Savills World Research

Briefing Office sector February 2016

Image: Century Grand Metropolis SUMMARY Driven by strong demand in non-prime projects handed over in the past few quarters, quarterly take-up reached highs not seen since 2011.

 Four projects launched onto the ­ As a direct consequence of the core office market in Q4/2015, adding influx of supply, regardless of the 280,000 sq m of supply, pushing total strength of demand, downward “International REITs have stock to 6.39 million sq m. pressure is expected to be placed on rents and occupancy rates as new focused on stabilised assets and ­ Net take-up in core areas totalled projects compete to attract and retain 325,000 sq m in Q4/2015, with tenants. approximately 90% of all transactions long-term holds. Domestic funds seen in non-prime areas, and around  Six new projects launched onto 60% of all transactions seen in . the decentralised market in Q4/2015, are increasingly seeking value- bringing 380,000 sq m of supply to the ­ As a result of strong take-up market and pushing total stock to over add opportunities and getting in recently handed over projects, 1.88 million sq m. vacancy rates in core areas fell by 1.0 involved in asset management, percentage point (ppt) quarter-on-  Decentralised rents remained flat quarter (QoQ) to 6.1%, down 2.0 ppt at an average of RMB4.9 per sq m per year-on-year (YoY). day. a divergence from previous  Average rents in core areas  The decentralised market opportunistic strategies.” James increased by 0.5% QoQ to RMB8.70 witnessed a fall in vacancy rates to per sq m per day, representing an 16.8%, mainly due to pre-leasing of Macdonald, Savills Research increase of 1.4% YoY. new projects.

savills.com.cn/research 01 Briefing |Shanghai office sector February 2016

Market commentary corporations (MNCs) are positive Market news Core market about China in the long term and Shanghai 2015 GDP growth Thirteen new projects, totalling over plan to continue investing in the stabilised at 6.9% 670,000 sq m, launched onto the country, high operating costs and Shanghai’s 2015 GDP amounted to core market in 2015. Pudong saw the economic slowdown are forcing RMB2.5 trillion, an annual growth prime areas continue to tighten in companies to pay closer attention of 6.9% and the highest in the Q4/2015, while non-prime areas to their operational costs and capital country. The added-value of the continued to witness rental growth expenditure. Adjusting to the new third industry accounted for an and decreasing vacancy rates. Non- norm, companies are looking for historically high proportion (67.8%) prime areas in both Pudong and productivity improvements to drive of the city's GDP, and 94.9% of witnessed strong take-up in growth and expansion. In the office the GDP growth. Among the third projects handed over in the past few market, this represents a review industry, the added-value of the quarters. of business space requirements financial sector increased 22.9% given the high-quality supply in YoY, with an increase of 8.2 ppt A supply influx of approximately 1.8 non-prime areas, the emergence of YoY. The third industry and financial million sq m is expected to enter the not only non-prime areas but also sector has continued to drive the core office market in 2016. Although decentralised ones, and changes in economic growth of the Shanghai the new supply is dispersed the way office space is used. market, which has also impacted throughout the city, approximately on the Shanghai office market. The 30% is located in prime areas, Decentralised Shanghai manufacturing industry fell notably the highly anticipated Eleven new projects, totalling over 0.8% in terms of added-value, with a Shanghai Tower and Taikoo Hui 650,000 sq m, launched onto the 2.4 ppt decrease in growth rate. The Phase I. In addition, Hongkou is decentralised market in 2015. Shanghai government has planned expected to receive its first Grade A Decentralised rents remained flat, to support the innovation of the office building since 2012. Although while vacancy rates fell due to industrial sector in order to maintain no notable examples have been projects handed over in the last few long-term development. Predicted confirmed, developers may be quarters. Shanghai 2016 GDP growth is inclined to delay projects as a result approximately 6.5% to 7%. of intensifying competition. Supply is expected to total over 2.3 million sq m in 2016, a considerable RMB internationalisation positive The key drivers of demand going amount, representing an increase for Chinese corporations forward will continue to be domestic of 278% over the past three-year Continued internationalisation companies, as well as financial and average annual supply. Half of this of the Chinese RMB will have professional services industries will be located in the Hongqiao long-term positive effects for choosing to upgrade to larger Transportation Hub (HTH) area. Chinese corporations, according spaces. Although many multinational to Fitch Ratings. The International Monetary Fund (IMF) executive GRAPH 1 board has decided to include Grade A office supply, take-upSTV andChart EN vacancy rate, 2000–2015 the Chinese currency in its SDR basket, marking a milestone in Supply (LHS) Take-up (LHS) Vacancy (RHS) the currency's global progression 900 18% and giving a vote of confidence to 800 16% China's financial reforms. This RMB Q4/2015 vacancy internationalisation will stimulate 700 rates 6.1% 14% China’s financial reform and be 600 12% positive for Chinese corporations in

the long term. 500 10% 400 8% Core market '000 '000 sq m 300 6% The core office market received four new projects in Q4/2015, adding 200 4% nearly 280,000 sq m of supply. 100 2% This included Lilacs International Commercial Centre and Century 0 0% Grand Metropolis in the Pudong district, Bund IFC north plot in Source: Savills Research the Huangpu district, and Kerry

02 Page 1 Briefing |Shanghai office sector February 2016

Everbright City Phase 3 Towers 1 & 2 GRAPH 2 in the district. Business district comparison, rent vs vacancy rate, Q3/2015 and Q4/2015 RV CBD EN Net take-up reached 325,000 sq m in Q4/2015, which represented highs Q3/15 rent (LHS) Q4/15 rent (LHS) Q3/15 vacancy (RHS) Q4/15 vacancy (RHS) not seen since 2011. The majority 12 30% of demand (90%) was in non-prime areas, due to an increasing interest 10 10.710.7 25% 10.010.0 9.8 9.9 in these areas from cost-conscious 8 20% tenants. The Pudong non-prime area 7.8 7.8 7.6 7.6 witnessed particularly high take-up, 7.2 7.2 7.2 7.4 6 15% driven by the active demand from the 5.6 financial sector, resulting in Pudong 5.3 4 10% accounting for 60% of the city-wide RMB psqm per day take-up. 2 5%

Despite new supply, vacancy rates 0 0% 'Little' Nanjing Rd Huaihai Rd Xujiahui Old Changning Zhuyuan Zhabei CBD in core areas fell by 1.0 ppt QoQ to Lujiazui (W) (M) Huangpu 6.1%, down 2.0 ppt YoY. This fall was a result of strong take-up in non- Prime districts Non-prime districts prime projects handed over in the Source: Savills Research Page 1 past few quarters. GRAPH 3 Zhabei saw an increase in vacancy Core market Grade A office rental indices, Q2/1999–Q4/2015 rates by 4.6 ppt, resulting from new All Prime Puxi Non-prime Puxi Prime Pudong Non-prime Pudong supply entering the market, but 200 this is expected to be absorbed in the coming quarters. In addition, 180 Xujiahui witnessed a rise by 1.6 ppt this quarter, as a number of tenants 160 relocated from aging buildings to newer projects in emerging areas. 140 Xujiahui has seen no new supply since 2007, leaving limited stock for 120 companies to expand. Apart from Q2 / 1999 = 100 Zhabei and Xujiahui, all submarkets 100 saw an overall decrease in vacancy 80 rates.

60 ‘Little’ Lujiazui continues to be the tightest market due to limited Source: Savills Research available stock, with vacancy rates at just 1.0%, but Shanghai Tower TABLE 1 is expected to provide some relief. Selection of leasing transactions, Q4/2015 Zhuyuan continued to have the highest vacancy rates because of Tenant Project Location Area leased (sq m) ample supply in recent quarters.

The area is currently seeing mixed Chrysler Hongqiao Vanke Center Minhang 6,000 reviews with some buildings seeing continuously strong take-up levels, Industrial Bank Garden Square Jing’an 4,200 while others are yet to see any City Life BenQ Plaza Changning 3,100 transactions. It is expected that Lilacs International Commercial Zhuyuan will receive a supply influx Beststone Pudong 1,800 Centre of around 400,000 sq m in 2016, causing vacancy rates to remain Messe Frankfurt Century Grand Metropolis Pudong 4,000 relatively high. Source: Savills Research

savills.com.cn/research 03 Briefing |Shanghai office sector February 2016

Grade A office rents increased Investment market International funds will keep an 0.5% in Q4/2015, to an average of The Shanghai office investment eye on currency movements as RMB8.70 per sq m per day, up 1.4% market was quite active in Q4/2015, they make their future investments YoY. Puxi rents increased 0.1% this with six sizeable sales deals in China. Domestic developers quarter, while Pudong rents increased concluded, representing a total and investors will conversely find 1.2%, mainly due to the increasing consideration of RMB14.97 billion. It overseas investments more lucrative interest in non-prime areas. Although is perceived that yields fell to 5.6% should the RMB devalue against rental growth has been witnessed in on a gross reversionary basis in the currency of the investment recent months as landlords of newer Q4/2015 (NOI: 4.2%). destination country or countries. buildings with healthier occupancy rates increased rents, such a trend The office sector continues to Shui On Land sold Corporate Avenue has begun to abate this quarter in dominate Shanghai’s investment #3 to Lee Kum Kee (90%) & Vanke anticipation of the upcoming influx market, accounting for 92% of (10%) for a total consideration of of supply. This looks set to continue transaction volumes this quarter. RMB5.7 billion. Corporate Avenue over the next two years. This is thanks to the depth and #3 has a total GFA of 87,200 sq m, liquidity of the market as well as the composed of a 24-floor premium Both prime and non-prime rents ease of management and market office tower (23 floors leasable), a increased 0.3% and 0.7% QoQ transparency. Quality assets in first- 5-floor retail podium (7,375 sq m) to RMB10.3 per sq m per day tier cities, Shanghai in particular, will and basement car parking, and is and RMB7.3 per sq m per day continue to attract capital looking expected to remain for lease. respectively. Non-prime Pudong for safe havens as investors look continues to record the strongest to capitalise on the loosening of China Science & Merchants rental growth as strong demand from monetary polices and for protection Investment Management Group the financial sector spills over from from the weakening markets in lower- (CSC Group) purchased Star Bund Lujiazui. The gap between average tier cities. #5 from China Jinmao JV Shanghai rents in non-prime Pudong and International Port Group for a total non-prime Puxi continues to widen, International REITs have concluded consideration of RMB2.28 billion. reflected in the 2.3% increase QoQ in three acquisitions of premium Located in the North Bund area, Star non-prime Pudong to RMB7.5 per sq office property – 21% of 2015’s Bund, with a total GFA of 24,000 sq m per day. total considerations – focusing on m, is expected to remain partly for stabilised rental-generating assets self-use and partly for lease or sales. Lujiazui, (W), Huaihai and long-term holds. Domestic funds Road (M), and Zhuayuan rents grew are increasingly seeking value-add ARA purchased BEA Finance Tower, by 0.3%, 0.3%, 0.3% and 2.4% QoQ opportunities and getting involved a 41,000-sq m office tower, for a total respectively, while other submarkets in asset management, a divergence consideration of RMB2.7 billion. This witnessed flat rents. from the previous opportunistic is the second deal concluded by ARA strategies. in the past six months, following its

TABLE 2 Sizeable sales transactions, Q4/2015

Total Price Property Location Buyer Deal Structure Usage (RMB mil) (RMB/sq m) Manpo International Plaza Changning 1,466 ~46,100 Carlyle Onshore asset Lease 万宝国际广场 One Prime Shanghai Chengli Hongkou 2,226 ~30,000 Onshore equity Lease 壹丰广场 Properties China Science & #5, Star Bund Merchants Investment Hongkou 2,282 ~94,800 Onshore asset Self-use/ lease/ sale 星外滩5号楼 Management Group (CSC Group) BEA Finance Tower Pudong ~2,700 ~66,000 ARA Offshore equity Lease 东亚银行金融大厦 Corporate Avenue 3 Lee Kum Kee (90%) & Huangpu 5,700 ~66,000 Offshore equity Lease 企业天地3号楼 Vanke (10%) Tower C of Hongqiao Green Minhang 595 ~33,300 Xinhu Zhongbao Onshore asset Self-use Valley Plaza 虹桥绿谷广场C幢

Source: Savills Research

04 Briefing |Shanghai office sector February 2016

acquisition of Platinum Tower in the Over the last 12 months, the HTH in Demand is expected to remain firm Huangpu district last quarter, and is the , New Jiangwan over the next few years, although it expected to remain for lease. Town in the , and is also expected to be inadequate Pudong Binjiang have recorded the to absorb the majority of the supply Strata-title market most amount of new supply. Demand entering the market. Key drivers of The strata-title market witnessed a has focused on Pudong Binjiang and demand will continue to be from supply decrease, reaching 852,000 Zhangjiang Business Park, HTH, and the financial and IT related sectors sq m in Q4/2015, down 9.5% QoQ, Everbright City in Zhabei. in Pudong, while Puxi is expected while transaction volumes doubled to see demand come from more to 895,000 sq m. The consideration Market outlook abundant industries, especially values increased from RMB11.28 2016 is expected to witness a supply professional services and retail billion to RMB38.2 billion in Q4/2015, influx of around 1.8 million sq m related companies. Several factors as more premium projects were entering the core market, 72% of will continue to drive demand for transacted this quarter. Self-use which is located in non-prime areas, various industries in the next few demand continues to drive the mainly Puxi. Decentralised areas are years, including: the deepening of market, with investors concerned also anticipated to see a supply influx financial reform and innovation; about lower yields and further limited of around 2.3 million sq m entering the implementation of policies in capital value appreciation potential. the market in 2016, almost half of the Shanghai Free Trade Zone; the which is located in the Hongqiao growth of domestic companies; the Prices based on a basket of around Transportation Hub (HTH). Current application of the concept "Internet 40 premium quality office projects1 forecasts predict that new supply in plus" combined with various and analysed on an un-weighted core areas will reach an all-time high industries; the expansion of the index basis, recorded a more in 2016, with a slight drop in 2017. middle class; and the upgrading of moderate rise of 0.4% QoQ to These estimates may change should consumption demand. This will also RMB46,047 per sq m in Q4/2015, developers postpone handover stimulate demand for office market. down 0.3% YoY. dates. 130 projects in Puxi and 13 projects in Pudong

TABLE 3 First-hand strata-title building activity, Q4/2015

Transacted Average price Project District GFA(sq m) (RMB per sq m)

Wentong Tower Yangpu 912.8 37,888 文通大厦 Xuhui Vanke Centre Xuhui 1,274.3 37,391 徐汇万科中心 ZJ Railway & Greentown Changfeng Centre Putuo 1,662.3 40,180 浙铁绿城长风企业中心 CIFI & Henderson Centre Minhang 1,250.6 42,834 恒基旭辉中心 Sino-Ocean Tower District 333.3 39,302 远洋洲海大厦

Source: Savills Research

TABLE 4 Key supply, Q4/2015

Supply Project District (sq m) Developer

SOHO Hongkou Hongkou 65,314 Xusheng 虹口SOHO大厦 Ranking Hongqiao Business Square Changning 60,082 Ranking 融真虹桥商务广场 Citic Pacific Shipyard Project Pudong 58,565 CSIC 尚悦东广场 Orstar City Zhabei Zhabei 42,247 Greenland & Star Capital 绿地星光耀广场

Source: Savills Research

savills.com.cn/research 05 Briefing |Shanghai office sector February 2016

As a direct consequence of the influx traditional business areas, instead is being developed by state-owned of supply, regardless of the strength opting for larger office spaces enterprises for self-use. Qiantan of demand, downward pressure will elsewhere. As replacement costs has attracted a number of well- be placed on rents and occupancy begin to increase, landlords will have known international developers, rates as new projects compete to to pay more attention to the time of including Tishman Speyer, Swire attract and retain tenants. All areas renewal, provide various benefits to and Hong Kong Land, known for of the city are expected to feel the tenants, and improve the property their international experience, pressure of competing projects, management level to retain existing management quality and reputation. albeit to different degrees. Prime tenants as well as attract new ones. The first projects in these areas will business areas with more limited enter the market in the second half supply, and demand that is less The proportion of decentralised of 2016. susceptible to cost increases, are areas in the city-wide Grade A likely to see more stable rents. supply will significantly increase, For tenants, the influx of supply in Additionally, projects entering these which will challenge landlords. For the next few years will be a good areas are of a higher quality and instance, the HTH will receive a opportunity to adjust the distribution therefore will be able to demand supply influx of over 2 million sq of resources and optimise office higher than average rents, despite m after all the projects are handed demand. Adjusting to the new the levels of supply seen across the over. Such a large amount of new norm, companies are looking for city. For instance, ‘Little’ Lujiazui, supply launching in a period of three productivity improvements to which has kept vacancy as low as to four years will bring pressure on drive growth and expansion. In the around 1-2% for three years, is the occupancy rates of the area. office market, this is represented also expected to feel the pressure, However, since HTH is an emerging by a review of business space with the launch of 220,000 sq m business area and not yet a mature requirements and changes in the of leasable area in the Shanghai business environment, the take-up of way office space is used. Domestic Tower. Although the project has these projects will still be challenging. companies will increasingly look already reached pre-leasing levels Landlords will have to differentiate at upgrading their office space or of roughly 50%, the launch of the themselves, consider postponing purchasing for self-use, leading to project and the softening of the their handovers, or consider strata- demand for quality office space and market is expected to curb future title or en-bloc sales. strata-title projects, while MNCs rental growth. In the context of the are beginning to adjust to the new wider market, Shanghai Tower is The Expo, Pujiang Yaohua, Xuhui pace and environment of the market. still expected to be one of the most Bingjiang and Qiantan areas are Lower margin operators are expected resilient performers. all anticipated to play an important to relocate to more affordable office role in the future decentralisation premises, while larger occupiers Landlords of existing buildings within of Shanghai’s office market. Based consider bifurcation. core areas that historically recorded on master plans provided by high occupancy rates are expected the government, these districts More and more companies are to feel the pressure. While a number will be developed into business tending towards purchasing en- of companies will continue to be in centres through the improvement bloc office projects in non-prime traditional business areas to maintain of infrastructure and surrounding and decentralised areas for self- a certain image, and due to the amenities such as international use, particularly in locations along clustering effect, many may make schools and hospitals. These areas the North Bund, and in the Xuhui the decision to move non-client will also be connected with Puxi and Binjiang, Expo and Qiantan areas. facing departments to more cost Lujiazui through extensive metro In addition, the emergence of the effective projects in non-prime areas. access to improve accessibility. mobile office and co-working spaces On the one hand, some traditional The Pudong master-planned areas meets the special needs of some business areas have limited space plan to attract companies from the start-up companies, showing the for companies to expand, like financial, consultancy, legal and diversity of the Shanghai office Xujiahui, which witnessed no new professional services industries to market.  supply of Grade A office buildings set up their headquarters, providing since 2007. On the other hand, as a complementary and supportive non-prime and emerging areas can function for the “Little Lujiazui” area. provide more reasonable rents, more Xuhui Binjiang is expected to focus abundant space for office design, on attracting media companies as and improving infrastructure and well as leisure and entertainment surrounding amenities, companies operators. A large percentage of may not feel the need to be in the future supply in the Expo area

06 Briefing |Shanghai office sector February 2016

Future project Shanghai Landmark Centre

The Shanghai Landmark Centre, developed TABLE 5 by HKC (Holdings) Limited, consists of two Shanghai Landmark Centre Grade A office towers. Located in the North Sichuan Rd (N) & Tiantong Rd, Location Bund area, the development is a five-minute Hongkou walk from Tiantong Road metro station (lines Developer HKC (Holdings) Limited 10 and 12). The project, which is expected Handover date Q4/2016(estimated) to be launched onto the market in Q4/2016, consists of 110,000 sq m of office space and Office GFA 110,000 sq m

72,000 sq m of retail space. No. of storeys 29

Typical floor plate 2,000 – 2,200 sq m The office component spans 29 floors. Whole-floor Typical floor plates will be around 2,000 – 70 – 75% efficiency 2,200 sq m, with whole floor efficiency of Clear ceiling height 3.0 m 70 – 75%. The clear ceiling height is 3.0 m and raised floors are 150 mm. The office Raised floor 150 mm buildings will be serviced by 26 ‘Schindler’ Passenger lifts 26 ‘Schindler’ elevators passenger lifts and will have around 1022 car parking spaces to support the whole project. Car parking spaces 1022

Source: Savills China Research

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