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Savills Research

Office Shenzhen – April 2021

Demand sees strong growthThe citywide average vacancy rate stabilised during Q1/2021 despite the influx of new supply.

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James MacdonaldSenior DirectorChina+8621 6391 6688james.macdonald@savills.com.cn

Carlby XieDirectorSouthern China+8620 3665 4874 carlby.xie@savills.com.cn

RESEARCH

Sam LaiSenior DirectorShenzhen+8620 3665 4830sam.lai@savills.com.cn

COMMERCIAL

Ray Wu Managing DirectorShenzhen+86755 8436 7008ray.wu@savills.com.cn

CENTRAL MANAGEMENT

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Savills team

• Shenzhen’s output of the financial industry increased 9.1% year-on-year (YoY), while that of the information transmission, software and information technology industry increased 11.3% YoY in 2020, offering a solid core of support to the Grade A office market recovery.

• An abundant new supply was handed over to the market during Q1/2021, bringing about a total leasable GFA of 405,549 sq m.

• With the new injection, the total stock expanded 4.9%

quarter-on-quarter (QoQ) and 18.0% YoY to 8.7 million sq m by the end of Q1/2021.

• As pent-up demand continued to be released in Q1/2021, the

quarterly net-take up hit 282,587 sq m, a new first-quarter historical high.

• The citywide vacancy rate saw a trivial QoQ increase of 0.1

of a percentage point (ppt) as a result, stabilising at around 28.0%.

• The citywide rental index saw a narrowing decline, down

0.5% QoQ and 5.2% YoY in Q1/2021. The citywide average rent fell to RMB184.7 per sq m per month.

• Four major office sales transactions, including three en bloc deals, were recorded in Q1/2021, all of which were new projects completed in 2020 or to-be completed in 2021.

“Given how COVID-19 disturbed the cyclical market pattern and caused rental decreases to last, pent-up demand continued to be released to the market with new annual budgets and more efficient decision-making processes in the post-epidemic Q1/2021. Therefore, the quarterly net take-up stayed high.” CARLBY XIE, SAVILLS RESEARCH

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SUPPLYThe pace of new completions recovered to a relatively fast rate at the beginning of 2021. Abundant new supply was handed over to the market during Q1/2021, totalling a leasable GFA of 405,549 sq m. These projects included Chuangyi Tech Building, Media Financial Centre and four others. With the new injection, the total stock expanded 4.9% QoQ and 18.0% YoY to 8.7 million sq m by the end of Q1/2021.

DEMAND Given how COVID-19 disturbed the cyclical market pattern and caused rental decreases to last, pent-up demand continued to be released to the market with new annual budgets and more efficient decision-making processes in the post-epidemic Q1/2021. Therefore, demand during the quarter remained robust as it has since Q4/2020. The quarterly net-take up of 282,587 sq m hit a new first-quarter historical high and was nearly on par with the all-time high of 297,224 sq m in Q3/2019.

Broken down by submarket, Nanshan’s net take-up remained the highest among all peers while Futian’s surged more than ten times QoQ due to policy incentives from the district government, positive performance of new projects and resuscitated demand for upgrading and relocation.

Notably, take-up at new completions in Q1/2021 amounted to 128,410 sq m, underpinned by several anchor tenant deals such as Tencent (54,500 sq m) and Kexing Biopharm (10,465 sq m) at Chuangyi Tech Building, as well as the University of Hong Kong (10,000 sq m), Dahua Certified Public Accountants (10,000 sq m) and Yingke Law Firm (8,000 sq m) at Media Financial Centre. The effective pre-lease performance of the new completions eased the oversupply concerns. The citywide average vacancy rate saw a trivial QoQ increase of 0.1 of a ppt as a result, stabilising at around 28.0%.

With the rise and development of the new economy in Shenzhen, leasing demand in Q1/2021 still mainly came from the information technology and finance sectors, and that from the professional services and retail and trade sectors was active as well. The latter, in particular, was fuelled by the fast-growing e-commerce businesses with momentum from incentive policies and new poles of growth amid the pandemic, yielding a growing demand for office expansion or upgrading.

RENTS Landlords continued with their strategy of rental concession in exchange for occupancy, while quality tenants still enjoyed better flexibility in negotiations. The citywide rental index saw a narrowing decline, down 0.5% QoQ and 5.2% YoY in Q1/2021. The citywide average rent decreased to RMB184.7 per sq m per month.

INVESTMENT Despite oversupply concerns, the ample new supply offered end-user buyers and investors a wider range of purchasing opportunities, as new completions are typically in the most preferred locations for many purchasers. Four major sales transactions, including three en bloc deals, were seen in Q1/2021, all of which were new projects completed in 2020 or to-be completed in 2021.

For instance, Shenzhen Expressway Company Limited purchased floors 35 to 48 with a combined office GFA of approximately 23,796 sq m at Hanking Centre, which was completed last year from the developer’s subsidiary for a total consideration of about RMB1.56 billion for old office consolidation and reconfiguration. Zhongqiao Sports Company Limited acquired IMC Qianhai International Centre T2, scheduled for completion during 2021, with an office GFA of 8,795 sq m for a total consideration of approximately RMB1 billion from CIMC. Both aforementioned buyers were end-users. Shenzhen continued to attract a sizable number of end-users for its dynamic economics and potential development. However, the city remained challenging for most investors for its relatively low yields.

MARKET OUTLOOKThree Grade A office projects with a total leasable GFA of approximately 115,000 sq m are scheduled for completion in Q2/2021. Industrial policy incentives, together with the ongoing softening rental performance, are expected to propel further growth in leasing demand. These collectively should help stabilise the average vacancy rate.

End-user buyers should stay active sourcing properties to set up their own offices in Shenzhen, leveraging on the city’s economy, its planning as a high-tech hub and its status as one of the core cities in the GBA. In consideration of the low rental yields in Shenzhen relative to other tier-one cities in the office investment market, structured deals consisting of either rental-guarantees or other tactical strategies in Shenzhen should be more appealing and realistic to a wider range of institutional investors.

Source Savills Research

GRAPH 1: Shenzhen Grade A Office Market New Supply, Net Take-up And Vacancy Rate, 2016 to Q1/2021

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GRAPH 2: Shenzhen Grade A Office Market Vacancy Rate, Q2/2016 to Q1/2021

Source Savills Research

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GRAPH 3: Shenzhen Grade A Office Market Rental Index, Q2/2016 to Q1/2021

Source Savills Research

Note Calculation of rental indices for all submarkets starts from Q4/2007 except for: Bao’an—Q2/2017

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Citywide Futian Nanshan Luohu Bao'an

Source Savills Research

TENANTTENANT

INDUSTRYPROJECT SUBMARKET

LEASING AREA(APPROX. SQ M)

Tencent Information Technology

Chuangyi Tech Building Nanshan 54,500

Transsnet Information Technology

Baidu International

BuildingNanshan 12,000

Galanz Retail & TradeChina

Resources Land Building

Nanshan 2,200

Shenzhen Qianhai Yisanda

Investment GroupFinance Hanking Centre Nanshan 2,200

TABLE 1: Selected Leasing Transactions, Q1/2021

Office