Savills World Research

Briefing Investment July 2017

Image: The Bund SUMMARY SOHO recorded their sixth large-scale divestment in Shanghai in the second quarter with the disposal of SOHO Hongkou for RMB3.57 billion. The 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, 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. In addition, investments two-storey retail podium (4,738 sq expected to launch in 2H/2017, though in hotels for non-conversion purposes m). SOHO China acquired the project given historical norms, approximately are mostly platform investments site for RMB1.5 billion in 2011 and 30% of this space could find itself because the industry requires a high completed construction in Q4/2015. delayed until next year. 300,000 sq economy of scale and management m of retail space in prime areas is expertise. - CapitaLand acquired the Guozheng currently under refurbishment. Leasing Centre from the Baohua Group for demand will likely be stimulated once Deals RMB2.64 billion. The project was these upgraded spaces re-enter the No pure hotel projects were transacted completed at the end of 2016, and had market in 2018. in Shanghai. However, a couple of an occupancy rate of 23% as at April deals are currently at the closing

savills.com.cn/research 03 Briefing |Shanghai investment July 2017

stage and will be disclosed in the next 1.0% QoQ to RMB156.8 per sq m per Investor sentiment quarter. month. Although investors remain interested in serviced apartment properties, and R&F Properties purchased Under the 2015-2020 Shanghai there remains a limited number 91% of the equity in 13 theme parks residential urban plan, the local of opportunities available for en- and 100% of the equity in 76 hotels government plans to provide 55 bloc sales. The government’s new from Wanda for RMB63.8 billion. million sq m of land, 20% more than restrictions on converting properties on the amount in the previous five-year commercial title into residential units Residential market period, of which 20 million sq m was deter investors from buying older office Market fundamentals for commodity residential, 17 million buildings to convert into residential or First-hand commodity residential sq m was for lease and 18 million sq m serviced apartments. Investors who transaction volumes rebounded by was for social housing. have already converted buildings with 38.8% in Q2/2017, to 2.1 million sq m. an intention for strata-sale had to Average transaction prices increased Shanghai’s land authority has launched switch to leasing. by 0.4% QoQ to a new high of two parcels designated solely for RMB47,600 per sq m. residential leasing in early 2017, the Deals first of its kind ever released in the city. CIFI Group purchased Belgravia Average serviced apartment rents Two parcels are located in Pudong Place from Chengli Properties for increased by 1.5% QoQ to RMB233.9 and Jiading. The new launch was RMB790 million. Belgravia Place has per sq m per month, while strata-title seen as local government’s attempt two apartment buildings with a total rental growth accelerated to 3.3% to tap into new options to address above-ground GFA of 29,680 sq m, of QoQ with rents eventually reaching accommodation needs of those who which 10,530 sq m was owned by the RMB186.8 per sq m per month. Villa find home prices highly unaffordable. vendor. rents witnessed a slight increase, up

TABLE 2 Key investment deals, Q1/2017

Three Forest City SOHO Hongkou Guozheng Centre Innov Tower Belgravia Place Commercial Plaza SOHO 虹口 宝华国正中心 凯科大厦 华山丽苑 三林城市商业广场

575 Wusong Road, 489 Zhengli Road, 1138 Yongtai Road, 1801 Hongmei Road, 139 Xingfu Road, Location Hongkou Yangpu Pudong Xuhui Changning

Date Jun, 2017 Jun, 2017 Apr, 2017 Jun, 2017 Apr, 2017

Property type Office / Retail Office Mixed-use Office Residential

Transacted price 3,573 2,640 2,430 1,560 790 (RMB mil)

Above-ground GFA 70,000 80,701 121,995 40,445 10,537 (sq m)

Vendor SOHO China Baohua Group Shanghai Land CapitaLand Chengli Properties

Keppel, Alpha, Purchaser CapitaLand Cinda Real Estate AEW Capital Management CIFI Group Allianz Insurance

Deal Structure Offshore equity Onshore equity Asset Offshore equity Offshore equity

Source: Savills Research

04 Briefing |Shanghai investment July 2017

Logistics market players account for the bulk of new residential use was sold this Market fundamentals development supply. quarter. Commercial AVs averaged Strong demand from third-party RMB10,661 per sq m. Such drop in logistics providers (3PLs), e-commerce Deals sales consideration was due to local and retail companies continues to A consortium led by China Vanke, government’s control on the supply drive demand in the logistics sector. Hillhouse Capital Management and side. Government support for cross-border Hopu Investment Management won e-commerce is expected to help a management buyout to take over Shanghai’s Housing and Urban- improve this sector further. Platform Global Logistics Properties Ltd (GLP), Rural Development office website and portfolio purchases are the the largest operator of warehouses in issued regulations that ban the sale preferred investment vehicles. China, for US$11.6 billion. GLP owns of property zoned for commercial and manages a global portfolio of 55 purpose for residential use, and also Investor sentiment million sq m, with dominant market forbid the construction or fit-out The market is dominated by a handful positions in China, Japan, US and of such units; the regulations took of players who are responsible for Brazil. As much as 57% of the firm’s effect in May. The restrictions on most investment cases. These players net asset value came from the Chinese commercial-titled property used typically look for acquisitions of market in June 2017. as apartments now prohibits a individual assets and development practice that had become common 1 sites, or platform equity injections. Land market over the last decade, of developing Many new investors who do not have TTotal land sales consideration and selling commercial land for on-the-ground leasing experience or reached RMB3.9 billion in Q2/2017, living purposes. The regulations are resources usually seek safer income around a quarter of that achieved expected to diminish developers’ producing products, while major in the first quarter. No land for interest in bidding for commercial- 1Land sales exclude public and economic housing titled lands to some extent.

Market news FIGURE 2 Industry saw mega consolidation Land transaction area and AVs, 2008–Q2/2017 China’s real estate industry saw a

Commercial GFA (LHS) Residential GFA (LHS) Industrial GFA (LHS) number of mega consolidations in Commercial AV (RHS) Residential AV (RHS) Industrial AV (RHS) Q2/2017. Sunac and R&F Properties 45 33,000 purchased 91% of the equity in 13 40 30,000 theme parks, and 100% of the equity 27,000 in 76 hotels from Wanda for RMB63.8 35 24,000 billion. Vanke acquired Guangdong 30 21,000 m sq per RMB International Trust Investment Corp’s

25 18,000 16 development sites, all located

million sq m in core areas in Guangzhou, for 20 15,000 RMB55.1 billion. Sino-Ocean Group 12,000 15 acquired a portfolio consisting of 9,000 10 six retail properties with a total GFA 6,000 of 200,000 sq m from BOCGI. A 5 3,000 Chinese consortium which included 0 0 private equity firms Hillhouse Capital 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H17 Management, Hopu Investment Source: Savills Research Management and Vanke will

TABLE 3 Key land deals, Q2/2017

GFA Consideration AV Plot District Use Buyer (sq m) (RMB million) (RMB per sq m)

Minhang Ecology Minhang Commercial 86,713 2,230 25,717 Henderson Business Center

Hongkou HK314-05 Hongkou Commercial 114,000 4,124 36,175 Jinmao

Source: Savills Research

savills.com.cn/research 05 Briefing |Shanghai investment July 2017

purchase GLP, the largest landlord of US private equity firm Lone Star and developers swallow up rivals, as well premium logistics assets in China, for Hong Kong peer PAG began buying as their land, at a record pace. US$11.6 billion. non-performing loan portfolios in China, marking the entrance of new With a scarcity of land resources Global interest in China NPLs (Non- global investors into the Chinese and increasing land prices, the performing Loans) market without a large mainland investment market is expected to Large global investors are coming partner for the first time in years. remain relatively active in 2H/2017, around to China’s NPL market, as developers see opportunities in which is continuously growing in Outlook existing properties. size. Bain Capital bought a portfolio Local governments’ property cooling of bad loans from a Chinese asset measures, tight credit control and Alternative asset classes, while still management company for US$200 competition for land is likely to force being relatively niche, will see their million in 2017. ShoreVest Capital smaller developers to consider other share of total investment increase as Partners says it has launched a options. As a result, in the remainder investors seek to move up the risk US$750 million fund targetting bad of the year, the market is likely to curve in search of higher yielding debt in China in 2017. In early 2017, see more consolidations as big opportunities. 

Please contact us for further information Research Agency

James Macdonald Siu Wing Chu Steve Chen Director Managing Director Deputy managing director, Shanghai +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 [email protected] [email protected] [email protected]

Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 700 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.

This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

06