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Briefing Office sector July 2018

Savills China Research Shanghai

SUMMARYNearly one million sq m of Grade A office space was handed over in Q2/2018. This area, together with the large amount of supply in the next six months, will likely mark 2018 as the year of peak supply.

Five new projects were launched onto the core office market in Shanghai in Q2/2018, adding 441,500 sq m of new office space and bringing the core Grade A office stock to 8.7 million sq m.

Net take-up picked up, totalling 382,200 sq m in Q2/2018, up 440% quarter-on-quarter (QoQ) due to a low base in Q1/2018.

Core market vacancy rates were stable at 12.4%, although they remained up 2.2 percentage points (ppts) year-on-year (YoY).

Core market rents remained flat on an index basis in Q2/2018, with rents

currently averaging RMB9.0 per sq m per day.

Five new projects, or 563,400 sq m of new office space, was handed over in the decentralised market in Q2/2018, pushing up the decentralised stock to 4.1 million sq m by the end of the quarter. Decentralised stock now accounts for close to one-third of the market.

Due to the large supply, vacancy rates in decentralised areas continued to rise, up 1.7 ppts in Q2/2018 to 35.5%, the highest level in the past three years. Rents remained flat on an index basis, averaging RMB5.8 per sq m per day.

“While financial de-risking is one of the main tasks over the next three years, the government also released tax cuts and incentives to support businesses.” James Macdonald, Savills Research

Image: Eco City, Jing’an

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Briefing | Shanghai office sector July 2018

GRAPH 1

Grade A office core market supply, take-up and vacancy, 2000-Q2/2018

Leasing MarketCore Market – Supply, Take-up and VacancyFive new Grade A office projects were launched onto the core market in Q2/2018, adding 441,500 sq m of new office space. The city’s core Grade A office stock, as a result, increased to 8.7 million sq m by the end of Q2/2018. New projects included:

- Harbour City Ph3, Lujiazui, Pudong New Area

- Raffles City Changning T1, Hongqiao, Changning District

- Haoyuan project, Huangpu District

- Lujiazui Financial Holding Plaza, Zhuyuan, Pudong New Area

- Pudong Financial Square, Zhuyuan, Pudong New Area

Core market absorption picked up, totalling 382,200 sq m in Q2/2018, up 440% compared to Q1/2018. The big growth in demand was largely

driven by the high pre-commitment rates and high proportion of self-use in new projects, as well as strong take-up in Puxi non-prime areas. For example, 70% of the office space in the 124,000-sq m Harbour City (Phase 3) was bought by China Industrial Bank in 2013 and would

Source: Savills Research

TABLE 1

Grade A office core market performance, Q2/2018

Supply (sq m) Take-up (sq m) Vacancy Stock (sq m)

Pudong 323,200 225,700 10.4% 4,170,600

Puxi 118,300 156,500 14.3% 4,509,000

All 441,500 382,200 12.4% 8,679,600


TABLE 2

Notable leasing transactions, Q2/2018

Tenant EN Tenant CN Tenant industry Project Business district Area leases (sq m)

Ping’an Finance 平安金融 Finance LCM Pudong others 11,000

HiLink 智联 Retail Tian’an Centre Old Huangpu 10,000

CICC 中金公司 Finance Azia Centre Lujiazui 3,400

Third Bridge 高临管理咨询 Professional service One Museum Place Nanjing Road (W) 2,000

CSL Behring 杰特贝林 Healthcare The Centre Huaihai Road (M) 1,700


STV EN

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be for self-use. In addition, two of the three office towers of the Pudong Financial Square in Zhuyuan area were bought by Alibaba (wholly for self-use) and Taikang Life Insurance (approximately 20% self-use).


July 2018Briefing | Shanghai office sector

GRAPH 2

Grade A office core market rental indices, Q1/1999-Q2/2018


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All Puxi prime Pudong prime Puxi non-prime Pudong non-prime

Q3/2008–Q2/2010 36.8% decrease from peak

Q2/2010–Q2/201838.8% increase from trough

GRAPH 3

Rent and vacancy by business district, Q1/2018 vs. Q2/2018


RV CBD EN

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Q1/18 rent (LHS) Q2/18 rent (LHS)Q1/18 vacancy (RHS) Q2/18 vacancy (RHS)

Prime areas Non-prime areas

per sq m per day in Q2/2018, respectively, while non-prime Pudong and Puxi rents averaged RMB8.2 and RMB7.5 per sq m per day, respectively, during the period.

Decentralised marketDespite no new supply being recorded in Q1/2018, the second quarter received as much as 563,400 sq m of new office space in the decentralised market, with five new projects being handed over. Total decentralised stock, as a result, was pushed up to 4.1 million sq m by the end of Q2/2018. New projects included:

- Crystal Plaza, Qiantan, Pudong New Area

- World Trade Centre Ph2, Qiantan, Pudong New Area

- LCM, Pudong New Area

- Poly Greenland Plaza & Anlian Tower, East Bund, Yangpu district

- CES West Bund Centre, Xuhui Riverside, Xuhui district

Due to the large supply, vacancy rates in decentralised areas continued to rise 1.7 ppts in Q2/2018 to 35.5%, the highest level of the past three years. Rents remained flat on an index basis, averaging RMB5.8 per sq m per day, 35% lower than the core market average.

Decentralised market take-up largely picked up in Q2/2018, up 61% YoY, totalling 304,100 sq m. This was primarily a result of pre-commitments in new projects. For example, Merck Group, a global healthcare science and technology company, leased 8,000 sq m in the Crystal Plaza.

Qiantan, one of the city’s master-planned decentralised business districts, aims to appeal to multinational and financial firms looking for an alternative to the costly and crowded Lujiazui financial hub. Many reporters and analysts expect the area to become a “2.0 version” of Lujiazui; however, the status

Strong market absorption offset the pressure from large supply, resulting in stable vacancy rates at 12.4%, although they remained up 2.2 ppts YoY. Vacancy rates in Old Huangpu’s Grade A office market continued to grow in the past two years, from 6.6% in Q2/2016 to 21.9% in Q2/2018. This was a result of tenants relocating from older buildings and the addition of new projects. Location is no longer everything as tenants now have plenty of options and new business areas are maturing.

Core market – rentCore market rents remained flat on an index basis in Q2/2018, with rents currently averaging RMB9.0 per sq m per day, up 0.5% on a YoY basis. This doesn’t mean there were no rental changes at all, but a combination of rent increases in relatively new projects and longer rent-free period offered to tenants offset rental reductions in older buildings.

Prime Pudong and Puxi rents averaged RMB11.3 and RMB10.3

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of Lujiazui is hard to duplicate or surpass due to its size, maturity and central location.

Sales marketEn-blocThe en-bloc office investment market saw a slowdown in transaction volume due to lack of debt availability and rising costs, with only RMB5.5 billion in deals concluded in 1H/2018.

More transactions of decentralised office properties with a relatively low price per unit were recorded in Q2/2018. Potential buyers and sellers of core assets continue to have a difference of opinion on market prospects and current market values. Meanwhile properties in decentralised areas that offer higher yields and have more capital value appreciation potential are popular among investors. In addition, business parks are drawing a lot of investment interest because of the growing rental projections, driven by demand from R&D and tech companies, and higher yields.

Gross yield remained stable in Q2/2018, while NOI yield was approximately 3.4%.


TABLE 4

Selected first-hand, strata-title sales transactions, Q2/2018

Project District Business district Transaction area(sq m)

Average transaction price(RMB per sq m)

Wentong Int’l Plaza Yangpu East Bund 7,773 24,900

Greenland Centre, Ph2 Xuhui Xuhui Riverside 1,044 63,900

Strata-titleNearly 20 projects (including existing and new projects) in the office market received pre-sale certificates in Q2/2018, totalling 485,900 sq m of office space. Overall transaction volumes totalled 310,900 sq m in Q2/2018, with transaction prices averaging RMB31,500 per sq m.

Transaction volumes rebounded in Q2/2018, totalling 34,300 sq m of

strata office space within the Middle Ring Road. Transaction prices averaged RMB31,100 per sq m.

Market outlook2H/2018 is scheduled to receive another 761,400 sq m and 594,000 sq m of new Grade A office space handed over into the core and decentralised markets, respectively, although it is unlikely all of these will be completed within six months.


TABLE 3

Notable en-bloc sales deals, Q2/2018

Project District Total value(RMB mil) Buyer Usage

Bay Valley B7 Yangpu 726 IDG Capital Lease

Qibao Powerlong Building T2 Minhang 452 Gopher Asset Lease

Hongqiao World Centre F4-10 Qingpu 403 Cura Investment Lease

GRAPH 4

Qiantan vs. Lujiazui


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2022F18Q2 stock


July 2018Briefing | Shanghai office sector

Vacancy rates, as a result, are forecast to rise further and rents are unlikely to see an upswing under these circumstances.

In accordance with the central government’s call for financial de-risking, China will establish a financial court in Shanghai to deal with finance-related lawsuits. This will not only increase the international influence of China’s financial laws and support its economic transformation, but would also boost Shanghai’s ambition as an international financial hub.

Shanghai continues to play a leading role in China’s opening-up efforts and has introduced 100 new measures to further open its

economy by cultivating the financial sector, modern services and high-end manufacturing industry, protecting intellectual property rights, promoting the import system and improving the business environment. Notably, Shanghai is encouraging foreign investment in the high-end manufacturing sector and will speed up the launch of new-energy vehicle projects. Tesla has recently signed cooperation agreements with the Lingang government to set up an R&D centre, and manufacture and sell electric cars in the city.

New economy industries including Internet, big data and other technology sectors will continue to generate new demand for office space.

2H/2018 will likely remain tough for landlords, especially those with older projects that are faced with increasing competition from new supply. They are now more open to discussion during renewal negotiation with existing tenants in an attempt to defend occupancy rates. Large space occupiers, in particular, have more room to bargain on their rental prices. Future competition among office projects will mainly focus on building quality and services provided by landlords. New developments could also take advantage of high technology such as artificial intelligence (AI) and Building Information Modelling (BIM) to better manage and maintain their projects and thus enhance competitiveness.

Project FocusLujiazui Financial Holding Plaza (陆家嘴金控广场)

Lujiazui Financial Holding Plaza is a new Grade A office project handed over in Q2/2018. The project is located at the intersection of Century Avenue and Yanggao Road (M) in the Pudong’s Zhuyuan business area. Next to the project by Shanghai Stock Exchange — which is close to handover — Lujiazui Financial Holding Plaza enjoys easy access to the Pudian Road Metro Station (Line 4/6) and Shanghai Science & Technology Museum Metro Station (Line 2), and is 50 minutes’ drive to Pudong International Airport.

Developed and owned by Lujiazui Group, the project consists of three office towers, with approximately 60,000 sq m of office GFA that is for lease only. Shanghai Insurance Exchange and China Central Depository & Clearing (CCDC) Shanghai have occupied the two lower towers, respectively. Asking rents started from RMB10 per sq m per day in Q2/2018, while management fees were priced at RMB38 per sq m per month.

Location Zhuyuan, Pudong

Developer Lujiazui Group

Handover date Q2/2018

Office GFA 59,200 sq m

Typical floor plate 1,100-1,500 sq m

Typical clear ceiling height Approx. 3.1 m

Asking rent Starting from RMB10 per sq m per day

Management fees RMB38 per sq m per month

Management company Lujiazui Group


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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

James MacdonaldSenior DirectorChina+8621 6391 [email protected]

Savills plcSavills 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.

Research

Cary ZhengSenior DirectorCentral China+8621 6391 [email protected]

Peter ShengDirectorShanghai+8621 6391 [email protected]

Commercial

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