Savills China Research Shanghai Briefing Office sector November 2018 Image: Xuhui ASE SUMMARY Prime areas witnessed office space being handed back to the market in Q3/2018. Location is no longer everything as tenants now have plenty of options and new business areas are maturing. Three new projects were launched onto the core office market in Q3/2018, adding 127,000 sq m of new office space and bringing the core Grade A office stock to 8.8 million sq m. Net take-up totalled 132,600 sq m in Q3/2018, down 65% from a high base in Q2/2018. Demand outstripping new supply resulted in a decline of 0.2 percentage points (ppts) in vacancy rates, to 12.2% in Q3/2018. Core market rents remained flat on an index basis in Q3/2018, currently averaging RMB9 per sq m per day. There was no new supply in the decentralised market in Q3/2018. Total decentralised stock remained at 4.1 million sq m by the end of Q3/2018. Decentralised stock now accounts for over one-third of the market. As the market continued to absorb current stock, vacancy rates in decentralised areas fell by 2 ppts in Q3/2018 to 33.8%. However, rents remained flat on an index basis, averaging RMB5.8 per sq m per day. Co-working supply is reaching saturation point in downtown locations, so future new openings are expected to extend to decentralised areas and focus on secondtier cities. James Macdonald, Savills Research savills.com.cn/research 01
Briefing Shanghai office sector November 2018 Leasing market Core Market Supply, take-up and vacancy Three new Grade A office projects were launched onto the core market in Q3/2018, adding 127,000 sq m of new office space. The city s core Grade A office stock, as a result, increased to 8.8 million sq m by the end of Q3/2018. New projects included: - Shimao Tower, Pudong New Area The project is located on West Weifang Road, south of the Lujiazui area. The developer, Shimao Group, relocated its headquarters here from One Lujiazui in Lujiazui and occupies around 30% of total office space. - Lujiazui Fuhui Tower, Lujiazui, Pudong New Area With 42,000 sq m of office space, this project is on Dongchang Road metro station (line 2) in Lujiazui, opposite the Pudong Financial Square, which was handed over in Q2/2018. The project consists of three for-lease office buildings, one of which has been wholly leased out to WeWork while the other two are vacant. The project was developed by Lujiazui Group. - City Link, Nanjing Road (W), Jing an district Developed by Hutchison Whampoa, the project is a 24-storey (actual floor) office building in the north of West GRAPH 1 Grade A office core market supply, take-up and vacancy, 2000-Q3/2018 million sq m 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Nanjing Road, next to Hines One Museum Place. The project is currently vacant as the landlord is considering selling the project en-bloc. Despite these new projects, the vacancy rate declined further by 0.2 of a ppt in Q3/2018 to 12.2%, due to Supply (LHS) Take-up (LHS) Vacancy (RHS) 0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Q3 18% 12% 9% 6% 3% TABLE 1 Grade A office core market performance, Q3/2018 Supply (sq m) Take-up (sq m) Vacancy Stock (sq m) Pudong 78,000 49,400 10.9% 4,248,600 Puxi 49,000 83,300 13.4% 4,558,000 All 127,000 132,600 12.2% 8,806,600 TABLE 2 Notable leasing transactions, Q3/2018 Tenant EN Tenant industry Project Business district Leased area (sq m) Chanel Retail and trade HKRI Taikoo Hui Nanjing Road (W) 7,000 WeWork Business centres and co-working spaces The Centre Huaihai Road (M) 6,800 Dyson Retail and trade China Overseas Int l Centre South Huangpu 4,200 J.K Life Insurance Finance One Museum Place Nanjing Road (W) 2,700 Franklin Templeton Sealand Fund Finance Shanghai IFC II Lujiazui 2,500 02
Briefing Shanghai office sector November 2018 strong demand. Net take-up totalled 132,600 sq m in Q3/2018, down 65% from a high base in Q2/2018, but still a strong performance in terms of the history of the market. Non-prime areas experienced strong demand, while prime areas (Lujiazui, West Nanjing Road and Middle Huaihai Road) all recorded office space being handed back to the market, an indicator of companies relocating to newer and more cost-efficient buildings away from the city centre. The financial sector continued to dominate core office demand, accounting for 24% of total recorded take-up in Q3/2018. Leasing activities were focused mostly in Pudong, with notable deals including: Franklin Templeton Sealand Fund renewing 2,500 sq m in IFC phase 2 in Lujiazui; and Aegon THTF leasing one whole floor in Century Link in Zhuyuan. Business centres and co-working spaces, one of the fastest growing sectors in 2018, and the retail and trade category accounted for an equivalent proportion (21%) of leasing activity during Q3/2018. GRAPH 2 Core Grade A office transactions* by industry, Q3/2018 Despite a limited number of deals, co-working operators tended to take up relatively large amounts of office space (generally two to three floors) in Grade A office buildings. Distrii took up 6,000 sq m of office space in Brick Tower (previously known as Oriental Financial Centre) in Lujiazui. Kr Space, one of the most aggressive operators in the sector, leased two whole floors or 5,200 sq m in Infinitus Tower in the Middle Huaihai Road (M) area. Foreign companies accounted for half of core take-up in Q3/2018. However, leasing activities in decentralised areas were dominated by domestic companies, accounting for 64% of total decentralised takeup tracked during the same period. IT 5% Manufacturing 9% Others 11% Commercial & professional services 9% Retail & trade 21% Finance 24% Business centres & coworking spaces 21% Core market rent Core market rents remained flat on an index basis in Q3/2018, with rents currently averaging RMB9 per sq m per day, up 0.5% on a year-on-year (YoY) basis. Prime Pudong and Puxi rents averaged RMB11.3 and RMB10.3 per sq m per day in Q3/2018, respectively, while non-prime Pudong and Puxi rents averaged RMB8.2 and RMB7.5 per sq m per day, respectively. GRAPH 3 Grade A office core market rental indices, Q1/1999-Q3/2018 Q2 / 1999 = 100 220 200 180 160 140 120 100 80 60 All Puxi prime Pudong prime Puxi non-prime Pudong non-prime Q3/2008 Q2/2010 36.8% decrease from peak Q2/2010 Q3/2018 38.8% increase from trough Decentralised market There was no new supply in the decentralised market in Q3/2018. Total decentralised stock remained at 4.1 million sq m by the end of Q3/2018. However, Q4/2018 is scheduled to receive as much as 376,100 sq m of new office space, with new projects including CIFI s Office Park in Xinzhuang, as well as Guohua Plaza in Wujiaochang. As the market continued to absorb current stock, vacancy rates in decentralised areas fell by two ppts in Q3/2018 to 33.8%. All of the decentralised locations recorded decreases in vacancies. However, rents have remained flat on an index basis at around RMB5.8 per sq m per day for 18 months (see Figure 5). With the market still maturing, there is limited scope for rental increases. savills.com.cn/research 03
Briefing Shanghai office sector November 2018 Decentralised market take-up totalled 80,600 sq m in Q3/2018, down from a high base in Q2/2018, which was primarily a result of pre-commitments in new projects. Manufacturing and professional services sectors took the biggest share of tracked deals, accounting for 22% and 21%, respectively. Master-planned areas such as Qiantan and Hongqiao Transportation Hub (HTH) remained particularly attractive to occupiers. Notable deals included Qoros, a domestic automobile manufacturing company, taking up 10,000 sq m of office space in Green Valley in HTH, and Cadence, an American IT company, taking up 12,000 sq m in World Trade Centre in Qiantan. GRAPH 4 Rent and vacancy by business district, Q2/2018 vs Q3/2018 RMB psm per day 12 10 8 6 4 2 11.3 11.3 10.3 10.3 10.3 10.3 Q2/18 rent (LHS) Q3/18 rent (LHS) Q2/18 vacancy (RHS) Q3/18 vacancy (RHS) 8.2 8.2 8.1 8.1 8.1 8.1 7.9 7.9 7.2 7.2 7.1 7.1 6.6 6.6 5.8 5.8 50% 40% 30% 20% 10% 0% Sales market En-bloc The en-bloc office investment market remained slow with a total consideration of only RMB5.2 billion in Q3/2018. Investors are showing concerns that the negative impact from a variety of factors oversupply, the US- China trade war, a slowing domestic economy and financial de-risking could result in slower lease take-up and a downward trend in rents in the office market. Business parks are still drawing investment interest because of their growing rental projections, which are driven by demand from R&D and tech companies. But tough credit conditions are making it hard for domestic funds to secure deals, thus giving international investors more opportunities since they face less competition from domestic investors. Generally speaking, international pension funds and sovereign wealth funds (SWFs) have an interest in core assets given their long investment cycles while PE funds remain interested in platform investments and value-added opportunities. Yields remained stable in Q3/2018, while the NOI yield was approximately 3.4%. Market outlook A total of 784,000 sq m of Grade A office space (including core and decentralised locations) is scheduled to launch in Q4/2018. Future projects Prime areas Non-prime areas GRAPH 4 Grade A office decentralised market, Q3/2016-Q3/2018 Q3/ 2009 = 100 135 130 125 120 115 110 GRAPH 6 Decentralised Grade A office transactions by industry, Q3/2018 Business centres & co-working spaces 4% Healthcare 5% Finance 13% Transportation Others 5% IT Manufacturing 22% Commercial & professional services 21% 40% 35% 30% 25% 20% 04
Briefing Shanghai office sector November 2018 include the 268,300 sq m of office space in the Shanghai International Financial Centre in Pudong s Zhuyuan area. However, the large volume will have a very limited impact on the overall vacancy rate as nearly 90% of the space is planned for self-use. Given the big support from the government, new economy industries such as IT and new energy vehicles are likely to see sustained growth and generate new demand for office space. Microsoft, Amazon, Alibaba and several other tech giants have recently announced their intentions to establish artificial intelligence (AI) innovation centres and research institutions in the city. Judging from the looming new supply, Shanghai office rents are unlikely to increase in the next 12 months. Large-space occupiers will have more room to bargain on rental prices, especially in the early stages of leasing promotions. More developers and investors are becoming cautious about the future market. They are looking to pay down debt, and are therefore looking to crystallise the capital value growth they ve realised in previous years, a move that could potentially benefit the sales market. TABLE 3 Notable en-bloc sales deals, Q3/2018 Project District Total value (RMB mil) Buyer Usage Bay Valley C6 Yangpu 554 Alpha Investment Partners and Allianz Insurance Lease Crystal Plaza one building Pudong 1,517 COMAC Partial self-use Greenland Jinchuang Building Changning 908 N/A Partial self-use Poly Greenland Plaza one building Yangpu 850 N/A Partial self-use Project Focus Shimao Tower ( 世茂大厦 ) Shimao Tower is a new Grade A office project handed over in Q3/2018. The project is located at the intersection of Weifang Road (W) and Pucheng Road in Pudong New Area. South of Lujiazui, the project is 15 minutes walking distance to the nearest metro (Shangcheng Road, Line 9), and a 50-minute drive to Pudong International Airport. Developed and owned by Shimao Group, the project consists of a 27-storey (nominal floor) office building and 31,000 sq m of retail space, which is scheduled to open on 31 December 2018. The developer, Shimao Group, relocated its headquarters here from One Lujiazui in Lujiazui and occupies around 30% of total office space. Asking rents started from RMB9 per sq m per day in Q3/2018, while management fees were priced at RMB36 per sq m per month. Location Developer Weifang Road (W), Pudong Shimao Group Handover date Q3/2018 Office GFA Typical floor plate Typical clear ceiling height Asking rent Management fees Management company 36,000 sq m 1,500-1,800 sq m Approx. 2.9 m Starting from RMB9 per sq m per day RMB36 per sq m per month Shimao Group savills.com.cn/research 05
Briefing Shanghai office sector November 2018 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. Rental index: A reflection of rental movement calculated upon a basket of projects. 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 Senior Director China +8621 6391 6688 james.macdonald@savills.com.cn Cary Zheng Senior Director Central China +8621 6391 6688 cary.zheng@savills.com.cn Peter Sheng Director Shanghai +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 600 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