Savills World Research Shanghai Briefing Office sector November 2017 SUMMARY Image: Vantone Center, HTH In recent quarters, more landlords are leasing out space in their traditional office projects to co-working brands, or entering the co-working market directly. Two new Grade A office projects were launched onto the core market in Q3/2017, adding 350,000 sq m of supply and increasing core office stock by 4.5% to 8.1 million sq m. Demand remained strong in the third quarter, with net take-up in the core market totalling nearly 165,200 sq m (including self-use). New supply pushed up vacancy rates in core areas by 1.8 percentage points (ppts) quarter-on-quarter (QoQ), to 12.5%, up 3.4 ppts year-on-year (YoY). Core market rents remained flat on an index basis at RMB8.9 per sq m per day, up 1.8% YoY. Two new projects were launched onto the decentralised market in Q3/2017, bringing 139,300 sq m of new supply and pushing total stock up to 3.2 million sq m. New supply pushed vacancy rates, in decentralised areas, up a further 4.2 ppts in Q3/2017 to 37.6%, while rents remained flat on an index basis averaging RMB5.8 per sq m per day. The strong growth in Shanghai s tertiary industry will continue to underpin strong demand for office spaces. The addition of new projects further pushed up vacancy rates in Q3/2017, while dragging down average rents. James Macdonald, Savills Research savills.com.cn/research 01
Briefing Shanghai office sector November 2017 Market News Shanghai Rolled Out Measures to Attract International R&D Centres Shanghai released 16 measures in October 2017 to attract more international research and development (R&D) centres into the city, as an effort to develop the city into a global technological innovation hub by 2030. Large-scale international R&D centres will be given the same privileges as regional headquarters of multinational companies (MNC), which means the R&D centres will receive favourable policies and financial support from the local government. New measures also include preferential policies, easier access to services and less processing time for work permits for international employees of R&D centres. These measures hope to attract more international-funded R&Ds to enter and expand in Shanghai, generating new occupier demand for the city s office market. Henderson Joined CIFI in Developing the Madang Road Project CIFI Holdings will jointly develop a commercial project in Huangpu with Henderson Land Development Co., with a 50%-50% stake. The project is located on Madang Road and Jianguo Road, with a planned above-ground GFA of approximate 25,000 sq m (20,000 sq m office and 5,000 sq m retail). Construction had not yet begun at the end of Q3/2017. Leasing Market Core Market Supply, Take-up & Vacancy The city s core office market received two Grade A projects in Q3/2017 Harbour City Phase 2 in Lujiazui and China Overseas International Centre in South Huangpu totalling 350,000 sq m of new supply. GRAPH 1 Grade A Office Core Market Supply, Take-up & Vacancy, 2000-Q3/2017 million sq m 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Source: Shanghai Statistics Bureau, Savills Research Jointly developed by CITIC Pacific and China State Shipbuilding Corporation (CSSC), the Harbour City Phase 2 comprises of two office towers, with one tower (approx. 150,000 sq m) bought and selfused by Industrial and Commercial Bank of China (ICBC), and the other tower (approx. 110,000 sq m) bought by China Life Insurance as its headquarter. Core market absorption totalled 165,200 sq m. This mostly came from the 106,200 sq m take-up in prime Pudong, where the ICBC self-use project was handed over. Excluding Supply (LHS) Take-up (LHS) Vacancy (RHS) 17Q3 vacancy rate: 12.5% 0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17Q3 18% 15% 12% 9% 6% 3% TABLE 1 Grade A office core supply, Q3/2017 Project District Business district Office GFA (sq m) Developer Habour City, Ph2 Pudong Lujiazui 260,000 Citic Pacific, CSSC China Overseas International Centre Huangpu South Huangpu 90,000 China Overseas TABLE 2 Grade A office core market performance, Q3/2017 Supply (sq m) Take-up (sq m) Vacancy Stock (sq m) Pudong 260,000 145,600 8.7% 3,847,400 Puxi 90,000 19,600 15.9% 4,260,700 All 350,000 165,200 12.5% 8,108,100 02
Briefing Shanghai office sector November 2017 GRAPH 2 Grade A Office Core Market Rental Indices, Q1/1999-Q3/2017 Q2 / 1999 = 100 GRAPH 3 Rent and Vacancy by Business District, Q2/2017 vs. Q3/2017 RMB psqm per day 220 200 180 160 140 120 100 12 10 80 60 8 6 4 2 0 10.3 10.3 Nanjing Rd (W) All Puxi prime Pudong prime Puxi non-prime Pudong non-prime 9.9 9.9 Huaihai Rd (M) 11.4 11.4 Q3/2008 Q2/2010 36.8% decrease from peak 8.1 8.1 8.1 7.8 Q2/2010 Q3/2017 37.8% increase from trough Q2/17 rent (LHS) Q3/17 rent (LHS) Q2/17 vacancy (RHS) Q3/17 vacancy (RHS) Prime areas Lujiazui Old Huangpu 7.3 7.3 7.9 8.0 6.4 6.4 Xujiahui Hongqiao Zhuyuan North Station Non-prime areas 30% 25% 20% 15% 10% 5% 0% the new project, prime Pudong and prime Puxi both witnessed negative take-ups, as many tenants relocated to non-prime or decentralised areas due to affordable rents and newlybuilt buildings. The addition of new supply increased the core market vacancy rate by 1.8 ppts in Q3/2017 to 12.5%. Non-prime Pudong was the only submarket that recorded a decrease in vacancy rates, down 2.7 ppts to 8.5% in Q3/2017. Core Market Rent Core office rents remained flat on an index basis in Q3/2017, at an average of RMB8.9 per sq m per day, up 1.8% YoY. Nevertheless, average rents were down in absolute terms from RMB9.0 per sq m per day in Q2/2017, with projects launched in the last six months, in non-prime areas, coming to market at below average rates to facilitate lease up. Prime Pudong and Puxi rents averaged RMB11.4 and RMB10.1 per sq m per day in Q3/2017, while non-prime Pudong and Puxi rents averaged RMB8.1 and RMB7.4 per sq m per day during the same period. All submarkets saw a similar flat rent with the exception being Xujiahui, due to the addition of new highend stock. Xujiahui CBD office rents increased in absolute value to RMB8.1 per sq m per day in Q3/2017, from RMB7.8 per sq m per day in Q2/2017. This was as the result of the rental consideration of Sun Hung Kai s ITC Phase 1 (G1), which launched six months ago, rather than any rental increases in the CBD. TABLE 3 Notable leasing transactions, Q3/2017 Tenant Project District Business district Area leases (sq m) Wework China Overseas Int l Centre Huangpu South Huangpu 27,000 M+W Group Capital Square Jing an North Station 3,500 China Dragon Securities Century Link Pudong Zhuyuan 2,300 Higgses Lujiazui Century Financial Plaza Pudong Zhuyuan 1,600 Hana Bank Ocean Towers Huangpu Old Huangpu 1,000 savills.com.cn/research 03
Briefing Shanghai office sector November 2017 GRAPH 4 Rent and Vacancy by Submarket, Q2/2017 vs. Q3/2017 RMB per sqm per day 12 10 8 6 4 2 0 Decentralised Market The decentralised market continued to see more new office space in Q3/2017. Two new projects were launched into the market, adding 139,300 sq m of supply. As a consequence, decentralised office stock was pushed up to 3.2 million Q2/17 rent (LHS) Q3/17 rent (LHS) Q2/17 vacancy (RHS) Q3/17 vacancy (RHS) Prime Non-Prime Decentralised 42% 35% 28% 21% 14% 7% 0% sq m, a 44% expansion from 12 months ago. In response to the new projects, the average decentralised market vacancy rate increased by 4.2 ppts in the third quarter to 37.6%, the highest level over the last two years. Similar to the core market, decentralised office rents remained unchanged on an index basis, in Q3, to an average of RMB5.8 per sq m per day, which was still down in absolute terms, dragged by projects launched in the last six months. The development of the city s decentralised office market continues to shift towards several masterplanned business areas, including the Hongqiao Transportation Hub (HTH), Qiantan and Expo business areas, and is expected to extend to areas, such as Longyang Maglev station area and Qingpu s West Hongqiao area. However, judging from the high vacancy rates in newly-handedover projects in recent quarters, the market needs more time to absorb the huge new supply. Sales Market En-bloc The en-bloc office investment market saw five key deals concluded in Q3/2017, for a total consideration of RMB14.4 billion, up 7% QoQ. When the capital value for office properties remain at a high-level, property owners are taking the opportunity to reap value from their mature investment properties and realise returns. In this quarter, Shui On Land sold 49% stake in KIC properties and YPU properties, after developing and managing the KIC project for over a decade. Current companies in KIC include IBM, Oracle and Kaspersky. SOHO China has also actively been selling its noncore assets, which included SOHO Century Plaza, SOHO Hongkou and Sky SOHO (sold in October, 2017). TABLE 4 Decentralised Office Supply, Q3/2017 Project District Business district Office GFA (sq m) Developer Hongqiao Sunnyworld Centre Minhang HTH 38,400 Sunny World Lihpao Plaza Minhang HTH 100,900 Lih Pao TABLE 5 Notable en-bloc sales deals, Q3/2017 Project International Metropolis Plaza Building 3 Greenland Huangpu Binjiang Building 1 District Total value (RMB mil) Eco City Jing an 6,400 49% stake in KIC properties and YPU properties Unit price (RMB per sq m) Buyer Usage Pudong 2,489 Tiancheng Group Self-use Lease Huangpu 2,111 Sinopharm Group Self-use Lease Ting Hsin International Group Lease Lease Yangpu 2,949 China Life Lease Lease TABLE 6 Selected first-hand, strata-title sales transactions, Q3/2017 Project District Business district Transaction GFA (sq m) Average transaction price (RMB per sq m) Huijing Int l Plaza Xuhui Xujiahui 476 62,200 Greenland North Bund Centre Hongkou North Bund 303 50,400 04
Briefing Shanghai office sector November 2017 Gross yield remained stable in Q3/2017 at 4.8%. Strata-title Under the background of tightened restrictions, the strata-title office sales market continues to slow in Q3. The Centre, by CITIC Pacific in Jiading district, received pre-sales certificates in Q3, adding 180 units totalling 31,200 sq m to the current stock. However, the near term is less likely to see much new strata-title supply because many of the recent land sales prohibit the purchaser from selling them on the strata-title market. Approximately 37,900 sq m of first-hand office space was sold within the Middle Ring Road, in Q3, with transaction prices averaging RMB31,900 per sq m. There were a number of high-end transactions in core locations, including Huaihai Middle Road and Xujiahui. Market Outlook The city s core office market will continue to receive a flood of new supply in the last quarter of 2017, with four projects expected to be handed over including: Harbour City (Phase 3), Lujiazui 2-16-2 project, Haoyuan project and Raffles City Changning (T1), adding a further 286,300 sq m of office space. The Harbour City (Phase 3) has approximately 124,000 sq m of office area, nearly 60% of which was bought by Industrial Bank in 2013. The trend of decentralisation is expected to continue as new emerging business areas grow and mature. The last quarter of 2017 is scheduled to see another 640,000 sq m of new Grade A office space handed over into the decentralised market, with some projects delayed from Q3/2017. However, it is unlikely to see all of these completed in Q4. The flood of new projects is continuing to cause vacancy rates to increase, giving downward pressure on rents. With an ample selection of new high-quality projects and emerging business areas, as well as a greater variety of flexible office formats, landlords will have no choice but to offer rental incentives, more flexible lease terms, or increase agency commissions in order to attract and retain high-profile tenants. In response to the recent growing popularity of co-working spaces, more landlords have been seen leasing out space in their traditional office projects to co-working brands, or entering the co-working market directly. This trend is expected to continue in the future, as the combination can be a win-win situation for property owners, coworking companies and a growing millennial workforce. Future Project Highlight China Overseas International Centre ( 中海国际中心 ) China Overseas International Centre is a new Grade A office project in South Huangpu CBD, and was handed over in Q3/2017. Developed by China Overseas Land & Investment Ltd., the project comprises of two office towers, totalling approximately 90,000 sq m of office GFA. The project enjoys easy access to the South-north Elevated Road and Madang Road Metro Station (Line 9/13). A new shopping mall developed by CapitaLand, Lu One, is located next to the project, which is currently under construction and is expected to open in 2018. The two office towers are both for lease only. Asking rents start from RMB9 per sq m per day in Q3/2017, excluding 5% tax, while management fees are priced at RMB35 per sq m per month. Location Developer South Huangpu, Huangpu district China Overseas Handover date Q3/2017 Office GFA Typical floor plate Typical clear ceiling height Asking rent Management company Management fees Approx. 90,000 sq m 2,000-2,200 sq m Approx. 2.9 m RMB9-11 per sq m per day + 5% tax China Overseas RMB35 per sq m per month savills.com.cn/research 05
Briefing Shanghai office sector November 2017 Definitions Core markets: Prime and non-prime markets. - Prime markets: Nanjing Road (W), Huaihai Road (M), Lujiazui. - Non-prime markets: Old Huangpu, South Huangpu, Hongqiao, North Station, North Bund, Zhuyuan, Xujiahui. Decentralised markets: All areas outside of the core markets including: Hongqiao Transportation Hub (HTH), Century Park, Former Expo, Yaohua Pujiang, Qiantan, Xuhui Bingjiang, Minhang, Caojiadu, Zhenru, Wujiachang. Rent: Achievable effective rents for a 500-sq m unit in the mid-zone of an office building signed for a three-year lease. Notes Rents are collected six months after project launch. Basket of monitored projects includes self-use for vacancy rate calculation purposes. Please contact us for further information Research Commercial James Macdonald Director +8621 6391 6688 james.macdonald@savills.com.cn Cary Zheng Senior Director +8621 6391 6688 cary.zheng@savills.com.cn Peter Sheng Senior Associate Director +8621 6391 6688 peter.sheng@savills.com.cn Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 700 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. 06