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According to Jones Lang LaSalle's fourth quarter property review
Hong Kong and Macau, 11 January 2011 – Overall average rents in the Grade A office market rose to RMB 8.8 per sqm per day, up by 2.7% q-o-q and 17.4% for 2011. “As the fourth quarter progressed, leasing demand began to soften amidst worries about global economic growth in 2012. The market continued to favor landlords, however, and rental growth slowed only slightly,” noted Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai. In the retail market, luxury and mid-range retailers took advantage of projects looking to upgrade their tenant mixes and expanded aggressively in both CBD and decentralized locations. The residential sales market in Shanghai remained weak as the local government held a firm stance and kept tightening policies including home purchase restrictions in place. As a result, sales volumes fell in the mass market and remained flat in the high-end market this quarter. In the en-bloc investment market, one whole office building was transacted in Zhuyuan and an additional floor was sold by strata-title in SWFC. In the non-bonded logistics market, rents grew by 1.1% q-o-q mainly due to the strong net absorption near Pudong International Airport where landlords were confident in raising rents.
Office Office leasing demand begins to soften. Leasing demand began to slow in 4Q11 in the Shanghai office market as concerns about Europe and a potential slow-down in China caused tenants to become increasingly cost-sensitive. While large deals continued to be closed, there was a noticeable decline in new enquiries and interest in space. In Puxi, many companies looked to areas outside of the core CBD where office space is less expensive and where there is more vacant space. In Longemont Yes Tower in Changning District, Australian retailer Kmart and European logistics firm DSV both leased about 2,000 sqm, relocating and expanding from the buildings in the Puxi core CBD. In Pudong, domestic financial services companies continued to drive demand. For example, a domestic investment company leased 550 sqm in Citigroup Tower, upgrading from a Grade B building. The Pudong decentralized market continued to see strong demand as evidenced by You You Century Place and Kerry Parkside, which have both surpassed 90% commitment rates.
Full-year rental growth reaches 17.4%. Despite a slowdown in leasing demand, rents continued to rise in both Pudong and Puxi as landlords remained confident due to the limited available supply in downtown areas. Overall average rents rose to RMB 8.8 per sqm per day, up by 2.7% q-o-q and 17.4% for 2011. Premium rents continued to outpace Grade A rents, climbing to RMB 10.3 per sqm per day, an increase of 3.4% q-o-q and 21.1% for the year. Grade A rents grew slightly more in Pudong than in Puxi, with rents rising by 2.9% and 2.7% q-o-q, respectively.
New supply remains limited, self-use purchasers absorb space in Pudong. The central business districts remained supply-constrained, with the vacancy rate falling to 5.2% in Puxi and 7.4% in Pudong. In Puxi, one new Grade A project, Eco City in Jing’an District, was completed at the beginning of 4Q11, adding 67,106 sqm of space to the market. Due to strong pre-leasing activity in 2Q11 and 3Q11, the building has reached 78% commitment. In Pudong, CITIC Shipyard Phase I (165,000 sqm) was completed and has been fully purchased for self-use by two large domestic banks. Ping An International Finance Centre (63,813 sqm) was also completed in the quarter, and all of the space in the building is to be self-used by Ping An Group. This leaves very limited available space in the Lujiazui leasing market. In the decentralized market, Cheng Tou Tower (36,919 sqm) and One Prime (38,618 sqm) were completed in Puxi. Several decentralized projects were delayed from 4Q11, leaving a very large supply pipeline for 1H12.
Core CBD markets will remain tight. “Over the next 12 months new supply will remain limited in Shanghai’s core CBD areas,” said Anny Zhang, Jones Lang LaSalle’s Head of Pudong Markets. “This will afford landlords bargaining power and the ability to maintain moderate rental growth during 2012.” Self-use purchasers will continue to absorb much of the new supply in the pipeline in Pudong while supply will be limited in Puxi before the Premium Grade A Jing’an Kerry Centre is finished in 3Q12. We expect that as MNC tenants become more cautious with their expansion plans, new leasing volume will decrease. Additionally, decentralized and non-core CBD areas will become increasingly attractive due to pricing concerns and lack of available expansion space downtown.
RetailUpgrading leads to new leases by luxury and mid-range retailers. Leasing activities were strong as retail sales increased quickly in 4Q11. According to the Shanghai Commerce Centre, retail sales in 456 major retail developments during the week-long national holiday increased by 17.6% y-o-y to RMB 7.1 billion. Looking closer, the retail sales of 30 shopping malls and 85 department stores grew by 20.5% and 18.1% y-o-y, respectively, during this period. Wujiaochang, Huaihai Road, and East Nanjing Road led the market in terms of sales growth. In the prime market, we saw several new transactions as active tenants moved into malls in the process of upgrading. In Grand Gateway 66, for example, luxury brands such as Gucci, Loewe, and Escada opened new stores on the ground floor replacing DKNY and agnes b, which moved to the second floor. In Super Brand Mall, around 2,000 sqm of vacant space on the eighth floor became occupied by several F&B brands including Bifengtang, Hanlin Korean restaurant and Yoshinoya. In the decentralized market, where sales performance continues to grow quickly, both mid-range fashion and luxury brands were expanding into the large supply of high-quality projects. For instance, Gap, Zara, and Mothercare expanded to the newly opened Hongkou Cloud Nine, and LV, Dior, and Tod’s secured spaces in the future project L'Avenue in Hongqiao. In addition, 4Q11 saw big-box retailers expand quickly in the city. Media Markt opened new stores in Minhang, Qingpu, Jiading and Baoshan Districts.
Vacancy rate remains low as no new projects are completed in 4Q11. No projects were completed in the prime market in 4Q11 as Eco City was delayed to 2012. In the prime market, the vacancy rate decreased from 1.7% in 3Q to 1.5% in 4Q. In decentralized areas, the 170,000 sqm Hongkou Cloud Nine held its soft opening on 2 December after already achieving a nearly 100% commitment rate. Anchor tenants include Gome, Carrefour, Gap, and The Grandma’s (Waipojia). To date, there are three Cloud Nine malls in Shanghai, located in Changning, Minhang and Hongkou Districts. Parkside Plaza in Changfeng Park held a soft-opening in December, opening floors B1, 1, and 2 to the public.
Decentralised areas will continue to see massive amounts of new supply. Looking ahead, mid-range fashion brands and F&B will continue to contribute to leasing demand in the near future. In addition, new entrants such as A&F are expected to enter the Shanghai market in 2012, as evidenced by the recent opening of Hollister, a sub-brand of A&F in Shanghai. Around 580,000 sqm and 990,000 sqm will be respectively delivered to the prime and decentralized markets by end-2012, which will likely push up the vacancy rate in the short term but will be quickly absorbed as leasing demand remains strong. The highest commitment rates will be seen in national-branded malls such as those by Wanda. “China’s economic growth rate in 2012 plus the direction of the housing market will be the main determinants of consumer confidence, and subsequently, retail sales,” commented Eugene Tang, Head of Retail for Shanghai and China, Jones Lang LaSalle.
ResidentialHome purchase restrictions continue to weaken sales market. Shanghai’s residential sales market continued to weaken as home purchase restrictions were still strictly enforced and the lending environment remained tight. Commodity housing sales volume in the primary market fell by 20% q-o-q to a total of 1,535,874 sqm in 4Q11. In the high-end segment, sales volume rose slightly from 194 units in 3Q11 to 207 units in 4Q11, as Star River in Pudong sold 62 units in the quarter after offering a substantial discount of about 15% to promote sales. For the full year, a total of 833 units were sold, the lowest total since we began tracking the market in 2005.
Despite weak demand, developers hold sales prices firm. Despite a further contraction in sales volume, sales prices of high-end apartments in Shanghai’s primary market remained stable. Except for Star River, all other developers held their sales prices steady as none were willing to offer discounts for their irreplaceable downtown projects. As a result, capital values in the primary sales market edged down by only 0.4% q-o-q on a like-for-like basis. Similarly, in the secondary market, only a very limited number of sellers were willing to lower their prices to attract buyers. As a result, capital values in the secondary market fell by only 0.5% q-o-q.
Leasing momentum remains steady for serviced apartments. In the high-end leasing market, there was a seasonal slowdown in leasing momentum. Short-stay demand for some serviced apartments fell slightly because of the holiday season in December, but inquiries from expatriates for medium to long stays remained solid. As a result, the average vacancy rate for high-end serviced apartments edged up slightly from 10.9% in 3Q11 to 11.0% in 4Q11 due to an increase in vacancies of several serviced apartment projects which cater mainly to short-stay demand. Rents in the leasing market remained relatively flat in 4Q11 for both serviced and non-serviced apartments as landlords remained confident. No new serviced apartment projects opened in 4Q11.
Home purchase restrictions likely to remain in place in 2012. As we expected, the Shanghai government confirmed that it will continue to enforce home purchase restrictions in 2012. “We maintain our view that the Central Government will not reverse its residential market policy in the near term until market conditions compel them to do so,” said Joe Zhou, Jones Lang LaSalle’s Head of Research for Shanghai. “We expect that when the government does begin to loosen policy, likely around mid- 2012, any changes will only be fine-tuning. Sentiment and sales will only begin to recover once the government decides to ease policy, most likely in 2H12. We expect developers to continue to hold sales prices steady for high-end projects in Shanghai 2012 even if the sales volume remains low.”
InvestmentInvestment demand remains strong in both the office and retail sectors. Preliminary figures indicate that the total sales value of en-bloc transactions reached RMB 3.9 billion in 4Q11. For the full year, the total transaction volume in Shanghai reached RMB 32.2 billion, close to the same amount as in 2010. In 4Q11, office and retail assets remained in high demand. In the Pudong office market, Mori continued to strata-sell office space in SWFC, as one additional floor was sold to a domestic manufacturing company for RMB 82,500 per sqm. In the non-core CBD, Zhuyuan area has seen strong investment demand. This quarter, CLSA completed its purchase of Hongjia Building, a Grade A project from ASE Group, the second large transaction in the last two quarters in Zhuyuan. In Puxi’s decentralized area, the CapitaLand Daning Project, a project under construction, was purchased by a domestic buyer. Yields remained flat as expectations for future rental growth remain positive. Meanwhile, in the retail investment market, available stock remained extremely limited in prime areas as landlords continue to hold on to high-performing properties.
The investment market in 2012 will be influenced by the direction of the global economy. The outlook for transaction volumes and yields for the whole year are very much dependent on both domestic policies as well as the external environment, including the evolution of the European sovereign debt crisis. Should the global economy deteriorate significantly, yields are likely to soften. “We expect interest in office and retail assets to remain strong. If funding becomes more difficult to obtain, investors with access to capital will have an advantage in purchasing projects sold at attractive prices by landlords and developers seeking cash,” said Alan Li, Head of Investment for Jones Lang LaSalle Shanghai. Evidence of this trend can already be seen in transactions involving large developers such as SOHO China, which purchased a 50% stake in a land plot in Huangpu district from Shanghai Zendai Property and Greentown for RMB 4 billion in December. “We also anticipate that more prime buildings will come onto the market next year as developers with limited access to financing are forced to sell off some of their prime assets in order to raise cash.”
IndustrialLogistics Demand remained strong in the non-bonded West Shanghai market. In the non-bonded logistics market, demand remained strong in West Shanghai and picked up in some areas in Pudong. In West Shanghai, logistics companies and e-commerce companies continued to seek space for distribution centers for the Yangtze River Delta’s population centers. Because all of the space in West Shanghai is occupied, potential tenants have had to consider other options. One option for many tenants is to lease space in Kunshan, across Shanghai’s border with Jiangsu Province. Other companies are pre-leasing in upcoming projects, securing space one to two quarters before projects are completed. Leasing demand near Pudong International Airport also grew as logistics companies handling exports and imports sought space here.
Market tightens with no new supply in 4Q11. No new projects were completed in either the non-bonded or bonded markets in 4Q11. The non-bonded vacancy rate fell to 6.5% from 9.4% in 3Q11 due to the falling vacancy near Pudong International Airport. Average non-bonded rents rose by 1.1% q-o-q to RMB 1.13 per sqm per day largely due to strong net absorption near Pudong International Airport where landlords raised rents aggressively. Bonded rents were unchanged at RMB 1.06 per sqm per day. Because vacant space is much lower and demand stronger in Waigaoqiao than in Lingang, rents continue to be considerably higher in Waigaoqiao.
Non-bonded space will remain in high demand. “In the non-bonded market, the vacancy rate in West Shanghai will remain near zero because of strong demand from logistics companies, e-commerce companies and traditional retailers,” said Stuart Ross, Head of Industrial for Jones Lang LaSalle China. As e-commerce companies have expanded quickly, they have leased large amounts of non-bonded space in West Shanghai warehouses to serve as distribution centers for the Yangtze River Delta region. Moving forward, landlords are becoming more cautious about leasing to e-commerce companies because the strong competition in the e-commerce market means that future consolidation among the companies is likely. As a result of limited supply in West Shanghai and increased landlord caution, e-commerce companies will increasingly be forced to look for space in other nearby markets such as Kunshan and Pudong.
Business ParksCost savings requirements cause many firms to slow expansion plans. Many companies in the IT and financial sectors, which have expanded quickly in Shanghai during the past few quarters, put their expansion plans on hold in 4Q11. As worries about a slowdown in China became more apparent, costs savings became the primary concern for many companies. Apple consolidated its operations centrer into a 15,000-sqm space in decentralized Pudong to save on costs and setup a new location for its customer service centers, while many other companies have put a stop to their expansion plans entirely for the time being. In the medical device and pharmaceutical industries, which have been traditional market drivers, demand remained strong this quarter. Novartis, for example, has begun construction on a USD 1-billion pharmaceutical R&D center in Zhangjiang Hi-Tech Park, which will consolidate the company’s head office and manufacturing facilities. The project was originally announced in 2009 but had been put on hold until this past quarter. Business parks have seen an uptick in enquiries and interest from investors that turned away from the residential market due to government tightening policies. While no significant deals were closed in 4Q11, we expect to see a growing number of investment transactions for business parks in the coming quarters.
ManufacturingManufacturers demand remains strong. As costs rise and land supply becomes increasingly limited in Shanghai, both new market entrants as well as companies with factories in Shanghai are looking to other areas in the Yangtze River Delta and across China for new manufacturing sites. Potential slowdowns in the Chinese and external economies have not impacted the demand for manufacturing space across eastern China as new inquiries remain strong. Particularly active in searching for space are companies in the automobile, pharmaceutical, machinery and fine chemical sectors. For example, AkzoNobel announced that it will invest approximately EUR 60 million to build a new automotive coatings production facility and supporting facilities in Changzhou in Jiangsu Province. Like many other facilities that companies are building, AkzoNobel’s manufacturing plant is targeted at meeting demand in the domestic market.
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