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Briefing Investment July 2017

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Briefing Investment July 2017 Savills World Research Shanghai Briefing Investment July 2017 Image: The Bund SUMMARY SOHO China recorded their sixth large-scale divestment in Shanghai in the second quarter with the disposal of SOHO Hongkou for RMB3.57 billion. The Beijing based developer’s plans to offload two more projects as part of their plan to go asset light. Eight key deals were concluded quarter saw international developers in Q2/2017, for a total consideration and investors became more active “International developers and of RMB13.5 billion. The transaction in secondary market in the second consideration for 1H/2017 doubled quarter, taking up 76% of total investors remain active in the second that of 1H/2016. transactions, with a focus on non-core quarter as they attempt to maintain a and value-added opportunities. Office properties remained the foothold in the world’s second largest most popular asset type in Q2/2017, Rising prices of Grade A office economy and arguably one the accounting for 66% of the total sales assets continue to compress gross consideration, with all of them intended yields, which fell by 10 basis points world’s largest and fastest growing for investment purpose. (bps) quarter-on-quarter (QoQ) to property markets.” James Macdonald, 4.8%. With a scarcity of land resources Savills Research and increasing land prices, this savills.com.cn/research 01 Briefing |Shanghai investment July 2017 Market commentary GRAPH 1 The investment market remained active Shanghai large-scale real estate acquisitions, in Q2/2017, with eight sizeable deals Q1/2011–Q2/2017 concluded for a total consideration Office Development site Retail of RMB13.5 billion, bringing total SA Residential Hotel consideration in 1H/2017 to RMB27.0 Office park Industrial Mixed-use billion, an amount which has doubled 50 year-on-year (YoY). 45 40 As the capital value for office 35 properties increased, and return 30 for core assets compressed, 25 some property owners are seeking billion RMB 20 opportunities to dispose of their 15 non-core assets and realise returns. 10 Investors, especially those with foreign 5 funds, who are usually more short- 0 term focused, continue to look at 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 11 12 13 14 15 16 17 value-added opportunities and assets in emerging areas, betting on the Source: Savills Research growth potential in such submarkets. For example, CapitaLand divested Road from Wing Tai Holdings for Sectors and deals of Innov Tower in the Caohejing area RMB1.33 billion in Q2/2017. In Eight key deals were concluded for a for RMB1.56 billion and acquired addition, Vanke acquired Guangdong total consideration of RMB13.5 billion Guozheng Centre, located in the International Trust Investment Corp’s in the second quarter. The transaction Wujiaochang area of the Yangpu real estate asset for RMB55.1 bilion, consideration for 1H/2017 was double district, which was completed in which was the country’s biggest land that of 1H/2016. Q4/2016. In addition, SOHO China deal. sold SOHO Hongkou in the Hongkou Office market district for RMB3.57 billion. SOHO Due to efforts in a bid to stem the Market fundamentals China also plans to offload two other housing bubble, the government Four projects launched onto the core properties they view as non-core – issued new standards for domestic office market in Q2/2017, adding Guanghualu SOHO in Beijing and Sky bond issuance in Q4/2016. After 338,600 sq m of supply and pushing SOHO in Shanghai. developers’ financing demands spilled total core market stock up to 7.76 over to the offshore market, new million sq m. Net take-up in core areas Land supplies, especially those in regulations in April have further closed totalled 267,000 sq m in the quarter, downtown areas, are becoming the offshore fund raising channel up by 23% QoQ, driven by strong scarce. Therefore, developers are by virtually stopping grants of new demand in core Puxi areas. buying land from the secondary market quotas for offshore sales. Faced with through acquisition and consolidation. the clampdown on debt financing, New supply pushed the vacancy rates CIFI Holdings acquired a development some developers are looking at equity in core areas up by 0.5 of a percentage site located in Madang Road/ Xujiahui financing as an alternative. point (ppt) QoQ to 10.7%. Supported TABLE 1 Yields and capital values by sector*, Q2/2017 High-end Prime shopping Prime retail High-end strata Grade A Office serviced 5 star hotel Logistics mall street store apartments apartments Gross 4.0-5.3% 6.0-7.0% 4.0-5.0% 4.0-5.0% 2.3-3.0% 6.5-8.0% 6.7-7.2% reversionary NOI 3.0-4.0% 3.0-4.0% 2.0-3.5% 2.2-2.8% 2.0-2.5% 1.5-2.0% 6.0-6.5% Approx. values 50-90,000 60-100,000 150–250,000 55-70,000 100-200,000 40-50,000 6-8,000 (RMB per sq m) Source: Savills Research Note: Yields refer to stabilised assets in downtown locations free of any impediments and a clean holding structure owning 100% of the building, assuming 100% occupancy. Capital values refer to the average for the building on an Aboveground GFA basis – retail assets will have higher capital values for lower floors. 02 Briefing |Shanghai investment July 2017 by rental growth in the secondary Puxi 2017. The Guozheng Centre consists Investor sentiment area, the average core market rent of three office buildings and is located A few international investors with increased by 0.5% QoQ to RMB9.0 in the Wujiaochang area of the Yangpu experience managing shopping malls per sq m per day, up 3.4% YoY. District. remain interested in acquiring retail properties in Shanghai. However, Six new projects launched onto the - AEW Capital Management acquired available projects remain limited. decentralised market in Q2/2017, Innov Tower from CapitaLand for Platform and portfolio purchases, or bringing 367,700 sq m of supply RMB1.56 billion, as the final property equity injections into local operators, and pushing total stock up to acquisition of its AEW Value Investors are currently the preferred investment approximately 3.1 million sq m. Asia II fund, a US$640 million value- vehicle. Vacancy rates in decentralised areas added fund focused on gateway cities increased by 6.3 ppts QoQ in Q2/2017, in the region. CapitaLand bought back Deals to 33.4%, while rents increased by 50% of the asset from CITIC Trust in Xincheng Real Estate purchased 3.4% QoQ to RMB5.9 per sq m per 2011 for RMB298 million. Three Forest City Commercial Plaza day. for RMB2.43 billion. The project has - Cheung Kei Group bought the ASA a total saleable GFA of 121,995 sq m, Office rents are expected to face Building from some private owners for comprising a shopping centre, street downward pressure, with looming RMB845 million. The ASA building, retail, an office building and an hotel. supply levels and the approaching of located in Jiangning Road/ West the traditionally slow season in July Beijing Road, Jing’an area, has a total Hotel market and August. In addition, the trend GFA of 18,045 sq m. It was completed Market fundamentals of decentralisation is expected to in 2004 and refurbished in 2008. The The hotel markets in first- and continue, as new emerging business average rent is 7-8 RMB/sq m/ day. second-tier cities remain one of the areas grow and mature. most challenging real estate sectors - Jingrui Holdings purchased the in China. Despite various challenges, Investor sentiment Zhangjiang Keyuan Building for Shanghai’s hotel market recorded Domestic buyers and insurance RMB300 million. The project has a total stable growth, with a revenue per companies remain interested in core GFA of 10,061 sq m and is located in available room (RevPar) of RMB705 assets for long-term hold as they are the Zhangjiang area. for five-star hotels, up 4.7% YoY, resilient towards rental depreciation. and RMB366 for four-star hotels, Meanwhile, due to shorter life cycle Retail market up 0.2% YoY, in December 2016. and return profile, international Market fundamentals This is attributable to an increase in funds typically look for value-added Four new projects launched in the occupancy rates. Mid-level hotels opportunities in emerging submarkets second quarter of 2017, adding appealing to leisure and family when in a market where return is being 349,740 sq m of new supply. Vacancy travellers continue to attract more continually compressed. rates remained at 6.3% in prime retail demand than luxury hotels targetting areas, and decreased 0.6 of a ppt YoY business travellers. Deals to 8.7% in non-prime retail areas. Five key deals were concluded in the Investor sentiment office market in the second quarter: First-floor shopping mall rents The interest of purchasing hotels - Keppel, Alpha Management and increased by 0.2% QoQ in prime and located in core areas for the purpose Allianz Insurance acquired SOHO non-prime retail areas, to an average of of converting them into other asset Hongkou from SOHO China for RMB50.2 and RMB16.6 per sq m per classes, usually apartments, still exists RMB3.57 billion. The complex day, respectively. in the market. However, there are very comprises a 29-storey tower of Grade few projects that meet such investment A office space (65,304 sq m) and a 1.2 million sq m of new supply is requirements.
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