Savills World Research Shanghai
Briefing Office sector May 2018
Image: Pujiang International Financial Plaza, Hongkou SUMMARY New projects in core areas pushed up vacancy rates by 0.5 percentage points to 12.4% in Q1/2018.
One new project, One Museum Core market rents remained flat in Place (博华广场) by Hines, was Q1/2018 at RMB9.0 per sq m per day, launched onto the core office market in though up 1.4% YoY. “In response to the government’s Q1/2018, adding 130,000 sq m of new office space. As a result, the Grade A No new supply was recorded in the call for environmental protection, office stock in core areas totalled 8.2 decentralized market in the first quarter million sq m by the end of Q1/2018. of 2018, leaving the decentralized stock more developers are expected at 3.5 million sq m. Net take-up remained low, totalling to take sustainability into 70,900 sq m in Q1/2018, down 67% As demand focused on existing compared to Q1/2017. stock, vacancy rates in decentralised consideration for their new areas declined by 0.5 ppts in Q1/2018 to New supply pushed up vacancy 37.1%, but remained up 10.3 ppts YoY. developments.” James Macdonald, rates by 0.5 percentage points (ppts) Rents remained flat averaging RMB5.7 quarter-on-quarter (QoQ), to 12.4%, per sq m per day, but up 3.4% YoY. Savills Research and remained up 2.2 ppts year-on-year (YoY).
savills.com.cn/research 01 Briefing |Shanghai office sector May 2018
Leasing Market Co-working operators continued to Pudong’s Century Link, occupying Core Market – Supply, Take-up increase their footprint in the city. approximately 5,000 sq m. and Vacancy WeWork opened its new space on The new project pushed up vacancy One new Grade A office project, the 15th floor in Shanghai IFC’s rates in prime Puxi by 3.1 ppts QoQ One Museum Place by Hines, was HSBC Building in March 2018, and to 10.7%, the highest level over the launched onto the core market in has signed a new lease contract past three years. As a consequence, Q1/2018, adding 130,000 sq m of with Yueshang Plaza in Jing’an core market vacancy rates increased new office space. The city’s core district, occupying five floors. by 0.5 ppts QoQ to 12.4%, and Grade A office stock, as a result, Kr Space leased two floors in remained up 2.2 ppts YoY. increased to 8.2 million sq m by the end of Q1/2018. GRAPH 1 Grade A office core market supply, take-up and Core market absorption remained STV EN slow totalling only 70,900 sq m in vacancy, 2000-Q1/2018 Q1/2018, compared to 216,200 sq Supply (LHS) Take-up (LHS) Vacancy (RHS) m in Q1/2017. This came mostly 1.2 18% from the 64,400 sq m take-up in
prime Puxi, where activity focused 1.0 15% mainly on the new project. Non- prime Pudong, namely the Zhuyuan 0.8 12% business area, saw spaces being handed back to the market in Q1/2018, with tenant relocations 0.6 9% and reductions outstripping new million sq m leases, expansions and renewals. 0.4 6% Some companies relocated to non-
prime Puxi while others relocated 0.2 3% to Pudong decentralized areas or business parks where rents are more 0.0 0% affordable. 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Q1 Source: Savills Research
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TABLE 1 Grade A office core market performance, Q1/2018
Supply (sq m) Take-up (sq m) Vacancy Stock (sq m)
Pudong 0 1,400 8.8% 3,847,400
Puxi 130,000 69,500 15.5% 4,390,700
All 130,000 70,900 12.4% 8,238,100
Source: Savills Research
TABLE 2 Notable leasing transactions, Q1/2018
Tenant EN Tenant CN Project District Business district Area leases (sq m)
Everbright Securities 光大证券 Plaza 66 Jing’an Nanjing Road (W) 10,000 Urban Development Terex 特雷克斯 Xuhui Xujiahui 7,000 Tower
Kr Space 氪空间 Century Link Pudong Zhuyuan 5,000
Guangyun Capital 广运资本 HKRI Taikoo Hui Jing’an Nanjing Road (W) 1,700
Jinmei Group 晋煤集团 Aurora Plaza Pudong Lujiazui 1,200
Source: Savills Research
02 Briefing |Shanghai office sector May 2018
GRAPH 2 Core market – rent Grade A office core market rental indices, Core market rents remained flat in Q1/1999-Q1/2018 Q1/2018, at an average of RMB9.0 per sq m per day, though up 1.4% All Puxi prime Pudong prime Puxi non-prime Pudong non-prime YoY. However, landlords remain 220 under competitive pressure from 200 new supply and are more open to Q2/2010–Q1/2018 39.0% increase from trough negotiations with existing tenants to 180 defend occupancy rates. 160 Prime Pudong and Puxi rents 140 averaged RMB11.4 and RMB10.3
120 per sq m per day in Q1/2018, while
Q2 / 1999100 Q2 / = Q3/2008–Q2/2010 36.8% decrease from peak non-prime Pudong and Puxi rents 100 averaged RMB8.2 and RMB7.5
80 per sq m per day during the same period. 60 All submarkets witnessed similar
Source: Savills Research flat rents with the exception being Pudong’s Zhuyuan area (see Figure 3). While some cost-conscious GRAPH 3 companies were relocating from Rent and vacancy by business district, Q4/2017 vs. Zhuyuan, many finance, insurance Q1/2018 RV CBD EN and professional services
Q4/17 rent (LHS) Q1/18 rent (LHS) companies are still looking at this Q4/17 vacancy (RHS) Q1/18 vacancy (RHS) area, resulting in it enjoying one of 12 50% the lowest vacancy rates (6.8%, 11.4 11.4 Q1/2018) among all the core 10 10.310.3 40% 10.310.3 business areas and thus giving
8 30% landlords the confidence to increase 8.1 8.1 8.1 8.2 8.1 8.1 7.3 7.3 rents. Zhuyuan office rents increased 7.1 7.1 6 6.6 6.6 20% 1.1% in Q1/2018, to an average of 5.8 5.7 RMB8.2 per sq m per day. New-built RMB psqm per day 4 10% Grade A office projects in the area were able to reach RMB10 per sq m 2 0% per day or above.
Decentralised Market The decentralised market saw no Non-prime areas Prime areas new supply in Q1/2018, as several Source: Savills Research Page 1 projects were postponed to the second quarter, including Crystal Plaza and World Trade Centre (Ph 2 GRAPH 4 & 3) in Qiantan. As a consequence, Office stock by submarket total decentralised stock remained Prime Non-prime Decentralised at 3.5 million sq m by the end of Q1/2018.
2011 61% 37% 3% As demand focused on existing stock, vacancy rates in decentralised areas declined by 0.5 ppts in 2014 47% 35% 18% Q1/2018 to 37.1%, but remained up 10.3 ppts YoY. Rents remained flat, averaging RMB5.7 per sq m per 2017 35% 35% 30% day, 58% lower than the core market average.
2020E 28% 37% 35% Decentralised market take-up was slow at the beginning of the year, 0% 100% totalling less than 20,000 sq m. Source: Savills Research However, cost-sensitive companies
savills.com.cn/research 03 Briefing |Shanghai office sector May 2018
are still looking to upgrade or expand deals concluded in Q1/2018, for a Strata-title to decentralised areas from older total consideration of RMB3.8 billion. The strata-title office market Grade A and Grade B buildings. Office properties in core areas are witnessed 11 projects (including receiving increased investment existing and brand-new projects) Judging from the high vacancy rates attention as they are considered to receiving pre-sale certificates in in some areas, e.g. 53% in Hongqiao be more insulated from downward Q1/2018, compared to the limited Transportation Hub (HTH), the rental pressure than those in new supply in 2017 under tightened market needs more time to absorb decentralized areas. Meanwhile, the restrictions. its large stock. The proportion of market saw an increasing demand A supply of 1,470 units totalling decentralised stock of the city’s total from high-tech companies as well as 465,600 sq m of new office space Grade A office stock has increased from R&D centres and back offices was added to the market. Notable from 3% in 2011, when there were for financial companies for business new projects include Greenland only a few new business areas, parks, given their comparatively low Huangpu, Crystal Plaza in Qiantan to 30% by the end 2017, and is rent and ample options. With leasing and Hongqiao World Centre in HTH. expected to rise further to 35% in demand and rents for business parks three years (see Figure 4). growing, they are in turn attracting Despite sufficient new supply, the large amounts of investment demand side was slow in the first Sales market interests. quarter, with only 10,500 sq m of En-bloc strata office space transacted within The en-bloc office investment market Gross yield remained stable in the Middle Ring Road. Transaction started slowly in 2018, with only three Q1/2018, while NOI yield was prices averaged RMB51,800 per sq approximately 3.4%. m.
TABLE 3 Notable en-bloc sales deals, Q1/2018
Total value Project District Buyer Usage (RMB mil)
Shanghai International Plaza Hongkou 2,421 LaSalle Investment Lease
City of Elite, L6 & L8 Pudong 512 World Union Lease
49% Vi-Hub Pudong 900 BOCGI Lease
Source: Savills Research
TABLE 4 Selected pre-sale office supply, Q1/2018
Office GFA Estimated asking price Project District Business district (sq m) (RMB per sq m)
Greenland Huangpu Huangpu South Huangpu 70,877 70,000
Crystal Plaza Pudong Qiantan 117,527 80,000
Hongqiao World Centre Qingpu HTH 114,595 50,000
Source: Savills Research
TABLE 5 Selected first-hand, strata-title sales transactions, Q1/2018
Transaction area Average transaction price Project District Business district (sq m) (RMB per sq m)
Greenland Centre, Ph2 Xuhui Xuhui Riverside 2,941 70,800
CITIC Plaza Hongkou North Bund 1,122 52,400
Source: Savills Research
04 Briefing |Shanghai office sector May 2018
Market outlook which could impact the business Co-working market Supply operations of American companies The recent acquisition of Naked Hub Supply levels continue to be the in China. by WeWork China does not mean biggest challenge for the Shanghai The Shanghai Administration for less competition in this specific office market. A total of 2.4 million sq Industry and Commerce (SHAIC) market. The city’s co-working market m of Grade A office space (including set up a one-stop service platform is still in its initial stages and will core and decentralized locations) is on 31 March 2018 to cut red continue to evolve and mature in scheduled to launch in the remainder tape and streamline procedures, response to the strong new demand of 2018. Vacancy rates, as a result, reducing the time of opening a from corporates and start-ups. are forecasted to rise further. new business from 22 days to five. Business environment The local government’s help for Landlords will be forced to provide The economy, and consequently new businesses will accelerate the more incentives to attract and businesses, could get a boost establishment of new companies and retain tenants in what will be an from recent announcements that should thereby quickly contribute to absolute tenant market for at least corporate tax rates would be cut office demand. the next two years. Competition in May for certain industries, and comes not only from other landlords that tax exemptions will go in to According to the Government Work but increasingly from intermediary effect for small business making Report from the lianghui (两会), the service providers such as co-working less than RMB5 million. Additionally, main drive for China’s economy spaces. Traditional landlords will the potential streamlining of IPOs is expected to come from new have to adopt some aspects and and issuance of China Depositary industries—Internet+, big data, principles of co-working when Receipts (CDRs) for Chinese artificial intelligence (AI) and other managing their office assets or start companies listed overseas and the technologies. These sectors have cooperating with co-working brands relaxation of ownership restrictions already and will certainly continue to effectively meet tenant needs. on securities companies are all to generate new demand for office positive for the market. These space. In Shanghai, Xuhui Riverside benefits are obviously weighted has led the way in developing as an against the backdrop of a potential AI headquarters cluster. trade war with the United States
Project Focus One Museum Placer (博华广场)
One Museum Place is a new Grade A office project handed over in Q1/2018. The project is located in the Location Nanjing Road (W), Jing’an Nanjing Road (W) business area in Jing’an district. Overlooking the Jing’an Sculpture Park, the project Owner Hines enjoys direct access to the Natural History Museum Metro Station (Line 13) and is a 10-15 minute walk from Handover date Q1/2018 the Nanjing Road (W) Metro Station (Line 2, 13).
Office GFA 130,000 sq m The development land was initially acquired by Hines in 2013 for a total consideration of RMB3.7 billion or a per Typical floor 2,400-2,800 sq m sq m price of RMB27,300. plate
Typical clear Approx. 3.0 m Developed and owned by Hines, the project is a ceiling height 54-story (aboveground; actual floors) office tower, with Starting from RMB10 per sq m approximately 130,000 sq m of office GFA which is Asking rent per day (excluding 11% VAT) for lease only, and 25,000 sq m of retail space. Asking rents started from RMB10 per sq m per day in Q1/2017 Management RMB49.6 per sq m per month (excluding 11% VAT), while management fees were fees (excluding 6% VAT) priced at RMB49.6 per sq m per month. Management Hines Property Management company The retail part of the project is scheduled to open later in 2018. Source: Savills Research
savills.com.cn/research 05 Briefing |Shanghai office sector May 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 Cary Zheng Peter Sheng Senior Director Senior Director Director China Central China Shanghai +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 [email protected] [email protected] [email protected]
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