Savills World Research

Briefing Office sector February 2015

Image: Shanghai Skyline SUMMARY Shanghai’s office market is expected to undergo a remarkable transformation over the next two years as the city experiences peak supply levels and the coming of age of the decentralised market, spearheaded by schemes such as the Hongqiao Transportation Hub.

Century Financial Plaza  Gross reversionary yields increased Tower 1 and Oriental Financial Centre to 6.0% in Q4/2014, as a handful of were launched onto the market in investment funds came to the end of Q4/2014, adding 187,500 sq m and their fund life. bringing annual supply to 523,000 sq m. ­ 2015 is expected to see an influx “Landlords will have to become  Net take-up totalled 126,000 sq m in of supply, with the completion of 15 Q4/2014, bringing total annual take-up projects adding 886,500 sq m of space more accommodative towards to 457,300 sq m, up from 323,000 sq m to the core market. in 2013. tenants moving forward,  Sky SOHO and MTR City Plaza were  Core vacancy rates increased by 0.8 launched into the decentralised market as new supply generates of a percentage point (ppt) quarter-on- in Q4/2014, adding 242,000 sq m. Total quarter (QoQ) to 8.6%, up 0.4 of a ppt supply witnessed in 2014 was 731,000 renewed competition.” year-on-year (YoY). sq m, bringing total stock to 1.29 million sq m. James Macdonald, Savills Research  Average rents increased by 0.3% QoQ to RMB8.6 per sq m per day, up  The decentralised market is expected 1.8% YoY. to receive 22 projects in 2015, adding 1.61million sq m to the market. savills.com.cn/research 01 Briefing |Shanghai office sector February 2015

Market commentary GRAPH 1 Core market Grade A office supply, take-up and vacancy rate, The core office market received Lujiazui Century Financial Plaza Tower 2000–2014 STV Chart EN (2) 1 and Oriental Financial Centre (OFC) in Q4/2014, adding 187,500 sq m. In Supply (LHS) Take-up (LHS) Vacancy (RHS) 2014, eight projects were launched 900 18% onto the core market, adding 523,000 800 16%

sq m. These projects were evenly 700 14% distributed between / and also prime / non-prime locations. 600 12% 500 10%

Net take-up reached 126,000 sq m 400 8%

in Q4/2014, 50% higher than the sq'000 m third quarter, and primarily focusing 300 6% on recently launched projects in 200 4% prime Puxi. Domestic financial and 100 2% professional services companies continued to be the main demand 0 0% drivers in 2014, taking up significant space in Lujiazui and prime Puxi. This Source: Savills Research trend is set to continue as measures Page 1 put in place to develop these sectors in 2014, Puxi received ample coming onto the market in these persist. supply of high quality projects at decentralisation areas, using these reasonable pricing. Multinational emerging areas as secondary office While Pudong saw limited available corporations (MNCs) took a more space for back-end operations, space and continued rental growth cautious approach to office expansion such as marketing and finance and capital expenditure in 2014, departments; low-cost businesses as they remained uncertain about may also consider these locations GRAPH 2 economic and business prospects. for their entire operations given the Business district comparison, rent vs Nevertheless, as the new economic potential for lower overheads. norms are realised and understood, vacancy rate, Q3/2014RV CBD EN (2) and Q4/2014 MNCs are beginning to look into more Market news Q3 rent (LHS) Q4 rent (LHS) Q3 vacancy (RHS) Q4 vacancy (RHS) business opportunities and office The emergence of the 12 30% space options, whether that be in core decentralised market

10 10.5 25% or decentralised locations. Shanghai is witnessing the evolution 10.2 10.5 9.9 9.7 9.7 of its office market. In the past, 8 20% Decentralised more than 90% of the city’s Grade A 7.8 7.7 7.8 7.8 7.1 7.1 6.9 Prior to 2010, only a handful office stock was located within the 6 6.8 15% of developers were looking at inner ring road and Hongqiao areas. 4 10% opportunities within decentralised However, recent office completions

RMB psqm per day areas, however, as land within are increasing the proportion of Grade 2 5% core areas became more limited A office stock located outside these

0 0% and expensive, developers started areas. Nanjing Rd Huaihai Rd Old Huangpu Changning 'Little' Lujiazui Pudong (W) (M) Others looking to emerging areas such as Minhang and Yangpu for development The main decentralised areas which Puxi districts Pudong districts opportunities. are witnessing this influx of new

Source: Savills Research Page 1 Grade A specification projects include 2014 witnessed the handover of Minhang – primarily the Hongqiao GRAPH 3 a number of these projects that Transportation Hub, Putuo – with were started in 2010 and 2011, with new supply such as MTR Plaza and Core market Grade A office rental around 730,000 sq m added to the Global Harbour, Yangpu –primarily indices, Q2/1999–Q4/2014 decentralised markets, doubling The Springs development by Tishman the amount of stock within these Speyer and Xuhui – with the expected All Prime Puxi Non-prime Puxi Prime Pudong Non-prime Pudong Q2 / 1999 = 100 areas. Decentralised supply in 2014 Greenland Centre. 200 focused largely on Puxi with this 180 expected to continue through into One of the most significant master- 160

140 2015. The received planned areas in Shanghai to be

120 the majority of new projects in 2014, developed over the next decade will

100 with Hongqiao Transportation Hub be the Hongqiao Transportation Hub.

80 seeing its first two projects launched. The scheme is located close to the

60 In 2015, Pudong is expected to see most significant intra and intercity

40 the launch of the first decentralised infrastructure in Shanghai, tying in 20 project in two years. the city’s domestic airport with the

0 main high-speed railway terminal, Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Many companies are taking a long distance coach terminal and 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 advantage of the new supply two existing metro lines ( and Source: Savills Research

02 Briefing |Shanghai office sector February 2015

10), one under construction (line 17) The expansion of the FTZ should wanting to be close to Lujiazui but not and a further two under planning prove beneficial to the Zone the FTZ willing to pay the higher rents. ( extension and line 20). The overcoming the stigma associated area plans to attract overseas and with the zone being located so far Net take-up totalled 126,000 sq m in domestic companies from industries away from the city centre. It should Q4/2014, bringing year-to-date (YTD) most crucial to the development of also present an opportunity to the take-up to 457,300 sq m. Lujiazui Shanghai and the Yangtze River Delta areas included in the enlargement, area. both from the actual tangible policy IMAGE 1 benefits and the association with the Nike is a prime example of a FTZ. Proposed enlargement of Shanghai company relocating from a central FTZ office space to a more decentralised The FTZ is still in its early years and premises. Prior to relocation they were further reforms and opening up are occupying roughly 15,000 sq m of expected to continue reaping benefits office space on Nanjing Rd (W); their for companies, areas and landlords new premises is roughly 55,000 sq associated with the zone. m on the new Springs Development in Wujiaochang. The relocation, while Lujiazui Century Financial Plaza Tower moving further away from the city 1 and OFC were handed over in centre, enables them to provide more Q4/2014, adding 187,500 sq m to the space to employees, landscaped core market. A total of eEight projects grounds and room for future were handed over to the core market expansion. The development consists in 2014, totalling over 523,000 sq m, of three office blocks and a five-story with the largest project, at 312,000 sq conference centre to host clients and m, being Lujiazui Century Financial promotional events, as well as an F&B Plaza. The project is located in area, a football pitch and a basketball Zhuyuan district and consists of five court. office buildings. It is the only project launched onto the non-prime Pudong Moving to decentralised locations market since Q3/2012 and has helped may not be for everyone as there are to meet some of the spill overspill advantages and drawbacks to any over demand from companies Source: Savills Research decision. However, the key challenge faced by decentralised locations will TABLE 1 be less about convincing occupiers to move and more about how to best Selection of leasing transactions, Q4/2014 differentiate themselves from all the Area leased other projects scheduled to come Tenant Project Location (sq m) onto the market in the next few years. Uniqlo Henderson Metropolitan Huangpu 4,500 优衣库

China (Shanghai) Pilot Free Trade Wuxi PRA SOHO Fuxing Huangpu 3,000 Zone (FTZ) 康德新药

The (Shanghai) Pilot Free Trade CICC AZIA Centre Pudong 3,000 Zone was approved by the State 中国国际金融有限公司 Council and officially launched in 2013 Changxin Asset Management Pudong 2,200 as a platform for the testing of new 长信基金 economic and social reforms. One Warburg Pincus Bund Centre Huangpu 1,400 feature of the FTZ is the negative list 华平投资 for foreign investment, which basically Source: Savills Research allows foreign investment in every sector unless explicitly prohibited in TABLE 2 the list. In 2013, 18 service industries received more relaxed policies in the Selected large scale commercial site acquisitions, Q4/2014 zone. The negative list was updated in Property Location Price Buyer Note July 2014, relaxing restrictions in the (RMB million) financial industry, manufacturing, and Suntown Plaza Gopher Real Estate Under construction Office and Huangpu 3,126 transportation services. 融创广场 Fund retail podium Also, at the end of 2014, the Shanghai International Alpha Investment commerce ministry announced Capital Plaza Hongkou 1,550 Office and retail podium Partners plans to expand the FTZ to include 上海盛邦国际大厦 the Lujiazui Financial Area (34.26 sq #18-1, Shanghai Int'l Shipping km), Jinqiao Export Processing Zone Service Centre Hongkou 1,309 Domestic bank - (20.48 sq km) and Zhangjiang Hi-tech #18-1,上海国际航运中心 Poly West Bund Centre Park (37.2 sq km). This expansion will Xuhui 693 Media Tek Under construction (13-19F enlarge the FTZ from 28 sq km to 121 保利西岸中心 #6, Guoson Centre sq km. Putuo 623 Future Holdings Under construction 国盛中心6号楼

Source: Savills Research

savills.com.cn/research 03 Briefing |Shanghai office sector February 2015

recorded 63,000 sq m of the take-up TABLE 3 in Q4/2014 as a result of the handover First-hand strata-title building activity, Q4/2014 of OFC and a sizeable portion of this was being for self-use. The second Transacted GFA Average price Project District highest net take-up was recorded in (sq m) (RMB per sq m) Nanjing Road (W), totalling 21,000 sq Huadu Building Pudong 10,484 35,735 m, which was more a result of organic 华都大厦 take-up in relatively new projects such Greenland Huizhong Centre Xuhui 7,734 46,438 as Garden Square and Henderson 绿地汇创商务广场 688. HTH Site Core 5 Longfor Paradise Walk Minhang 5,409 37,695 虹桥龙湖天街商业中心一期 2014 saw the highest levels of net Greenland North Bund Centre Hongkou 3,462 49,764 take-up since 2011, supported in 绿地浦创商务大厦 large part by strong demand from Source: Savills Research domestic companies. Puxi recorded a larger portion of take-up in 2014, than at the beginning. Pudong believed to have increased to 6.0% largely attributableed to ample rents increased 0.6% in Q4/2014 to on a gross reversionary basis, while supply, reasonable pricing and higher RMB9.2 per sq m per day;, with prime capital values have decreased. While vacancy rates than Pudong. Lujiazui Pudong up 0.3% QoQ and non-prime yields on assets sold to international witnessed the highest take-up of any Pudong up 1.2% QoQ. With the funds are increasing, recent deals business district in 2014; , at 106,500 recent launch of OFC and Lujiazui to domestic funds and end -users sq m, this was also the highest take- Century Finance Plaza, and more to continue to fall, given their quite up recorded in Lujiazui since 2011, come in 2015, pent-up demand within different investment criteria. highlighting the importance of Lujiazui the Pudong market is expected to be to financial institutions. met, resulting in slower rental growth The only deal by an overseas fund in the future. in a core location in 2014 was the Vacancy rates in core areas increased purchase of Shanghai International by 0.8 of a ppt in Q4/2014 to 8.6%, Puxi witnessed a reduction in rents Capital Plaza (ICP) in Hongkou with the highest vacancy rates during the 1H/2014, but managed to by Alpha Investment Partners for recorded in non-prime Pudong stabilise rents during the second half, RMB1.55 billion, in October 2014. areas at 26.4%, as a result of newly mainly thanks to tenants upgrading The project comprises of both office -handed -over projects. their space. Both prime and non- and retail components, with a total prime Puxi recorded rental growth GFA of 57,000 sq m. This deal, in Prime Pudong remains extremely tight of 0.1% in Q4/2014, as the majority part, is a visible indicator of the with vacancy rates in ‘Little’ Lujiazui of landlords kept rents unchanged. re-rating of yields for international at 1.6% at the end of the year, up 1.3 Only Nanjing Road (W) witnesseding a institutional investors in Shanghai. ppts QoQ, as a result of the launch significant decline in rents, to RMB9.9 of OFC. Pudong Others continued per sq m per day. Puxi has seen flat or The largest deal in terms of to benefit from spill overspill over falling rents and a number of newly- consideration was the purchase demand from ‘Little’ Lujiazui, launched projects in 2014, resulting in of Suntown Plaza in Huangpu recording net take-up of 7,800 sq m., more attractive offerings to those who by Gopher Real Estate Fund, for hHowever, vacancy rates increased are becoming more cost conscious. RMB3.1 billion. The project consists 8.0 ppts as a result of new supply. of both office and retail components, While take-up rates are expected to with a total GFA of 73,300 sq m Puxi vacancy rates fell to 7.3%, down increase in the short term, demand is and is expected to be for sales and 2.0 ppts QoQ. Hongqiao and Nanjing expected to be inadequate to absorb leasing. Road (W) saw the largest drop in the upcoming plethora of supply in vacancy rates, down 3.3 and 2.7 ppts 2015, leading to further decreases Other sizeable deals include: the respectively. Nanjing Road (W), which in rents as landlords offer additional purchase of #18-1, Shanghai Int'l has many high-specification projects incentives to attract tenants. Shipping Service Centre in Hongkou as well as lower rents than Lujiazui, for RMB1.3 billion, by a local bank, benefited from stronger demand. Investment market expected to be for self -use; the Xujiahui remains the least -changed Shanghai’s investment market acquisition of Guoson Centre Block market among all the business remained active in Q4/2014, with a 6 by Future Holdings Group for districts, given its limited new supply number of large-scale acquisitions RMB623 million; and the purchase and stable demand, though it was the concluded, totalling RMB7.85 billion. of 12,500 sq m in Poly West Bund only district in Puxi to see vacancy Domestic purchasers continue to Centre (F13-19) in the rates increase in Q4/2014, up 0.9 ppt dominate the market while at least for RMB693 million by Media Tek from its low base of 1.6%. two of the recorded acquisitions are (the project is currently under believed to be for self-use. construction and is expected to be Grade A office rents increased 0.3% for self-use). in Q4/2014, to an average of RMB8.6 As a number of investment funds are per sq m per day, a third consecutive coming to the end of their fund life, The strata-title market witnessed QoQ increase. many fund managers are considering a pick-up in transaction volumes reducing prices in order to expedite in Q4/2014, reaching 431,441 sq Pudong rents saw continued growth sales. As a result, yields for deals m, compared with 258,923 sq m in in 2014, however, albeit at a slower involving international investors are Q3/2014. Self-use demand continues rate towards the end of the year to drive the market.

04 Briefing |Shanghai office sector February 2015

Supply reached a year -to -date high the Hongqiao Transportation Hub sharp increases in vacancy rates, of 695,068 sq m in Q4/2014. Total expected to account for around 50% especially in relatively small and young sales consideration for Q4/2014 was of decentralised supply in 2015. submarkets. RMB6.66 billion while and the average As office occupiers review transaction price was RMB 30,433 per opportunities for expansion and The Puxi market is expected to see a sq m. different ways to utilise their office larger proportion of the new leasable space, take-up patterns are expected and uncommitted stock over the next The strata-title market in 2014 saw to shift. Domestic companies will three years, likely resulting in vacancy new supply fall to 2.13 million sq m, increasingly look at upgrading their rates hikes and decreases in rents due while and transaction volumes fell to office space or purchasing for self-use, to most supply being located in non- 1.21 million sq m. leading to demand for quality office prime areas. Despite robust demand space and strata-title projects. Lower and more manageable levels of supply, Market outlook margin operators are expected to Pudong is expected to witness a Supply, not demand, will most likely be relocate to cheaper office premises, similar trend during the same period, the key determinant of the near future and larger occupiers are likely to albeit not to the same extent with the of the office market. In 2015 alone, the bifurcate back- and front-office majority of new leasable uncommitted market is expected to see the addition operations. stock to be located in Zhuyuan, the of 886,500 sq m of Grade A office main non-prime business district. space in core areas and an additional The key trend over the next few years 1.6 million sq m in the decentralised will undoubtedly be that of rising Decentralised areas that have limited market. vacancy rates and falling rents as a existing stock and/or tenant base direct consequence of the volume of and only a small number of unique The new supply, especially in the first new supply coming onto the market advantages will find it very difficult in half of the year, is not expected to be irrespective of the relatively robust the coming quarters and years. Certain even, with the vast majority of new levels of demand expected from both master-planned areas, however, will buildings located in non-prime and domestic and overseas companies. outperform, such as the Hongqiao decentralised locations, accounting Transportation Hub due to its scale for 87.5% of total supply. This trend Pressure from competing projects and infrastructure links, or Qiantan is likely to persist over the next few will be felt in all areas of the city but with its backing from the Pudong years, but not as pronounced, with to differing degrees. Prime business government and leading overseas and decentralised supply accounting for areas with more limited supply and domestic developers. an increasing percentage of total demand that is less susceptible to cost stock. These projects with their lower increases are likely to see vacancy Current forecasts predict that new rents and an abundance of supply rates remain relatively low and rents supply in the city as a whole will will start attracting some corporations comparatively firm, even in Lujiazui peak in 2016, continuing into 2017. to relocate out of core areas, putting with the addition of the 200,000 sq However, these estimates may change pressure on projects located closer m . Non-prime areas depending upon developer decisions to the city centre. Some schemes are expected to see more supply and in terms of development pace.  will find the issue of oversupply indirect competition from decentralised especially acute with areas such as areas, potentially resulting in quite

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