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Investment Savills Research Shanghai – October 2020 MARKET IN MINUTES Investment Savills Research Savills team Please contact us for further information RESEARCH James Macdonald Senior Director Community retail garners attention China +8621 6391 6688 Smaller lump sums, lower price points and higher yields, as well as the james.macdonald@ potential for increased operational efficiencies, have attracted investors to the savills.com.cn community retail space. INVESTMENT • Only six deals were concluded in Q3/2020 for a total • Transaction volumes could pick up in Q4/2020 as buyers pull Nick Guan consideration of RMB4.5 billion, down 60% YoY. the trigger on deals and sellers seek to meet sales targets and Head of continue to feel financial pressure. Shanghai Investment • A fall in activity in the third quarter reflects the lack of deal +8621 6391 6688 origination in the first two quarters as a result of COVID-19 as nick.guan@ savills.com.cn well as continued market uncertainty and price disparities. • End-use buyers remain active in the office and business park “ Tighter control over Savills plc markets with three deals concluded in Q3/2020, accounting for Savills is a leading global real developer financing with the estate service provider listed on more than half of the office and business park transactions. the London Stock Exchange. The company established in 1855, has announcement of the 3-4-5 a rich heritage with unrivalled growth. It is a company that leads • The commercial land transaction volume in the first three rather than follows, and now has policy will mean that many over 600 offices and associates quarters of 2020 has already exceeded 2019 full-year volumes throughout the Americas, Europe, by 70%. Asia Pacific, Africa and the Middle companies will have to focus East. This report is for general informative purposes only. It may on monetising assets and not be published, reproduced or • Driven by the rapid expansion of the digital economy, growing quoted in part or in whole, nor may it be used as a basis for any use of cloud services and the dawn of 5G mobile data networks, attracting new equity contract, prospectus, agreement investors are actively exploring opportunities to investment in or other document without prior investments while continuing consent. Whilst every effort has data centres. been made to ensure its accuracy, Savills accepts no liability to roll over debt whatsoever for any direct or consequential loss arising from its • Gaw Capital US$1.3bn fund back by ADIA recently announced use. The content is strictly a JV with Beijing-based data centre operator Centrin Data to commitments.” copyright and reproduction of the whole or part of it in any form is acquire, develop and operate hyperscale facilities in China. JAMES MACDONALD, SAVILLS RESEARCH prohibited without written permission from Savills Research. savills.com.cn/research 1 Investment MARKET COMMENTARY when the rules will be enforced yet, GRAPH 1: Shanghai Large Scale Real Estate according to some media, a pilot program Acquisitions, 2015 to Q3/2020 Only six deals were concluded in Q3/2020 for a total consideration of RMB4.5 billion, was instigated where a dozen key developers were selected to submit a three-year debt- Consideration Count bringing the YTD consideration to RMB43.8 reduction plan, and other developers may 25 20 billion, down 50% YoY (albeit from a high base of comparison). Three deals have to follow suit in 2021. were concluded by end users, including 20 16 two offices and one business park, with While the government has attempted to less price-sensitive buyers seizing the curb excesses in the past, the current policy 15 12 opportunity to secure ideal projects at seems to be a more concerted, transparent, a reasonable price while the market is long-term and broad approached to forcing quiet. The other three are retail, serviced heavily-indebted developers to deleverage. 10 8 RMB billion apartment and mixed-use properties. Heavily indebted developers will likely need to speed up monetisation of assets 5 4 The investment community has taken a by cutting home prices to boost sales, sell significant interest in community retail equity stakes or spinoff non-core businesses and assets. More market consolidation is 0 0 centres with several en-bloc deals closed over the last year or in the final stages of expected, with more fiscally conservative closing, including Zhangjiang Jade Park, developers able to gain market share over Yuqiao Haishang Chuanqi, Sanlin Vanke their more cavalier peers. Wujiefang and a small retail asset on OFFICE MARKET Source Savills Research Baotou Road. Community retail has proved resilient in 2020 with changes in consumer Three new projects, including One Financial behaviour prove positive as individuals stay Street, the Edge and the Huatai Financial closer to home and avoid more crowded city Building were handed over in Q3/2020, centres. Community retail’s comparatively adding a total office GFA of 105,700 sq low capital value, stable cash flow and m. Net take-up totalled 168,200 sq m in relatively high returns are all key selling Q3/2020, compared to just 14,200 sq m in GRAPH 2: Land Transaction Area And AVs, 2010 points. City-centre shopping mall cap Q2/2020. Rising net take-up resulted in to Q3/2020 rates in first-tier cities stand at roughly the citywide Grade A office vacancy rate 4.0-4.5% while community retail is typically declining by 0.5 ppt in Q3/2020 to 16.9%. Commercial GFA (LHS) Residential GFA (LHS) Industrial GFA (LHS) 50 bps higher at 4.5-5.0% (while cap rate The effective rent continued to decrease in Commercial AV (RHS) Residential AV (RHS) Industrial AV (RHS) for logistics properties stand at 5.5-6%). Q3/2020, but at a slower rate of 1.4%, to an 40 32,000 The drawback, however, is that given the average of RMB7.4 per sq m per day. 35 28,000 location and nature of the asset there is End-user buyers were the most active 30 24,000 little tenant reconfiguration that can be RMB per sq m done to increase revenues, and each asset office buyers in 2020 accounting for more 25 20,000 is a relatively small lump sum making it than half of the office and business park 20 16,000 challenging to deploy significant capital. transactions to date compared to just one- 15 12,000 sixth of deal in 2019. Funds on the other million sqmillion m The PBOC and MOHURD announced hand have remained cautious due to market 10 8,000 in August that they were drafting new uncertainties and softening fundamentals. 5 4,000 financing guidelines for real estate Core area assets have few discounts, 0 0 developers, assessing companies against with owners often, if possible, holding three key ratios, namely liabilities to asset, onto the assets until the market picks up. net debt to equity and cash to short-term Nevertheless the market is expected to debt. Though there has no clear timetable see more highly motivated sellers and an Source Savills Research TABLE 1: Yields And Capital Values By Sector1, Q3/2020 PRIME HIGH-END HIGH-END GRADE A PRIME RETAIL SHOPPING SERVICED STRATA 5-STAR HOTEL LOGISTICS OFFICE STREET STORE MALL APARTMENTS APARTMENTS APPROX. GROSS 70-80% 55-65% 70-80% 60-70% 80-90% 35-45% 80-90% TO NET RATIO2 NOI 4.0-4.5% 3.5-4.5% 3.5-4.0% 2.5-3.0% 2.0-2.5% 1.5-2.0% 5.5-6.0% APPROX. VALUE 50-90,000 60-100,000 100–200,000 55-70,000 100-200,000 40-50,000 6-8,000 (RMB PER SQ M) 1 Yields refer to stabilised assets in downtown locations free of any impediments with a clean holding structure owning 100% of the building, and assuming 100% occupancy. Capital values refers to the average for the building on an aboveground GFA basis – retail assets will have higher capital values for lower floors. 2 Takes into consideration the costs, including taxes, fees, and other miscellanies. Source Savills Research savills.com.cn/research 2 Investment increase in NPL in response to owners cash crunch and restricted financing KEY DEALS channels, such as the Tomorrow Square’s scheduled online auction. • Guohai Securities purchased Greenland Bund Centre C1 for RMB1.38 billion intended for self-use. Located in Dongjiadu, Greenland Bund Centre is RETAIL MARKET expected to be completed in 2021, has a total lettable GFA of 15,209 sq m and is Retail sales totalled RMB966 bn in the first eight months of 2020, down 6.4% one of 11 buildings in the complex. Together with Guohai Securities’ purchase, YoY despite a return to growth in May. No new projects were launched onto seven of the planned 11 commercial buildings in the complex have been sold, the market in Q3/2020 or indeed for the whole of 2020. Overall shopping including one building to Bank of Shanghai, two buildings to PICC and three mall vacancy rates fell by 0.2 ppt QoQ to 11.5%. Fashion retailers were more buildings to Haitong Securities. positive in the third quarter with many young brands helping to drive footfall and consumption to malls. First-floor rents fell 0.2% in Q3/2020 at an average • Blackstone acquired Central Garden for RMB1.0 billion from Sunac. Central of RMB26.5 per sq m per day. Garden is a serviced apartment project located in Putuo district with a total GFA of 42,600 sq m. Blackstone is said to have appointed Funlive, a apartment Appetite for shopping centres remains limited to a handful of investors given platform run by SCE Real Estate, to be the operator.
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