government policy remains tight." The year 2018 will be strong for leasing as central and local authorities continue to encourage the development of rental housing with strong incentives. Although currently SOEs play the leading role, more private investors and developers will join the competition amid the rental market's large potential, robust demographic fundamentals and government support.
Retailers continue to cultivate interactive shopping experiences. Mall operators and retailers both have gradually made unique shopping experiences a prevailing focus in order to improve customer retention. Starbucks Reserve Roastery debuted at Taikoo Hui this quarter, aiming to lure customers with a multi-sensory coffee experience. "'New retail' concepts gained traction as retailers sought to leverage digital strategies." said James Hawkey, Head of Retail for JLL China. For example, online-integrated supermarkets He Ma Xian Sheng and Super Species opened flagship stores in decentralized malls, while many online retailers opened pop-up stores in popular malls to boost sales during the "Double 11" online shopping festival.
Four projects deliver 480,000 sqm, giving 4Q the largest supply of 2017. Overall supply in both prime and decentralized markets came in at 1.2 million sqm in 2017, down slightly from 2016's 1.4 million sqm, but still one of the largest years on record. A large portion of 2017's supply was finished in 4Q, including the refurbished No.1 Shopping Center and the mega projects Gala Mall, Aegean Shopping Mall and Xuhui ASE Mall. Vacancy decreased to 9.2% in prime areas as a result of improved occupancy in new projects such as Raffles City Changning and mature projects such as Mosaic. However, due to supply pressure, decentralized vacancy slightly increased to 8.7% despite new projects' high occupancy.
Rental growth slows in both prime and decentralized markets. Prime open-market ground floor base rents increased by 2.6% y-o-y to RMB 51.7 per sqm per day, decelerating 0.9 ppts compared with 3Q, as growth was hindered by weaker projects in West Nanjing Road and Lujiazui. Decentralized rents rose 2.5% y-o-y to RMB 19.8 per sqm per day, and strong performers such as Kerry Parkside have been balanced by struggling projects in saturated submarkets.
Net absorption reaches 164,000 sqm. Demand from 3PLs and e-commerce firms helped take-up reach 164,000 sqm despite a lack of new supply, helped in part by leasing in advance of the annual "Double Eleven" shopping festival. "Much of the activity took place in projects completed in 1Q17's supply wave," said Stuart Ross, Head of Industrial for JLL China. Two such projects contributed more than 60,000 sqm of the quarter's absorption. Over 2017, leasing activity has been concentrated outside of the traditionally popular West Shanghai area, where supply has been limited and vacancy near zero. Tenants have turned instead to submarkets like Baoshan, Fengxian, and Jinshan, where supply has been more plentiful and connections to downtown are still good.
Vacancy declines to near-frictional level. No new supply was completed in 4Q, leaving total non-bonded stock flat at 5.1 million sqm. Overall supply for 2017 was about 250,000 sqm, half that of 2016. Strong leasing demand led non-bonded vacancy to decline 3.2 ppts q-o-q to 4.4% in 4Q. Baoshan saw the greatest decline, as leasing at GLP's Baoshan project pushed the vacancy rate there down by 15 pps. Shanghai's remaining vacancy is concentrated in the Lingang and Pudong Airport (PVG) submarkets, which serve specialized demand focused on Shanghai's port and airport. In addition, Lingang's remote location leads projects there to lease out at a relatively slow rate.
Rental growth accelerates. Non-bonded rents rose 1.0% q-o-q and 2.4% y-o-y to RMB 1.33 per sqm per day in 4Q17. The pace of rental growth accelerated 0.4 ppts from 3Q17 as landlords were more confident to raise rents given strengthening leasing momentum and falling vacancy.
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JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the third quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of over 80,000. As of September 30, 2017, LaSalle Investment Management had $59.0 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit http://www.jll.com.
JLL has over 50 years of experience in Asia Pacific, with 36,900 employees operating in 96 offices in 16 countries across the region. The firm won the 'World's Best' and 'Best in Asia Pacific' International Property Consultancy at the International Property Awards in 2016 and was named number one real estate investment advisory firm in Asia Pacific for the sixth consecutive year by Real Capital Analytics. www.ap.jll.com.
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