Savills World Research

Briefing Office sector November 2017

Image: Vantone Center, HTH SUMMARY In recent quarters, more landlords are leasing out space in their traditional office projects to co-working brands, or entering the co-working market directly.

 Two new Grade A office projects  Core market rents remained flat on were launched onto the core market an index basis at RMB8.9 per sq m per in Q3/2017, adding 350,000 sq m of day, up 1.8% YoY. “The addition of new projects supply and increasing core office stock by 4.5% to 8.1 million sq m.  Two new projects were launched further pushed up vacancy rates onto the decentralised market in  Demand remained strong in the Q3/2017, bringing 139,300 sq m of new in Q3/2017, while dragging down third quarter, with net take-up in the core supply and pushing total stock up to 3.2 market totalling nearly 165,200 sq m million sq m. average rents.” James Macdonald, (including self-use).  New supply pushed vacancy rates, Savills Research  New supply pushed up vacancy in decentralised areas, up a further rates in core areas by 1.8 percentage 4.2 ppts in Q3/2017 to 37.6%, while points (ppts) quarter-on-quarter (QoQ), rents remained flat on an index basis to 12.5%, up 3.4 ppts year-on-year averaging RMB5.8 per sq m per day. (YoY). ­ The strong growth in Shanghai’s tertiary industry will continue to underpin strong demand for office spaces.

savills.com.cn/research 01 Briefing |Shanghai office sector November 2017

Market News The project is located on Madang Jointly developed by CITIC Pacific Shanghai Rolled Out Measures to Road and Jianguo Road, with a and State Shipbuilding Attract International R&D Centres planned above-ground GFA of Corporation (CSSC), the Harbour Shanghai released 16 measures approximate 25,000 sq m (20,000 City Phase 2 comprises of two office in October 2017 to attract more sq m office and 5,000 sq m retail). towers, with one tower (approx. international research and Construction had not yet begun at 150,000 sq m) bought and self- development (R&D) centres into the end of Q3/2017. used by Industrial and Commercial the city, as an effort to develop Bank of China (ICBC), and the the city into a global technological Leasing Market other tower (approx. 110,000 sq m) innovation hub by 2030. Core Market – Supply, Take-up & bought by China Life Insurance as its Vacancy headquarter. Large-scale international R&D The city’s core office market received centres will be given the same two Grade A projects in Q3/2017 – Core market absorption totalled privileges as regional headquarters Harbour City Phase 2 in and 165,200 sq m. This mostly came from of multinational companies (MNC), China Overseas International Centre the 106,200 sq m take-up in prime which means the R&D centres in South Huangpu – totalling 350,000 , where the ICBC self-use will receive favourable policies sq m of new supply. project was handed over. Excluding and financial support from the local government. New measures GRAPH 1 also include preferential policies, Grade A Office Core Market Supply, Take-up & easier access to services and less STV EN processing time for work permits Vacancy, 2000-Q3/2017 for international employees of R&D Supply (LHS) Take-up (LHS) Vacancy (RHS) centres. 1.2 18% 17Q3 vacancy rate: 12.5% These measures hope to attract 1.0 15% more international-funded R&Ds to enter and expand in Shanghai, generating new occupier demand for 0.8 12% the city’s office market. 0.6 9%

Henderson Joined CIFI in million sq m

Developing the Madang Road 0.4 6% Project CIFI Holdings will jointly develop a commercial project in Huangpu with 0.2 3% Henderson Land Development Co., with a 50%-50% stake. 0.0 0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17Q3 Source: Shanghai Statistics Bureau, Savills Research

Page 1

TABLE 1 Grade A office core supply, Q3/2017

Project District Business district Office GFA (sq m) Developer

Habour City, Ph2 Pudong Lujiazui 260,000 Citic Pacific, CSSC

China Overseas International Huangpu South Huangpu 90,000 China Overseas Centre

Source: Savills Research

TABLE 2 Grade A office core market performance, Q3/2017

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

Pudong 260,000 145,600 8.7% 3,847,400

Puxi 90,000 19,600 15.9% 4,260,700

All 350,000 165,200 12.5% 8,108,100

Source: Savills Research

02 Briefing |Shanghai office sector November 2017

GRAPH 2 the new project, prime Pudong and Grade A Office Core Market Rental Indices, prime both witnessed negative Q1/1999-Q3/2017 take-ups, as many tenants relocated to non-prime or decentralised areas All Puxi prime Pudong prime Puxi non-prime Pudong non-prime due to affordable rents and newly- 220 built buildings.

200 Q2/2010–Q3/2017 The addition of new supply increased 37.8% increase from trough 180 the core market vacancy rate by 1.8 ppts in Q3/2017 to 12.5%. 160 Non-prime Pudong was the only submarket that recorded a decrease 140 in vacancy rates, down 2.7 ppts to

120 8.5% in Q3/2017.

Q2 Q2 / 1999 = 100 Q3/2008–Q2/2010 36.8% decrease from peak 100 Core Market – Rent Core office rents remained flat on 80 an index basis in Q3/2017, at an average of RMB8.9 per sq m per day, 60 up 1.8% YoY. Nevertheless, average rents were down in absolute terms Source: Savills Research from RMB9.0 per sq m per day in Q2/2017, with projects launched in the last six months, in non-prime GRAPH 3 areas, coming to market at below Rent and Vacancy by Business District, Q2/2017 vs. average rates to facilitate lease up. Q3/2017 RV CBD EN Prime Pudong and Puxi rents Q2/17 rent (LHS) Q3/17 rent (LHS) averaged RMB11.4 and RMB10.1 Q2/17 vacancy (RHS) Q3/17 vacancy (RHS) 12 30% per sq m per day in Q3/2017, while

11.4 11.4 non-prime Pudong and Puxi rents averaged RMB8.1 and RMB7.4 per 10 10.3 10.3 25% 9.9 9.9 sq m per day during the same period.

8 20% 8.1 8.1 8.1 7.8 7.9 8.0 All submarkets saw a similar flat rent 7.3 7.3 with the exception being , 6 6.4 6.4 15% due to the addition of new high- end stock. Xujiahui CBD office 4 10% RMB psqm per day rents increased in absolute value to RMB8.1 per sq m per day in 2 5% Q3/2017, from RMB7.8 per sq m per day in Q2/2017. This was as the 0 0% Nanjing Rd Huaihai Rd Lujiazui Old Xujiahui Hongqiao Zhuyuan North result of the rental consideration of (W) (M) Huangpu Station Sun Hung Kai’s ITC Phase 1 (G1),

Prime areas Non-prime areas which launched six months ago, rather than any rental increases in the Source: Savills Research Page 1 CBD.

TABLE 3 Notable leasing transactions, Q3/2017

Tenant Project District Business district Area leases (sq m)

Wework China Overseas Int’l Centre Huangpu South Huangpu 27,000

M+W Group Capital Square Jing’an North Station 3,500

China Dragon Securities Century Link Pudong Zhuyuan 2,300

Lujiazui Century Financial Higgses Pudong Zhuyuan 1,600 Plaza

Hana Bank Ocean Towers Huangpu Old Huangpu 1,000

Source: Savills Research

savills.com.cn/research 03 Briefing |Shanghai office sector November 2017

Decentralised Market sq m, a 44% expansion from 12 over projects in recent quarters, the The decentralised market continued months ago. market needs more time to absorb to see more new office space in the huge new supply. Q3/2017. Two new projects were In response to the new projects, launched into the market, adding the average decentralised market Sales Market 139,300 sq m of supply. As a vacancy rate increased by 4.2 En-bloc consequence, decentralised office ppts in the third quarter to 37.6%, The en-bloc office investment market stock was pushed up to 3.2 million the highest level over the last two saw five key deals concluded in years. Similar to the core market, Q3/2017, for a total consideration of GRAPH 4 decentralised office rents remained RMB14.4 billion, up 7% QoQ. Rent and Vacancy by Submarket, unchanged on an index basis, in Q3, to an average of RMB5.8 per sq When the capital value for office Q2/2017 vs. Q3/2017 m per day, which was still down in properties remain at a high-level, Q2/17 rent (LHS) Q3/17 rent (LHS) absolute terms, dragged by projects property owners are taking the Q2/17 vacancy (RHS) Q3/17 vacancy (RHS) 12 42% launched in the last six months. opportunity to reap value from their mature investment properties and 10 35% The development of the city’s realise returns. In this quarter, Shui decentralised office market continues On Land sold 49% stake in KIC 8 28% to shift towards several master- properties and YPU properties, after

6 21% planned business areas, including the developing and managing the KIC Hongqiao Transportation Hub (HTH), project for over a decade. Current

RMB RMB per per sqm day 4 14% Qiantan and Expo business areas, companies in KIC include IBM, and is expected to extend to areas, Oracle and Kaspersky. SOHO China 2 7% such as Longyang Maglev station has also actively been selling its non- area and Qingpu’s West Hongqiao core assets, which included SOHO 0 0% Prime Non-Prime Decentralised area. However, judging from the high Century Plaza, SOHO Hongkou and Source: Savills Research vacancy rates in newly-handed- Sky SOHO (sold in October, 2017).

TABLE 4 Decentralised Office Supply, Q3/2017

Project District Business district Office GFA (sq m) Developer

Hongqiao Sunnyworld Centre Minhang HTH 38,400 Sunny World

Lihpao Plaza Minhang HTH 100,900 Lih Pao

Source: Savills Research

TABLE 5 Notable en-bloc sales deals, Q3/2017

Total value Unit price Project District (RMB mil) (RMB per sq m) Buyer Usage International Metropolis Plaza Pudong 2,489 Tiancheng Group Self-use Lease Building 3 Greenland Huangpu Binjiang Huangpu 2,111 Sinopharm Group Self-use Lease Building 1 Ting Hsin International Eco City Jing’an 6,400 Lease Lease Group 49% stake in KIC properties and Yangpu 2,949 China Life Lease Lease YPU properties

Source: Savills Research

TABLE 6 Selected first-hand, strata-title sales transactions, Q3/2017

Transaction GFA Average transaction price Project District Business district (sq m) (RMB per sq m)

Huijing Int’l Plaza Xuhui Xujiahui 476 62,200

Greenland North Bund Centre Hongkou North Bund 303 50,400

Source: Savills Research

04 Briefing |Shanghai office sector November 2017

Gross yield remained stable in Market Outlook The flood of new projects is Q3/2017 at 4.8%. The city’s core office market will continuing to cause vacancy rates to continue to receive a flood of new increase, giving downward pressure Strata-title supply in the last quarter of 2017, on rents. With an ample selection Under the background of tightened with four projects expected to be of new high-quality projects and restrictions, the strata-title office handed over including: Harbour City emerging business areas, as well sales market continues to slow in Q3. (Phase 3), Lujiazui 2-16-2 project, as a greater variety of flexible office Haoyuan project and Raffles City formats, landlords will have no The Centre, by CITIC Pacific in Changning (T1), adding a further choice but to offer rental incentives, , received pre-sales 286,300 sq m of office space. more flexible lease terms, or increase certificates in Q3, adding 180 units The Harbour City (Phase 3) has agency commissions in order to totalling 31,200 sq m to the current approximately 124,000 sq m of attract and retain high-profile tenants. stock. However, the near term is less office area, nearly 60% of which was likely to see much new strata-title bought by Industrial Bank in 2013. In response to the recent growing supply because many of the recent popularity of co-working spaces, land sales prohibit the purchaser The trend of decentralisation is more landlords have been seen from selling them on the strata-title expected to continue as new leasing out space in their traditional market. emerging business areas grow and office projects to co-working brands, mature. The last quarter of 2017 is or entering the co-working market Approximately 37,900 sq m of scheduled to see another 640,000 directly. This trend is expected first-hand office space was sold sq m of new Grade A office space to continue in the future, as the within the Middle Ring Road, in Q3, handed over into the decentralised combination can be a win-win with transaction prices averaging market, with some projects delayed situation for property owners, co- RMB31,900 per sq m. There were from Q3/2017. However, it is unlikely working companies and a growing a number of high-end transactions to see all of these completed in Q4. millennial workforce.  in core locations, including Huaihai Middle Road and Xujiahui.

Future Project Highlight China Overseas International Centre (中海国际中心)

China Overseas International Centre is a new Grade A office project in South Location South Huangpu, Huangpu district Huangpu CBD, and was handed over in Q3/2017. Developed by China Overseas Developer China Overseas Land & Investment Ltd., the project comprises of two office towers, totalling approximately 90,000 sq m of office Handover date Q3/2017 GFA. Office GFA Approx. 90,000 sq m The project enjoys easy access to the South-north Elevated Road and Typical floor plate 2,000-2,200 sq m Madang Road Metro Station (/13). A new shopping mall developed by Typical clear Approx. 2.9 m CapitaLand, Lu One, is located next ceiling height to the project, which is currently under construction and is expected to open Asking rent RMB9-11 per sq m per day + 5% tax in 2018. Management China Overseas The two office towers are both for lease company only. Asking rents start from RMB9 per sq m per day in Q3/2017, excluding 5% Management fees RMB35 per sq m per month tax, while management fees are priced at RMB35 per sq m per month. Source: Savills Research

savills.com.cn/research 05 Briefing |Shanghai office sector November 2017

Definitions

Core markets: Prime and non-prime markets. - Prime markets: (W), (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), , 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.

Notes

Rents are collected six months after project launch.

Basket of monitored projects includes self-use for vacancy rate calculation purposes.

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James Macdonald Cary Zheng Peter Sheng Director Senior Director Senior Associate Director +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 [email protected] [email protected] [email protected]

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