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News Release

Hong Kong and Macau

Pudong office demand remains strong; quarter ends strong for residential sales

According to Jones Lang LaSalle Shanghai First Quarter Property Review

Rents in Pudong’s office market continued their rebound in Q1, posting an increase of 5.4% q-o-q.  Office market demand in Pudong continued unabated, further boosting the confidence of landlords. “Much of the upcoming space this year in Pudong is already sold or committed,” noted Anthony Couse, managing director of Jones Lang LaSalle Shanghai. “The remaining space entering the market will be readily absorbed.” By quarter-end, demand from retailers of all trades was climbing as many major chains looked for new locations.  It was a quiet quarter for the luxury residential sales market, echoing the temporary pause seen in the overall residential market. The investment market was active with seven major deals closing, and the presence of foreign investors was noticeably more visible.  Demand was on the rebound in Shanghai’s bonded logistics market, and rents continued to stabilise.

Pudong rents up 5.4% and will continue to rise. Average rents in Pudong increased by 5.4% q-o-q to a level of RMB 6.4 per sqm per day.  In light of strong demand, a growing number of landlords raised rent expectations. The Pudong premium market increased even faster, posting a 7.7% increase in rent for the quarter.  Rents are expected to continue rising in Pudong due to strong net absorption in the market.  Over 60% of the space to be completed in 2010 is already committed through either lease pre-commitment, sale or imminent sale to an owner-occupier, or construction for partial self-use by the developer. The remaining 40% of the space will enter the leasing market where demand remains robust.  Many landlords in Pudong’s new buildings have already achieved high occupancy rates and are raising rents. Following two consecutive quarters of positive net absorption in Puxi, average rents on the West side of the Huangpu ended 6 quarters of decline and rose by 0.5% q-o-q.
Pudong office demand remains strong. Pudong continued to lead the boom in office space demand in Shanghai, posting another strong result for 1Q10.  The leasing market was brisk in Pudong despite the Chinese New Year holidays, with both DBS Bank Tower and GC Tower signing large new tenants.  DBS Bank Tower, a new Pudong building, has already reached 60% commitment. Financial institutions, especially domestic and joint venture companies, continued to expand their footprint in Lujiazui.  For example, a major securities firm expanded in-house by 1,100 sqm in One Lujiazui and a large fund management joint venture leased 2,700 sqm in DBS Bank Tower.  PriceWaterhouseCoopers (PWC) also committed to 5,400 sqm in DBS Bank Tower.  Vacancy rates in other recent Pudong buildings such as One Lujiazui continued to fall. The Puxi office market started to see a few tenant expansion plans reactivated, resulting in a vacancy rate drop of 1.2 percentage points to 8.3%. Wheelock and Henderson Metropolitan, two upcoming Puxi buildings, have attracted a reasonable amount of leasing enquiries. Meanwhile, newly completed decentralised Grade A projects also experienced more leasing demand.  For example, NXP Semiconductor and Vale Inco leased 4,500 and 3,500 sqm, respectively, in InterContinental Centre in Zhabei.
Retailers ready for Expo. Leasing activity went through a seasonal low in 1Q10, with activity especially limited around Chinese New Year. By quarter-end, demand from retailers of all trades was climbing as many major chains looked for new locations.  Consumer sentiment, while still off from 2008 peak levels, continued to rise. Retailers resumed their expansion plans with confidence as Shanghai prepares for the start of the World Expo. For example, Emporio Armani, after committing to space in the Peninsula Hotel, planned to launch another location on the first floor of Grand Gateway. Within the same property, Versus Versace Café, a high end restaurant under the Versace brand, will open on the second floor.  Ferragamo committed to open its largest Asian specialty store in the upcoming Shanghai ifc mall in Lujiazui. Several international brands planning to enter or expand in the market include Gap, Apple, Shiatzy Chen, Mux, 72 Changes, Golden Biersch, and the King Parrot affiliated brands.  On the back of strong demand, average ground floor rents for Shanghai prime retail space increased by 1.1% q-o-q to RMB 49.4 per sqm per day. This minor increase was mainly driven by rental growth in Nanjing East Road, Xujiahui, and Huaihai Road precincts.
The Bund’s first new building in 83 years. The retail portion of the Peninsula Hotel, the first new building on the Bund in 83 years, reached completion, adding 6,500 sqm to Shanghai’s prime retail stock. In spite of its limited size, the project accommodates celebrated international luxury retailers such as Chanel, Valentino, Berluti, Prada, Giorgio Armani, and Piaget. The grand opening on 18th March marked the expansion of these players in the city. Ten days later, the Bund waterfront re-opened to the public, making the Peninsula Hotel and its neighbours more accessible and providing a huge boost to retailers in the area. In the decentralized retail market, Plaza 889 reached completion. The mall, located at the intersection of Wanhangdu Road and Changshou Road, has a total GFA of nearly 50,000 sqm, including eight floors above ground and one floor below ground. Plaza 889 is positioned as a family-oriented mall, and its anchor tenants thus far include HOLA, Novo Concept, Sephora, Muji, Uniqlo, Next, and Tom’s World.
Quarter ends strong on pent up demand. Sales volume in Shanghai’s primary market fell to near record lows in January and February following the frenzy of the 4th quarter as buyers reacted to the tighter regulatory environment.  Total sales volume in Shanghai in January was lower than any month since detailed records began in 3Q04.  February totals were even lower, due in part to seasonality around Spring Festival. Uncertainty around the impact of regulatory changes on home prices has temporarily kept homebuyers out of the market. Price levels in the market showed minimal growth in January and February, with the government’s CREIS index showing a rise of 0.38% in January and 1.10% in February. Early indications of changing market sentiment appeared in the second half of March, as sales transaction volumes increased. Sales in the second half of the month were up 94% compared to the first half of the month. Very few developers have lowered prices and few are likely to do so. Sales volume will likely begin a sustained increase when homebuyers are confident the regulatory environment has stabilized.
A quiet quarter for the luxury market. The luxury residential market also saw sluggish sales in the first three months of the year, registering few transactions. Central Residence Phase II, for instance, only sold 2 units in 1Q10 in contrast to 24 units in 4Q09. Similarly, Bound of Bund only sold 7 units this quarter while 77 units were snapped up in 4Q09. Due to weak sentiment in the sales market, many developers opted to hold back new launches until momentum shifts back upward. As a result, the quarter contained only one major new launch. Bund House launched 86 new units in January and sold only 25 by the time of this writing, this compares relatively poorly to the 66 units sold immediately after their previous launch in August 2009. Despite weak sales demand, sellers maintained an optimistic outlook, given the limited new supply in pipeline and the fact that prices have remained firm.  Sellers were reluctant to lower prices to spur more volume. Developers are not offering discounts at this point and continue to show confidence in the market. Capital values of luxury apartments in Shanghai largely remained unchanged at RMB 55,237 per sqm, on average in 1Q10. Looking ahead, in anticipation that the sales market will regain momentum and if the regulatory environment turns out to be more benign than originally feared, developers are likely to release more new projects in the next two quarters. In the rental market, expatriate deployments increased even before Chinese New Year, and rents for luxury apartments started to creep up in 1Q10 as vacancies fell. The average rent for luxury apartments rose by 1.0% q-o-q to RMB 185.5 per sqm per month.
Active acquisition market. Several large en-bloc deals were closed in the first quarter of 2010 as the investment market maintained strong momentum in Shanghai. Preliminary figures indicate a total of RMB 18.9 billion of en-bloc transactions for the first quarter. This puts 2010 in Shanghai on track to meet or exceed the 2009 transacted value total.  The presence of foreign investors was notably stronger, in sharp contrast to the second half of 2009. In one of the largest real estate portfolio sales in China to date, CapitaLand purchased Orient Overseas Developments Limited (OODL) for RMB 15 billion in January, which contained a real estate portfolio worth RMB 13.56 billion.  OODL is a subsidiary of Orient Overseas International Limited.  According to materials released by CapitaLand, 35% of the total space in the portfolio is located within Shanghai borders and is valued at RMB 9.89 billion. The portfolio also includes a large township project in nearby Huaqiao in Kunshan. The residential investment market was highlighted by the transaction of Shanghai Garden Plaza in 1Q10. In February, Forte Land, a Shanghai-based developer, announced that it had acquired Shanghai Garden Plaza from Goldman Sachs for approximately RMB 2.2 billion. The property, located in Changning District, has a total gross floor area of 97,227 sqm. Goldman Sachs purchased the property from Daito Trust Construction for RMB 1.4 billion in 2007.
Bonded logistics market begins recovery. Due to the effect of a low base for comparison, Shanghai exports posted double digit year-on-year growth in January and February. Monthly export values in Shanghai were up 19.1% y-o-y in January and 34.5% in February as global inventories went through a cyclical restocking process.  With a total of USD $13.2 billion during January, export volumes returned to the levels seen two years ago. Industrial production values were also up dramatically by 46% y-o-y, more than any month in 2009, and another 17.5% in February.  As a result, demand for space in Shanghai’s bonded warehouse market started to reappear in earnest.  Bonded vacancies fell 1.7 percentage points to 35.8%. Waigqaoqiao was active, with DHL Supply Chain leasing 8,885 sqm in Phoenix Waigaoqiao Bonded Logistics Park. The non-bonded warehouse market remained strong.  Average vacancies dropped for the fourth consecutive quarter to 2.6% on the back of strong demand.  Significant non-bonded leasing deals included Best Buy, which leased 12,000 sqm in Dongqi Logistics Park Phase I, Shanghai Medical which leased 9,400 sqm in GLP Park Hongqiao North, and B&Q which leased another 6,000 sqm in GLP Park Songjiang after they secured 12,000 sqm in 3Q09 when the park was completed. Rents for bonded warehouse space reached bottom, falling only 0.4% to RMB 0.91 per sqm per day. Non-bonded rents remained stable, with average rent registering a slight 0.5% q-o-q growth to reach 0.98 per sqm per day.  In general, changes in warehouse rent during 1Q10 were almost undetectable.
Business Parks
Multi use facilities popular for consolidation; clean industries gaining ground.  A growing number of companies are following in the footsteps of Dow Chemical and are actively considering similar consolidation strategies into business park areas. Large companies are looking to do this to enjoy incentives from local governments and to consolidate multiple functions in one location, such as business support, administration, and laboratories. The approach is particularly attractive to companies with a research & development (R&D) function. Zhangjiang has traditionally been popular for this purpose but other areas also offer competitive locations. A new category of requirements is emerging in the business park market which includes new energy and clean technology. Several companies are even looking at establishing R&D facilities and laboratories on top of open farmland in the city’s suburbs. These requirements are coming from both foreign and local companies.  Businesses in environmental industries are expected to receive generous subsidies in the near future. The general framework for clean tech subsidies is expected to gradually develop this year as further details are added.
Demand for manufacturing space is accelerating. Following a long period of slower demand in 2009, activity in the manufacturing sector rebounded in the first quarter of 2010. For example, Jones Lang LaSalle recently completed a leasing deal for BWI (Beijing West Industries), an automotive components supplier, which leased 11,650 sqm in Waigqaoqiao in the first quarter of the year. For many companies, the planning processes which began in late 2009 are starting to translate into new activity as the site selection process begins and multiple locations are evaluated.  Large-sized requirements for manufacturing land are appearing in the market and negotiation with key industrial zones in Shanghai was on the rise during the quarter.  Major companies currently looking at the market are not primarily concerned with land prices but placed a strong emphasis on labour availability and incentives.  While most deals remain under negotiation and are as yet incomplete, there is a clear trend toward strong demand.