Emerging CBDs see strong demand

According to JLL Shanghai 2019 First Quarter Property Review

April 12, 2019

Shanghai – Leasing demand moderated in Shanghai’s traditional CBD while the decentralized market continued to see strong demand. “Rising competition means we are seeing greater divergence in performance at the building-level, not just at the submarket level,” said Eddie Ng, Managing Director for JLL Shanghai and East China. In the retail market, prime area vacancy declined as new supply fell to its lowest level in over a year. Residential sales momentum began improving in March as looser monetary conditions encouraged buyers to shift from a wait-and-see approach to active buying. In the logistics market, non-bonded rental growth accelerated as supply remained limited and demand for space in Shanghai remained strong.


Moderate leasing in traditional CBD as emerging CBDs remain strong.  Leasing demand softened in 1Q19 in the CBD as concerns about a slowing economy caused tenants to become increasingly cost-sensitive. In the Pudong CBD, net take-up declined due to rising competition from emerging areas. In the Puxi CBD, demand was stable and mainly driven by professional service firms and retailers. The decentralised market continued to see strong demand, with strong net take up of 133,000 sqm in 1Q19. “Emerging CBDs such as Qiantan and Xuhui Bund have attracted strong interest from healthcare, TMT, and manufacturing firms seeking cost saving and expansion opportunities,” said Anny Zhang, Head of Markets for JLL China.

Two projects add 228,851 sqm. The completion of Gubei SOHO led Puxi CBD vacancy to rise 0.7 ppts to 10.1%. Pudong CBD vacancy increased 0.8 ppts q-o-q to 12.9%, as several large tenants relocated to the decentralised area to save costs or move into self-use projects. In the decentralised market, The Gate reached completion with a total GFA of 171,000 sqm. Despite the large amount of new space, strong demand kept the decentralized vacancy rate flat at 23.3%.

Greater divergence in building-level performance. Slowing demand led rents to decline in the first quarter. Pudong CBD rents decreased by 1.4% q-o-q and Puxi CBD rents edged down by 0.5% q-o-q. Rising competition meant the market saw a greater divergence in performance not just between submarkets but even between individual buildings in the same submarket.

Strata-titled Office

Sales prices remain stable as market passes through seasonal quiet period. Two projects contributed 54,741 sqm of new supply. Sales prices edged down 0.2% q-o-q on a chain-linked basis as demand softened in a seasonally quiet quarter. Self-use demand from domestic companies was the primary source of demand this quarter, with transactions concentrated in the Hongqiao Transportation Hub and Qibao Ecological Business District submarkets.

Over the remainder of 2019, a large volume of new high-quality projects is expected to enter the market, and sales volume is expected to grow further. The West Hongqiao and Qibao Ecological Business District submarkets will benefit from their proximity to Hongqiao Transportation Hub. Future high-quality projects in these two submarkets are expected to receive significant inquiries from companies with self-use demand.

Business Parks

New supply pushes up vacancy. Three new projects with a total GFA of 255,000 sqm reached completion in 1Q19, leading overall vacancy to increase by 2.5 ppts q-o-q to 13.8%. Due to the slowing economy and ongoing trade tension, several tenants in the manufacturing and trading industries became more cautious on expansion, while TMT companies continued to drive demand. Thanks to its clear positioning as a big data industry cluster, Shibei received increasing inquiries from TMT companies in fields such as cloud services and big data. In addition, Zhangjiang continued to see active demand from cutting-edge companies in the TMT and healthcare sectors seeking space for R&D centres. Overall rent remained stable with a 0.1% q-o-q increase to RMB 4.5 per sqm per day, while strong demand allowed rents in Shibei and Zhangjiang to outperform those of the overall market.


Brands target promising consumer groups as retail market sends mixed signals. China's slower retail sales growth in the first three months of the year contrasted with strong consumer confidence, while retailers expanded to serve sectors where spending was still strong. High-end cosmetics brands expanded following good 2018 sales performance. Boutique fitness clubs opened in more malls to target consumers' specific training needs. “Young parents are willing to pay a premium for quality when shopping for children, and this is driving the expansion of mid-to-high-end children's brands,” said Ellen Wei, Head of Retail for JLL China. More eat-in chains are taking up spaces in malls while venture capital-fuelled casual drink brands have slowed their expansion. New-energy vehicle brands continued taking prominent spaces in malls.

Quarterly supply eases to lowest level since 2Q17.  Two decentralized projects delivered 139,300 sqm. Orstar City debuted as the first mall in Zhenru catering to families living nearby. Sinar Mas Plaza held a soft opening in the North Bund to serve surrounding office workers and residents. Vacancy in the prime market declined from 11.1% to 9.4% as major projects that opened in 4Q18 made further progress on leasing, while decentralized vacancy rose from 8.7% to 9.5% q-o-q as more projects closed for renovation and the quarter's two new projects opened with lower-than-average opening rates.

Gap in rental growth between prime and decentralized markets shrinks. Prime open-market ground floor base rents increased at a faster pace this quarter, rising 1.7% y-o-y to RMB 51.0 per sqm per day. Decentralised rental growth slowed slightly, with rents rising 2.9% y-o-y to RMB 20.2 per sqm per day. Decentralized supply pressure and further leasing progress in prime projects contributed to the narrowing of the gap between the two areas’ rental growth rates.


Absorption remains strong despite stricter tax enforcement. Demand remained robust from 3PLs and manufacturers that were able to satisfy local tax requirements, while cold chain solution providers emerged as a demand driver. Non-bonded take-up reached 119,540 sqm, more than four times the absorption of 1Q18. While demand remains strong and inquiry levels high, developers remain concerned about stepped-up enforcement of local tax policy. New projects in popular districts such as Qingpu may take longer to lease as they seek tenants willing to pay the tax, while existing projects that already satisfied tax requirements will fill space more quickly.

One new project adds 47,000 sqm to Shanghai total stock. New Ease Jiading Weiyu opened with full occupancy. Scarcity of developable land plots means that new supply over the rest of 2019 is expected to drop to approximately 218,000 sqm, less than half of 2018's level. “Strong demand led overall market vacancy to decline from approximately 8.0% to 6.5%,” said Stuart Ross, Head of Industrial for JLL China. Among submarkets, vacancy in Songjiang rose slightly as leases expired, but this is expected to be temporary given the area's strong location.

Rental growth accelerates. Robust demand and limited lettable space led to an acceleration in non-bonded rental growth, which rose from 1.1% to 1.5% q-o-q. Mature submarkets like Jiading and Qingpu witnessed the highest q-o-q rental growth, and even landlords of new projects most affected by tax policy held steady on rents as they expect strong demand to deliver tenants.


Sales momentum improves beginning in March. While tight housing policies continued constraining sales, RRR cuts and lower real mortgage rates created a looser monetary environment and helped buyers gradually regain confidence. Beginning in March, some buyers started to shift from a wait-and-see attitude to active buying. Improving sentiment and increased new supply in March allowed Shanghai's mass market primary sales volume to improve over 1Q19, though still down 0.9% q-o-q. High-end sales volume fell 20% q-o-q to 642 units due to limited new supply. The leasing market was less active in 1Q19 due to seasonal effects related to Chinese New Year (CNY).

New launches ease in 1Q19. After two quarters of large supply, 1Q19 saw only 1.7 million sqm reach the market, down 42% q-o-q. The decline in new launches was due not just to the CNY holiday but also to fewer new projects in the pipeline, since many developers had accelerated new launches in 2H18 to ease cash flow pressure. In the high-end segment, only one project -The Palace in Xuhui District- launched 106 units in 1Q19.

Primary prices flat while secondary price declines decelerate. Price caps helped keep high-end primary prices at RMB 116,366 per sqm, flat from 4Q18 on a like-for-like basis. Secondary prices slipped 1.0% q-o-q, slowing from last quarter's 3.8% drop. A slight recovery in secondary transactions helped to stablize individual sellers' confidence, which prevented a sharper slide in secondary prices. Rents declined another 0.8% q-o-q due to slower leasing activity. Fourteen residential-use plots and nine rental housing plots were sold mostly at reserve prices.

Fine-tuning policies still expected to stabilize market. We expect a looser monetary environment in 2019, while Shanghai's tight housing policy stance is expected to stay in place. “Although all-out housing policy loosening is not likely, some fine-tuning policies can be expected to stabilize the market amid economic uncertainty,” Stephenie Zhou, Head of Project Sales for JLL Shanghai. We retain our forecast that both mass market and high-end sales will remain subdued in 1H19 and then slightly recover in 2H19 as the government's fine-tuning efforts take effect. Supply will ease in 2019. Primary prices are likely to remain stable under price caps, while the fall in secondary prices is expected to continue decelerating.

Capital Markets

Buying momentum remains strong in Shanghai investment market. Shanghai transaction volumes jumped to RMB 48.9 billion in the first quarter of 2019, up 136% y-o-y, representing 38% of China’s overall transaction volume. Foreign investors remain active. Total foreign investment in the first quarter of 2019 reached RMB 18.1 billion, up 129% from the same period in 2018. As more deep-pocketed investors with long-term outlooks have entered the market looking for large-size deals, the mixed-use sector dominated Shanghai’s investment market in 1Q19, with transaction volumes reaching RMB 26.6 billion, or 55% of the city’s total.

Looking forward to the rest of 2019, the Shanghai real estate investment market is expected to have good prospects. “With transaction volumes in the first quarter already representing almost 44% of the total deal volume of 2018, the year is off to a healthy start and total transaction volumes for 2019 are expected to reach a record high.” said Jim Yip, Head of Capital Markets for JLL China and East China.

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