In the Grade A office market, average rents rose slightly to reach RMB 8.9 per sqm per day, an increase of 1.2% q-o-q. “Deal flow from MNC tenants was limited this quarter due to economic concerns,” commented Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai. “However, a tight supply picture coupled with improving demand from domestic tenants in Pudong allowed landlords to maintain modest rental growth.” In the retail market, leasing activity was strong as retailers moved forward with aggressive expansion plans and retail sales continued to grow in both prime and decentralised markets. The high-end residential sales market was subdued this quarter as home purchase restrictions continue to limit sales volume. There was a rebound in the mass market, however, as the government is beginning to introduce favourable policies for first-time home buyers. Meanwhile, in the investment market, the first quarter was very quiet as no new en-bloc transactions occurred. In the non-bonded logistics market, leasing activities were concentrated in Pudong, mainly due to the lack of available space in West Shanghai, where demand remains quite strong.
Limited MNC deal flow; domestic tenants in Pudong more active. The leasing market was quiet in the first quarter as tenant expansion plans continued to be clouded by economic uncertainty. In Pudong, leasing activity from MNC tenants, particularly foreign financial companies slowed significantly. Leasing demand from domestic companies improved, however, with domestic tenants contributing to a larger portion of net take-up this quarter. In Puxi, there were a limited number of transactions as MNC companies were largely inactive in the leasing market. Jing An Kerry Center remains the main focus of tenant interest in the Puxi market. Cost considerations led many companies to look to non-core CBD locations where large-block space is more readily available. For example, AIA pre-leased 10,000 sqm in the upcoming project SML Center, located in New Huangpu District.
No new supply leads to tightening vacancy downtown. No new projects were completed in the CBD market on either side of the river, as a number of building completion dates were pushed back to later in the year. As a result, overall vacancy in the Grade A market fell to 4.9% in Puxi and 6.1% in Pudong. Three new decentralised projects were completed this quarter. Developed by Henderson, Greentech Tower (31,702 sqm) was completed in Zhabei District and opened with around a 15% pre-commitment rate. In addition, Pole Tower (41,000 sqm) reached completion in decentralised Xuhui and space in the building has been sold by strata-title. Finally, Central Towers (66,000 sqm) was completed in Putuo this quarter. “In Pudong, future supply on the leasing market will remain limited as new projects will be taken largely by owner-occupiers,” said Anny Zhang, Head of Pudong Markets for Jones Lang LaSalle Shanghai. “This will afford landlords in existing buildings greater bargaining power, especially in the Premium Grade A market.” In Puxi, supply will remain limited in the core-CBD until the delivery of the Premium Grade A Jing An Kerry Centre Tower 2 and Tower 3 in 3Q12. Tower 3 in this project (65,000 sqm) has already reached a pre-commitment rate of approximately 50% two quarters prior to completion, reflecting the strong interest among MNC tenants for this new landmark building.
Rental growth slows in Puxi due to softening demand from MNC tenants. Due to weakened leasing demand, rental growth was modest for the overall market this quarter. Overall average rents for Grade A office space grew to RMB 8.9 per sqm per day, an increase of 1.2% q-o-q and 11.4% y-o-y. Landlords in Pudong remained confident due to the limited future supply pipeline, with rents increasing by 2.4% q-o-q to RMB 8.6 per sqm per day. Meanwhile in Puxi, in light of slower leasing demand, rents remained flat at RMB 9.1 per sqm per day. Premium Grade A rents increased by 1.5% q-o-q to reach RMB 10.5 per sqm per day. Rents in Premium Grade A buildings have continued to outperform the overall market, especially in Puxi.
Retail projects upgrade tenants to attract more foot traffic. Leasing activity remained strong this quarter due to retailer expansion and continued growth in retail sales. According to the Shanghai Commerce Center, total retail sales of 452 mid-to-large-scale retailers grew by 14% y-o-y to RMB 5.66 billion during the CNY holiday. Leasing demand by mid-range fashion tenants remained robust as brands such as Gap, H&M, C&A, Muji, and Mango continued to announce ambitious expansion plans in Shanghai and throughout China. In prime areas, the share of new openings by F&B tenants steadily increased for the third consecutive quarter. Measured by commitments, as much of 20% of demand in decentralised malls came from services retailers (e.g. English schools, banks, and weight loss clinics). Upgrading continues in pockets around the city. West Nanjing Road’s Sunny 993 chose not to renew several sporting goods brands in order to make room for a Sephora flagship store. Bund 5 and Hongyi Plaza are in the midst of shuffling their tenant mixes in an effort to move further upscale. In order to draw more foot traffic through its large property, SML Center has begun increasing its percentage of F&B and entertainment tenants.
Vacancy continues to fall in Prime retail market. In the prime market, the 20,000 sqm New Road project reopened under the new name “Bailian Xuhui Shopping Center”. Two-storey flagship stores from Gap, H&M, C&A, Ochirly and Chocoolate helped the re-opened project to achieve 100% occupancy. Bund 5 began renovation this quarter and plans to upgrade its tenant mix before re-opening in the second quarter with the new name “B5”. In the decentralised market, Huge Lifestyle Center (30,000 sqm) opened on 16 March with a 70% opening rate including retail brands Selected, La Chapelle, Watson’s, and F&B brands Costa and Fengshouri. Vacancy fell by 0.4% to reach 1.6% in prime areas due to declining vacancy in over 10 major shopping malls. In the decentralised market, the vacancy rate remained low at 3.1%, with notable decreases observed in Skymall and IMAGO. “Average ground floor rents in the prime market edged up 0.6% q-o-q to RMB 46.5 psm per day, while rents in the decentralised market increased by 1.1% q-o-q to RMB 18.6 psm per day,” commented Eugene Tang, Head of Retail for Jones Lang LaSalle greater China.
Government policy aims to support first-time home buyers. In 1Q12, both the Central and Shanghai local governments began fine-tuning policies aimed at supporting first-time home buyers. Measures included improvements to the availability of mortgage finance and broader coverage for a reduced deed tax. Sales volumes of commodity housing in the primary market plunged in January due to the Spring Festival holiday, but rebounded quickly to 429,000 sqm in February and continued to trend upwards in March, increasing 84% m-o-m as first-time home buyers gradually returned to the market. Growing sales volume late in the quarter can be attributed to government support measures along with more reasonable pricing from developers.
High-end sales market remains subdued this quarter. The high-end sales market remained subdued and only recorded 237 units sold through the quarter as potential buyers remained held back by home purchase restrictions (HPRs). The majority of sales this quarter came from transacted units in projects offering significant discounts, resulting in a decline in high-end primary sales prices of 2.8% for the quarter. Projects offering discounts were mostly in emerging high-end residential locations like the Xuhui Binjiang area and the Huamu area in Pudong. In established high-end residential areas, developers generally held sales prices steady because of limited future land supply in these locations. Two new high-end projects in mature areas launched sales. Located on the Pudong riverfront, the SHKP-developed Shanghai Arch launched 195 units in March while Shui On launched its Four Seasons Place in the high zone of 21st Century Tower in Lujiazui.
Leasing demand boosted by MNC employees. In the high-end leasing market, demand remained fairly strong in 1Q12 as MNCs in the automotive, retail and pharmaceutical industries continued to deploy expatriates to Shanghai to facilitate their business expansions in China. “The average vacancy rate for serviced apartments fell to 10.3% while rents grew by 1.6% q-o-q, boosted by landlord confidence,” commented Joe Zhou, Head of Research for Jones Lang LaSalle Shanghai. In the serviced apartment market, Peninsula Residence on the Bund and The One - Executive Suites Shanghai in the Jing’an District each held soft openings this quarter.
Investment market quiet in 1Q12, demand remains stable. “No new en-bloc transactions were completed in the CBD this quarter, leaving 1Q12 one of the quietest quarters in the investment market in the past few years,” said Alan Li, Head of Investment for Jones Lang LaSalle Shanghai, “although a number of asset sales are currently in the negotiation process.” Investor interest was stable, particularly for office and retail assets which remain attractive due to their long-term fundamentals. Investors who have been turned away from the residential market due to tightening policies and HPR’s have continued to drive up demand for other asset classes. The biggest issue for investors at present is the increasing cost of capital and decreasing availability of debt financing. High cost of debt has made it difficult for some investors to justify participating in the market with yields at their present levels. As a number of developers and landlords have expressed interest in selling their assets, particularly in decentralised areas, we expect a rebound in transaction volumes over the next 6 months. It is also possible that developers with limited access to financing may start to consider selling more prime assets in the coming quarters. With capital values holding stable from last quarter and mild rental growth, yields softened slightly in the first quarter.
New non-bonded leasing activity concentrated in Pudong. “In the non-bonded market, West Shanghai remained fully occupied while take-up continued in some parts of Pudong,” said Stuart Ross, Head of Industrial for Jones Lang LaSalle China. Space in West Shanghai continues to be sought after by potential tenants from e-commerce, consumer goods, and automotive industries. Demand from the e-commerce industry slowed this quarter as firms became more cautious about expanding in the face of increasing industry competition. As logistics space is extremely limited in West Shanghai, an increasing number of potential tenants are considering alternatives such as Jiaxing, Taicang and Kunshan where there is more new supply and rents are lower. For example, a consumer products company leased approximately 20,000 sqm in Taicang this quarter because of a shortage of single-floor space in Shanghai. Leasing demand near Pudong International Airport remained stable as logistics companies handling imports and exports sought space there. Deppon Express expanded by 10,000 sqm in GLP Park PVG, doubling its occupied space in the property to 20,000 sqm. Falling vacancy near Pudong International Airport helped lower the overall non-bonded vacancy rate to 5.9% from 6.5% in 4Q11.
Rents continue to grow in West Shanghai due to strong demand and limited supply. Average non-bonded rents rose by 0.6% q-o-q to RMB 1.14 per sqm per day. As a result of increased enquiries in West Shanghai, landlords there have increased rent expectations this quarter. The 45,000-sqm Blogis Park Songjiang Phase I was completed in the non-bonded market in 1Q12. As a result of strong demand, it was fully committed before completion. In non-bonded projects in Pudong, rents remained flat in spite of the leasing activity and falling vacancy. Bonded rents remained flat at RMB 1.06 per sqm per day.
Medical device and pharmaceutical companies remain active in the business park market. “Demand from I.T. and financial sector tenants declined in 1Q12 as cost-savings have become a primary concern for many companies,” noted Tammy Tang, Head of Business Parks for Jones Lang LaSalle China, “certain sectors have remained active and continue to show strong demand for space.” Medical devices and pharmaceutical firms have led the market thus far in 2012. Abbott Laboratories, for example, recently expanded its footprint in Zhangjiang High-tech Park due to higher space requirements. Many traditional business park locations in Shanghai are nearly full, leading tenants with expansion requirements to look to more peripheral areas such as Shibei and Putuo for business park space. Waigaoqiao is also in the process of constructing a new business park location to support growing demand in this sector. Investment demand for business park space is strong, due in part to purchase restrictions in the residential sector which have driven potential investors towards other asset classes.
Demand for manufacturing space resilient. Companies from automotive, automotive parts, medical devices, automation, and machinery industries all remained active this quarter leasing manufacturing space. For example, Jaguar Land Rover and Chery Automobile have signed a joint venture to produce Jaguar, Land Rover and JV-branded vehicles in China in Changshu in Jiangsu Province. The venture will receive total investment of USD 2.78 billion and include the construction of a new factory with 5,000 employees and an annual output of 50,000 cars. This new facility also reflects the growing trend of locating manufacturing facilities further outside of major urban areas due to shrinking land supply and cost concerns. In Shanghai we have seen some tenants look to relocate further outside of the city centre to more peripheral areas in the Yangtze River Delta such as Suzhou, Jiaxing, Nantong and Wuxi.