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Puxi office demand remains strong; policy tightening affects residential sales

According to Jones Lang LaSalle First Quarter Shanghai Property Review

Continued demand from foreign companies in Puxi led to an increase in office rents of 8.8% q-o-q, the fastest quarterly increase since the first quarter of 2005.  “Multinational occupiers continue to implement expansion plans, fuelling confidence and pricing power among landlords,” noted Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai. Retail leasing activity picked up this quarter, as foreign retailers continued to enter the market and the opening of Sinan Mansions added to the prime retail stock. Sales volume in the residential mass market surged in January before falling off sharply in February as new restrictive policies came into effect.  These policies also weakened sentiment in the high-end residential sales market. In the en-bloc investment market, growth prospects in the retail and office sectors remained strong. With demand strong for a limited amount of vacant space, rents in Shanghai’s non-bonded logistics market grew 2.1% q-o-q.


Puxi rents rise 8.8% as market tightens. A growing number of landlords took advantage of robust expansion demand from MNCs, resulting in significant rental growth in Puxi. Average rents grew by 8.8% q-o-q to reach RMB 8.2 per sqm per day. This quarter’s growth was, for the second consecutive quarter, the fastest quarterly growth observed since 1Q05. In Pudong, average rents rose steadily by 3.7% q-o-q to RMB 7.7 per sqm per day. Rents in premium buildings increased even faster, growing by 10.9% and 4.1% q-o-q in Puxi and Pudong, respectively.  No new projects reached completion during 1Q11 in the CBD areas. The majority of existing buildings on both sides of the river were full, with the available space mainly concentrated in a handful of recently built projects.  With strong demand and no new supply, the market vacancy rate dropped to 5.6%.

Strong demand from increased expansion across industries. The leasing market remained active in 1Q11 despite the Chinese New Year holiday, with expansion demand driving net take-up on both sides of the river. Net take-up in Puxi totalled 43,140 sqm, representing a nearly 80% increase compared with the same period in 2010. An increasing number of multinational companies across all industries expanded; a result of a positive outlook for their China businesses. For example, Aecom committed to 6,300 sqm of space in Wheelock Square, expanding by approximately 60% from their previous office space. Mitsubishi Electric also expanded its space by about 50% and leased approximately 3,000 sqm in Henderson Metropolitan. In Pudong, financial companies continued to be the dominant sector driving absorption in the market. Morgan Stanley leased 6,000 sqm in SWFC and 8,000 sqm in Kerry Parkside. In addition, foreign professional services and manufacturing companies actively expanded their presence in Lujiazui. PricewaterhouseCoopers (PWC) expanded in-house in DBS Bank Tower by about 100%, taking an additional 5,400 sqm of space, while Fujitsu pre-leased 5,400 sqm in Taiping Finance Tower.

Decentralized projects to relieve pressure on supply. The tight CBD market and the widening rental differential between the CBD and decentralized areas together made decentralized options popular in 1Q11. Two new projects in decentralized areas were completed this quarter. Kerry Parkside, located immediate adjacent to Pudong’s New International Exhibition Center, was completed, adding a GFA of 88,732 sqm to the market and helping to alleviate tight market conditions in Lujiazui. Kerry Parkside reached a commitment rate of almost 50% before completion, and it will house many companies that were unable to find available expansion space in their current buildings in the CBD.  In the Puxi decentralized market, City Point, located in the Zhongshan West Road precinct in Changning District, was handed over adding a total GFA of 40,000 sqm to the market.


Leasing activity rebounds as retailers look to expand.  Retail sales were boosted by the Spring Festival holiday in February. The total turnover of 460 major retail developments tracked by the municipal statistics bureau was 11.5% higher for Chinese New Year 2011 compared to the previous year’s holiday period, reaching a total of RMB 5.04 billion. Retailers became more active compared to last quarter as they initiated their next round of store openings around the city. Most new leasing activity was concentrated in fast fashion, appliance and cosmetics trades. WE, a Holland-based fast fashion brand, made their China debut in Shanghai this quarter. It opened a 2,000 sqm flagship store in Shimao International Plaza at the western end of the Nanjing Pedestrian Street on 20 January. Two other branches were opened on the same day in Ningbo and Chongqing. Next to Marks & Spencer on Nanjing West Road, H&M leased approximately 4,000 sqm of retail space over 3 floors. The new store will be double the size of the existing Huaihai Road flagship and is expected to open in May.  Following the opening of the first store on Huaihai Road last November, Media Markt opened its second store with an area of 4,600 sqm on Jinxiu Road in Pudong.  However, even as many retailers are eager to enter Shanghai, others decided to leave the market. The closure of Best Buy’s Shanghai locations and the Barbie flagship store were notable examples, and were caused by a variety of factors related to retailing strategy. Average ground floor rents in the Shanghai prime retail market increased by 1.1% q-o-q to RMB 50.6 psm per day. Some landlords raised their rent expectations when they began upgrading tenants this year, such as Citic Square on Nanjing West Road and Grand Gateway 66 (previously known as Grand Gateway) in Xujiahui.

Sinan Mansion arrives in Luwan. The overall prime retail market vacancy rate climbed by 11 basis points to 0.8% due to the closure of Best Buy’s 2,500 sqm space in Super Band Mall. Sinan Mansion was delivered this quarter, adding 20,000 sqm to the prime retail stock. Comprised of several newly built and some old renovated villas, Sinan Mansion is designed as a lifestyle shopping destination on Sinan Road in Luwan district. Its market positioning is similar to Xintiandi Phase I. The project reached an 80% commitment rate with restaurants, bars and flower stores as its anchor tenants. 


Tightening measures take effect. A slew of new tightening measures announced in late January, including purchase restrictions, a property tax and lending restrictions, resulted in a substantial reduction in activity within Shanghai’s residential sales market. The sales volume of commodity housing in the primary market surged nearly 50% y-o-y in January 2011 with buyers rushing into the market before the introduction of the property tax in Shanghai. As buyers reacted to the newly-introduced tightening measures, the sales volume then plunged about 50% y-o-y in February to a record low since July 2004. The sales volume more than doubled m-o-m in March, but were still down about 50% y-o-y. Even with the tightening measures and drop in sales, average prices in Shanghai continued to rise slowly. The Shanghai government’s CREIS index showed that prices rose by 0.5% m-o-m in January and 0.7% m-o-m in February.

Weak market sentiment hurts sales in the high-end. The sales volume in the high-end segment reacted to government tightening measures in-step with the overall residential market during 1Q11, as an active market in January virtually ground to a halt during the second half of the quarter. For example, Park View II in Changning District, which launched pre-sales this quarter, sold 49 units in January. However, in February and March combined, only 1 unit was transacted in the project. The same pattern occurred in a few other projects such as Dynasty on the Bund and Artdeco Mansion II, each of which reported 12 units sold in January. In February and March combined, only 1 unit was transacted in Dynasty on the Bund and no units were transacted in Artdeco Mansion II. Two high-end projects launched new units on the market in 1Q11. Park View II in Changning District and Bo Jue Ju in Luwan District respectively launched 251 units and 388 units this quarter. Other upcoming projects such as City Castle Phase II and Eight Park Avenue Phase II further delayed new launches due to weak market sentiment.

In the high-end rental market, leasing demand for long stays continued to grow in the quarter as MNCs, especially in the professional services industry, brought more new expatriates to Shanghai to support their growing businesses in China. As a result, the average vacancy rate for serviced apartments edged down slightly by one percentage point to 12.4% in 1Q11.

Tightening policies will continue to affect residential market. We expect that the current tightening measures will remain in place for the remainder of 2011 and likely into 2012. “Because of these tightening measures and an increase in new supply of mid to low-end apartments in areas peripheral to the city center, we expect to see a lower average transaction price in 2011,” noted Michael Klibaner, Head of Research for Jones Lang LaSalle China. However, capital values for high-end apartments are expected to remain stable as the projects on the market are built mostly by experienced, cash-rich developers who would prefer to wait out the slow market rather than offer discounts. In the rental market, serviced apartment rents are likely to continue their upward momentum over the course of 2011 as a result of strong landlord confidence backed by growing leasing demand from expatriates.


Strong start to the year for investment volume.  Preliminary figures indicate that the total sales value of en-bloc transactions reached RMB 10.5 billion in Shanghai in 1Q11, up 11.5% y-o-y excluding CapitaLand's purchase of the OOCL portfolio in 1Q10. After foreign investors dominated in 2010, domestic buyers made up more than 60% of the market in the first quarter of 2011. Both domestic and foreign Investors remain particularly interested in the retail and office sectors because of strong growth prospects in both sectors. With few tradable prime retail and office assets available, foreign investors have been searching for properties that are either non-prime or that need to be refurbished. For example, Treasury China Holdings purchased Huai Hai Mall for RMB 575 million with plans to change the tenant mix to match the high-end Huai Hai Road retail precinct. Additionally, a PE fund purchased International Capital Plaza for RMB 1.16 billion. In one of the first major purchases by a domestic insurance company, China Pacific Life bought The Centre, a Premium Grade A office building, for approximately RMB 4.4 billion. While insurance companies potentially have a lot of money to deploy in the real estate investment market, it will still take more time before they appear in a significant way. In Lujiazui, financial companies purchasing space for self-use continued to drive the market. In order to raise money and tap into this demand, Mori began selling individual floors of SWFC, but only to owner-occupiers. Because many domestic companies are willing to pay a premium for space in this iconic building, five floors were sold in 1Q11 for an average price of RMB 82,000 per sqm. OCBC Bank also bought SIG Plaza, a Grade B building in Pudong, for self-use. Yields remained relatively steady this quarter. Even with strong foreign and domestic interest in Shanghai real estate, yields are unlikely to compress further because of tightening monetary policy and rising interest rates.



Non-bonded logistics market remains tight.  Strong consumer retail spending contributed to the increase in non-bonded demand this quarter, particularly in the West Shanghai market. With continued strong demand and no new supply this quarter, the non-bonded vacancy rate dropped from 6.5% to 5.8%. With supply limited, net absorption decreased by 12,038 sqm q-o-q to 21,000 sqm, and a number of companies pre-leased space in upcoming projects. In Phase III of Vailog Songjiang Logistics Park, which will be completed in 2Q11, Elee Logistics and Vancl pre-leased approximately 19,000 sqm and 18,000 sqm, respectively. Vancl, China’s largest independent online fashion apparel retailer, will lease 37,000 sqm in Phase III of GLP Park Songjiang, which is expected to be completed this year.  Additional non-bonded projects in the pipeline include the 27,260 sqm Pinuo Songjian Logistics Park and the 26,465 sqm AMB Qingpu Zhonggu Distribution center.  Both non-bonded and bonded rents increased steadily in 1Q11. Average non-bonded rents grew by 2.1% q-o-q this quarter to 1.05 RMB per sqm per day while bonded rents increased 2.8% q-o-q, rising to 1.03 RMB per sqm per day. 
Business Parks

Interest in innovation centres grows. More and more companies in Shanghai are becoming interested in developing innovation centres. While R&D centres have traditionally been closed to the public, some innovation centres are now set up both to conduct research and also to demonstrate technologies for clients in an interactive setting. Companies setting up innovation centres are interested in selecting sites which are easily accessible for their staff and clients, which allow them to showcase their image and which have compatible technical specifications. As an example, FMC announced in March that it would construct a 12,000 sqm Asia-Pacific headquarters and innovation centre in Zhangjiang High-tech Park in Pudong. A number of other companies are planning to establish innovation centres in Shanghai.


Companies are actively expanding manufacturing space.  P&G announced in 1Q11 that it has acquired 481,000 sqm of land in Taicang, Jiangsu Province with an option to expand by a further 252,000 sqm. The manufacturing plant that will be built on this land is slated to open in 2012 and will be one of P&G’s largest manufacturing sites worldwide. The plant will be P&G’s first plant designed in accordance with global LEED standards. With space for manufacturing plants in Shanghai extremely limited, the acquisition demonstrates the importance of neighbouring provinces for companies’ expansion plans. Other companies are actively looking for manufacturing space in the Yangtze River Delta.