SHANGHAI GRADE A OFFICE MARKET UPDATE Q3 2018

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1 COLLIERS QUARTERLY Peng Jiang Senior Manager Research East China OFFICE SHANGHAI Q OCTOBER 218 SHANGHAI GRADE A OFFICE MARKET UPDATE Q3 218 Summary & Recommendations Shanghai s CBD overall net take-up remained stable, despite the impact of deleveraging and financial supervision from the central government. We foresee: > Vacancy in the CBD market should drop to 9.2% at end218, and will likely climb over due to the influx of supply. It should then show a steady decline to about 9.4% at end-222, and rent should remain flat during Q4 218 to 219, and should rise over with an 1.8% annual growth rate. > Rent in the Pudong CBD is seeing a small dip in 218, but considering the limited future supply in the area, rent should rise again with an annual growth rate of 2.2% over Tenants may consider negotiating lease terms in the upcoming quarters rather than waiting longer. Full Year Annual Average 664, sq m 483, sq m 373, sq m 465, sq m End Q3/QOQ End 218/YOY End 222/ Annual Average Growth % 1.4% 1.5% RMB1.35 RMB1.36 RMB pp -4.6pp -.9pp 1.3% 9.2% 9.4% Q3 218 > We predict that average annual net absorption in the CBD market per annum will be maintained at 483, sq metres ( , sq m Demand million sq ft) over > About 2.3 million sq metres (24.8 million sq ft) GFA of new office supply in the CBD market is scheduled to be completed over Supply Rent > Daily rent in the CBD market should stay flat during Q4 218 to 219, and rise gradually over at a rate of about 1.8% per annum. There is a risk of a decline in 219 due to turbulence in financial markets. > CBD Grade A office vacancy at year end should drop to 9.2%, and will likely climb during due to supply influx. It should then show a steady decline to about Vacancy 9.4% at end , sq m

2 4Q9 1Q1 2Q1 3Q1 CBD Market: Puxi rent outperforms Pudong Overall vacancy dropped slightly Supply: two new buildings During Q3 218, two new Grade A projects totalling 119, sq metres (1.28 million sq ft) were completed in the Shanghai CBD market: > Taikang Century Tower (9, sq metres or 969, sq ft) in Lujiazui, Pudong > International Trade Center T1 (29, sq metres or 321, sq ft) in Xuhui, Puxi Shanghai's CBD Grade A office stock was therefore lifted by 1.6% to a total of 7.39 million sq metres (79.5 million sq ft) at end-q3. Demand: net take-up remained stable While the central government carried on deleveraging and financial supervision policies aimed at reducing financial risks, which has an impact on banks and other institutions financing activities and therefore on the city s demand for prime office space, new leases and expansions were still being witnessed in the Shanghai office market during Q A total of 123, sq metres (1.32 million sq ft) of net take-up in CBD was recorded, up 37% YOY although there was a 43% drop QOQ. Flexible workspace operators maintained their firm demand for prime offices. However, the market is facing a shortage of suitable supply after a year of relentless growth. The city s vacancy rate in Q3 was pushed down by.3 pp QOQ to 1.3% from 1.6% in Q2. By region, Puxi s vacancy rate fell by.8 pp QOQ or 6.5 pp YOY to 8.5%, while Pudong increased by.5 pp QOQ or.2 pp YOY to 12.8%. Figure 1: Shanghai CBD Grade A Office Quarterly New Supply, Net Absorption and Vacancy Rate ( sq m) Figure 2: Shanghai CBD Grade A Office Occupied and Vacant Area by Submarket ( sq m) 2,5 2, 1,5 1, New Supply Net Absorption Vacancy Rate 8.6% 1.9% 13.8% 9.5% 8.4% 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % 25% 2% 15% 1% 5% 4.% Huangpu Jing'an Lujiazui Zhuyuan Changning Xuhui Occupied Area Vacant Area Vacancy Rate % 2

3 4Q9 1Q1 2Q1 3Q1 Pudong rents under pressure Due to deleveraging and regulation from central government, the financial industry has slowed its expansion during the third quarter, and a large portion of the take-up was concentrated in recent completions offering high quality and attractive rents. Some landlords in Pudong (including in the Lujiazui and Zhuyuan submarkets) have lowered their rental expectations or extended rent-free periods with the competition to attract tenants. Pudong rents therefore dropped 1.1% QOQ or.8% YOY to RMB11.54 (USD1.68) per sq metre per day, whereas the figure in Puxi continued increasing, by.6% QOQ or 3.8% YOY to RMB9.51 (USD1.39) per sq metre per day. The city s overall rent flattened under pressure after four consecutive quarters of growth with a slight fall of.1% QOQ to RMB1.35 (USD1.51) per sq metre per per day; however, this represents a 1.8% rise on a yearly basis. By submarket, rents in Jing an, Xuhui and Changning have enjoyed an increase, whereas Lujiazui, Zhuyuan and Huangpu have recorded a drop. Figure 3: Shanghai CBD Grade A Office Average Rent and Growth Rate (RMB psm per day) % 12% 8% 4% % -4% -8% -12% Average Rent Rental Growth Figure 4: Shanghai CBD Grade A Office Average Rent by Submarket (RMB psm per day) Average Rent: RMB 1.35psm per day Huangpu Jing'an Lujiazui Zhuyuan Changning Xuhui 3

4 2Q1 3Q1 DBD market: vacancy continued falling Demand maintained healthy Three new projects totaling 184, sq m (198, sq ft) entered the decentralised market during Q3 218, including > SCE Plaza Phase II (62, sq m or 667, sq ft) in Hongqiao CBD > The Gate Phase I (12, sq m or 1.1 million sq ft) in Hongqiao CBD > Poly Greenland Plaza Bldg. J (2, sq m or 215, sq ft) in Yangpu This lifted total DBD Grade A office stock by 4.% QOQ to 4.78 million sq metres (51.5 million sq ft). We foresee that Shanghai s decentralised market will receive over 5 million sq metres (53.8 million sq ft) of new supply by end-222. About 29, sq metres (2.25 million sq ft) of net take-up was recorded in Shanghai s DBD market during Q3 218, representing a 76% increase QOQ or 6.1% on a yearly basis. The overall vacancy rate therefore dropped by 1.5 percentage points QOQ to 23.3% at the end of Q3. By segment, the vacancy of the established decentralised submarkets (Huamu, Hongkou, New Jing an/zhabei, and Putuo) declined by.6 percentage points QOQ to 12.6%, whereas emerging clusters dropped 3.3 percentage points QOQ to 33.6%. Emerging clusters to drive overall rental rise In Q3 218, firm demand in emerging clusters including New Bund and the Hongqiao CBD drove up overall rents in the decentralised market by.3% QOQ or 5.2% YOY to RMB6.69 (USD.98) per sq metre per day. Overall the emerging clusters recorded a 1.3% QOQ rental increase or 13.6% YOY to RMB6.23 per sq metre per day (USD.91), reflecting a maturing business climate in these areas and landlords optimistic outlook for the future. In contrast, rents in established submarkets remained flat at RMB7.16 (USD1.5) per sq metre per day. Figure 5: Shanghai DBD Grade A Office Quarterly New Supply, Net Absorption and Vacancy Rate ( sq m) Figure 6: Shanghai DBD Grade A Office Average Rent and Growth Rate (RMB psm per day) New Supply Vacancy Rate Rent (Overall DBD) Rental Growth (Overall DBD) 35% 3% 25% 2% 15% 1% 5% % Net Absorption Vacancy Rate in Established Market 15% 1% 5% % -5% Rent (Established DBD) Rental Growth (Established DBD) 4

5 5 Investment market: office properties continue to be the focus While deleveraging and financial supervision have driven financing costs higher for domestic buyers, Colliers believes that foreign investors maintained interests in seeking suitable assets in the Shanghai market. In Q3 218, Colliers recorded sixteen major transactions totalling USD1.14 billion or RMB7.74 billion. Offices in business districts and business parks continued to be the major sector for investment in Shanghai, accounting for 49.5% of the total transacted volume. Meanwhile, retail assets as well as government supported long-term rental apartments are emerging sectors that drew investors attention. Examples of major office transactions include: Poly Greenland Plaza B2 with a Shnaghai GFA of 14,526 sq metres (156,357 sq ft) was sold to Yancheng State-Owned Assets Group for RMB85 million (USD124 million). Block A of Hongqiao R&F Center located in Hongqiao Business District with a GFA of 9,6 sq metres (96,94 sq ft) was sold to an undisclosed SOE for RMB54 million (USD74 million). Hongqiao Sincere Center Phase 1 (Flower Block) with a GFA of 3,8 sq metres (4,93 sq ft) was sold from Sincere Holdings to Pinghu Economic-Technological Development Zone for RMB228 million (USD33 million). Outlook: rent growth should remain steady in CBD market By 222, about 2 million sq metres (21.5 million sq ft) GFA of new supply in the CBD market is scheduled to be completed. Colliers expects the vacancy rate for the CBD at end-218 to drop to 9.2%, but to climb over due to the influx of supply. Vacancy should then show a steady decline to about 9.4% by the end of 222. Meanwhile, rents should remain flat during Q4 218 to 219, and should rise over with an 1.8% growth rate per annum. There is a risk of a decline in 219 due to turbulence in financial markets. Although average rents in the Pudong CBD (including Lujiazui and Zhuyuan) are going through a dip, considering the limited future supply in the area, rents should rise in a faster pace in the next five years with a growth rate of 2.2% per annum. Tenants may consider negotiating lease terms in the upcoming quarters rather than wait longer. Table 1: Major Investment Transactions in Q3 218 Project Seller Buyer Macrolink International Centre #19 Macrolink International Centre #25 Hongqiao Sincere Center Phase 1(Flower Block) Poly Greenland Plaza B2 Hongqiao R&F Center Block A Hongqiao World Centre Block 5 GFA (Sq m) Trasaction Amount (Million RMB) Macrolink Real Private Buyer Estate 2, Macrolink Real Private Buyer Estate 2, Sincere Holdings Poly / Greenland Pinghu Economic- Technological Development Zone Yancheng State- Owned Assets Group 3, , R&F Group SOE 9,6 54 China Greenland Shanghai Kaitai Broad Greenstate Table 2: Major Leasing Transactions in Q3 218 Property Lujiazui Fortune Mansion New Bund World Trade Centre Hong Kong New World Tower China Overseas International Centre Luneng International Centre Submarket / Cluster Tenant 2, Industry Area (Sqm) Lujiazui Caitong Securities Finance 13,8 New Bund ICONIQ Auto 5, Xintiandi Xintiandi Expo KrSpace FCA Automotive Finance Shandong Energy Group Flexible Workspace 3,6 Finance 2,24 Energy 2, Kerry Parkside Huamu Fingerprints TMT 9

6 Primary Authors: Peng Jiang Senior Manager Research East China Contributors: Timothy Chen Director Research East China For further information, please contact: Tammy Tang Co-Head Managing Director China Head of Industrial China Andrew Haskins Executive Director Research Asia Dave Chiou Senior Director Research China About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI) (TSX: CIGI) is a top tier global real estate services and investment management company operating in 69 countries with a workforce of more than 12, professionals. Colliers is the fastest-growing publicly listed global real estate services and investment management company, with 217 corporate revenues of $2.3 billion ($2.7 billion including affiliates). With an enterprising culture and significant employee ownership and control, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide, and through its investment management services platform, has more than $2 billion of assets under management from the world s most respected institutional real estate investors. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice to accelerate the success of its clients. Colliers has been ranked among the top 1 global outsourcing firms by the International Association of Outsourcing Professionals for 13 consecutive years, more than any other real estate services firm. Colliers is ranked the number one property manager in the world by Commercial Property Executive for two years in a row. Colliers is led by an experienced leadership team with significant equity ownership and a proven record of delivering more than 2% annualized returns for shareholders, over more than 2years. For the latest news from Colliers, visit our website or follow us on