POISED to OVERTAKE a Study on Tianfu’S Emerging Office Market COLLIERS RADAR OFFICE | RESEARCH | CHENGDU

Home , New areas, Sichuan, Tianfu New Area

COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

Donna Zhang Senior Manager | Research | West China +86 28 8658 6288 [email protected]

POISED TO OVERTAKE A study on Tianfu’s emerging office market COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

Chart 1: Review the development path of the Hi-tech Zone (2005 - 2016) Summary & Recommendations Phase > Tianfu New Area’s development, as a new sub-provincial district under the Tianfu Software Park offers favorable jurisdiction of Sichuan province and the 1 policies attracting numerous TMT, 11th new district in China nationwide (2005- software and Forbes Global 500 since 2014, is attracting a lot of 2015) enterprises to settle, supporting the attention for its development and development of an industry investment opportunities. aggregation. > This report focuses on the office market, and with our market forecast and characteristics of office demand in Phase After relocation of government and Tianfu we hope to provide valuable state-owned enterprises’ solutions for investors and developers headquarters to Hi-tech Zone, we interested in these opportunities. 2 expect their subsidiaries, other > Our recommendations for market- (2008- functional institutions and supporting satisfying office projects in the Tianfu 2012) private enterprises to relocate. New Area include: − During the early leasing stage, from 2020 to 2022, the core competitive advantage in Tianfu will likely be cost performance. Phase From 2012 onward, with a more mature − Developers need to offer office market and supporting facilities, differentiated products such as 3 we witnessed office-for-lease projects longer than market-average free (2010- enjoy greater demand, furthering the rent periods and customized industrial agglomeration effect. decorations to help enhance their 2016) building’s attractiveness − Developers should also reasonably plan the timing of leasing, to avoid Donna Zhang peak supply in their micromarket. Senior Manager Research | West China 2 COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

OFFICE-FOR-LEASE RECOMMENDATIONS

Offering affordable rent is the key Characteristics of Tianfu New Area towards success Submarkets where demand is supported by Abundant new office supply launched in a short period is underling policies, such as industrial common to see in new areas due to concentrated development policies or tax breaks, face fierce development. Considering the immature commercial services competition from other submarkets, and a and supporting facilities, the core success factor for office longer incubation period is typically needed for projects in new areas will likely be cost-effective products. them to mature. Projects that offer high quality space at relatively low cost will likely seize market opportunities, achieve higher According to our analysis, in the early stages of a occupancy rates and secure quality tenants in a short time. policy-oriented submarket’s development, business parks developed by the government with tax deductions, rent or purchase subsidies, Diversity enhanced attractiveness and state-owned enterprise headquarters will likely be the most attractive property for tenants. Tianfu New Area’s Grade A stock has been increasing, and we this submarket to have the highest proportion of Grade A When those properties achieve high occupancy, offices in Chengdu. However, Grade A offices construction it is time for office-for-lease projects to attract costs are higher, and take longer to lease out due to landlords’ potential tenants in the market. high rental expectations. As such, we suggest landlords have a As such, we recommend office landlords and diversified office portfolio, including high and medium quality developers choosing the timing of their supply buildings and high and low-density buildings. This can reduce carefully, to avoid direct competition with overall office construction costs and reduce the time to fill the projects developed by government or state- buildings. owned enterprises.

CONCLUSION As a new player in office market, the business environment in the Tianfu New Area has yet to mature. But considering the development history of similar new areas, Tianfu New Area has been developed with better regional planning and land allocation, and office supply is scheduled to come online at a reasonable pace. Thus, we recommend adhering to this development schedule for a more sustainable pace of office market development in Tianfu New Area.

3 COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

OPPORTUNITIES AND Chart 2: Three core development Areas CHALLENGES COEXIST IN OFFICE MARKET Recent planning highlights the function of headquarters 28.6 sq km planned area, Tianfu CBD with a headquarters- This report focuses on the prime office area of oriented economy, Tianfu’s CBD and Science City submarkets, exhibition space and a considering the office supply and demand, as livable vitality. well as additional influencing factors.

In 2014, the Tianfu New Area development The 73 sq km pilot zone is plan proposed the construction of Xinglong Science City planned to have six Lake Science City, which became Science City industrial communities, and Qinhuangsi CBD, which became Tianfu including the new economy, CBD. AI, digital economy, 5G, major scientific By the second half of 2018, a new round of infrastructure, with military- planning emerged, with Tianfu New Area’s civilian integration and a core development zones officially divided into high-end commercial the three clusters of Tianfu CBD, Science City industrial park. and Tianfu Cultural and Creative City (please see Chart 2). Total planning area is about According to the June 2019 construction plan, 60 sq km (urban area of 25 Tianfu Cultural and sq km), leading industries Tianfu CBD is positioned as a headquarters- Creative City contains film and television oriented micromarket within the Tianfu New media, cultural and tourism Area. City industries. Office building development is mainly Center concentrated in the Tianfu CBD and Science City, with the Tianfu CBD designated as the Tianfu New largest commercial office cluster in Tianfu New Area Area. Science City has been planned for

industrial office properties and business parks. Source: Colliers International, Tianfu New Area Official Website, Mapbox.

4 COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

Office Supply and Demand Forecast Tianfu New Area is focused on owner-occupied buildings, with comparatively small amount of area for lease. This is different from Chengdu’s existing Supply perspective submarkets, which are mainly made up of buildings for lease. The development of the Tianfu New Area office market is following the We expect the total office stock of the two core areas (Tianfu CBD & Science development pattern of the Chengdu High-tech Zone, with City) to reach 2.5 million sq metres (26.9 million sq feet) by 2025 (including development of business parks and buildings for state-owned office-for-lease projects, not business parks), but only about 0.8 to 1.25 enterprises the pioneer. million sq metres (8.6 to 13.45 million sq feet) should be available to lease as up to two-thirds of supply is planned to be owner-occupied. On the supply side, to improve our analysis, we focused on office projects that have transacted at least once. Tianfu CBD is planned to Demand Outlook have the highest density of office buildings, and despite Science City having a concentration of offices, these are mainly business parks, and What are the prime tenant site selection considerations? therefore excluded from our analysis. As a basic condition for site selection, the accessibility and public transport As the future core area for office buildings, Tianfu CBD is further in the Tianfu New Area has been improving. Apart from that, the following divided in two areas, the east and west zones. six factors are the primary criteria for tenant site selection: The east zone is developing faster than west zone, and as of Q4 2019, Six key factors affecting companies’ site selection in Tianfu New Area three projects (CCC International Centre, CREC Excellence Centre and CSCEC Southwest Headquarters) already been delivered to market. Sixteen more office projects (see Chart 4) are under construction as Location of planned. We expect the total east zone office market stock to reach 1Rent 2 tenant’s major 1.4 million sq metres (15.1 million sq feet) by 2022. customer base In contrast, the west zone went through a new plan adjustment in 2018, which is set to attract state-owned enterprises’ headquarters and leading private enterprises. By 2019, 15 enterprises (see Chart 5) Location of already signed contracts to launch their headquarters in Tianfu’s west 3 suppliers, clients Quality of office zone. Considering a three to four year construction period, we expect and enterprises 4 buildings and to see the office supply influx from 2023 to 2025, pushing west zone in the same neighboring total stock to be comparable total with that of the east zone. industry or tenants supply chain Characterized by a large amount of leading industry players and the headquarters of high-growth companies, the shape of Tianfu New Area has already appeared. Around 60% of future office supply is developed by state-owned enterprises, with the balance being a mix of leading Talent base Policy support private enterprises’ headquarters, and administrative, accounting 5 6 or incentives settlement and R&D functions.

5 COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

> Rent, accessibility and public transportation are We forecast the source of demand in Tianfu New Area office market in three phases. And now, we the top considerations for site selection. believe we are in the early stage of Phase 1. > Location of main customer base: In addition to the top considerations, the location of a company’s clients is also an important factor. Chart 3: Tianfu New Area forecast of demand phasing According to Colliers’ long-term observations, tenants of real estate, architecture, traditional Source of demand Preference finance, business service and consumer service Business parks  Enterprises from leading industry players companies prefer to locate near to their clients, developed by the Phase 1 introduced by the government to reduce their response times. (2019-2020) government State-owned  State-owned enterprises, and relevant > Enterprises in the same industry or industry chain: enterprise subordinate and associated enterprises Like business location, some enterprises need to headquarters be close to enterprises in the same industry or  Real estate and architecture enterprises whose from the same industry chain, making Lease offices in business is in Tianfu New Area and surrounding areas information exchange among relevant headquarters and office-for-lease enterprises more convenient and efficient, and  Spillover demand from Chengdu’s Hi-tech Zone, projects maintaining sensitivity to the market. Tenants in mostly in TMT tenants. the TMT, real estate, architecture, energy and Attracted by upstream and downstream businesses chemical industries, as well as foreign enterprises, Lease in office Phase 2 in the Tianfu Jingrong Centre and state-owned buildings that are show a clear tendency to cluster. (2021-2023) enterprises in Tianfu New Area, we expect office developed by state- demand from rail transit, construction and TMT > Office building quality and neighboring tenants: owned enterprises. Medium and large enterprises with mature industries will increase. businesses, and growth enterprises with a clear  Enterprises based outside of Chengdu expanding business plan, give important consideration to Phase 3 into Chengdu the office quality and neighboring tenants. (2023 onwards) In this stage, we expect a > Business supporting facilities and work  Business services companies growing number of Lease space in environment: To attract more talent, many enterprises to settle in  Trading companies headquarters buildings technical-oriented enterprises including TMT and Tianfu New Area. Tianfu New Area has also been benefiting from and office-for-lease medical businesses also take business supporting projects where we facilities (banks, post offices, cafes, hotels, Sichuan Free Trade Zone. The free trade zone in Tianfu New Area is 26.45 sq km, covering all office expect these firms to conference facilities) and the work environment clusters. With expanding business opportunities become one of the top as key considerations. from the One Belt, One Road project, we expect demand drivers in the long term. > Policy support and subsidies: tenants may choose more local companies to work with foreign less desirable projects if sufficient policy support businesses. As such, Tianfu CBD and Science City will likely be more attractive to enterprises from logistics, such as tax deductions, rent or purchase wholesale, infrastructure, manufacturing and finance subsidies are available. industries.

6 COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

Chart 4: Tianfu CBD (East Zone) project distribution (Signed projects, Q4 2019)

Office projects

No. Project Name 016 Guanghui Group Headquarter 017 COL “One Belt & One Road" Center Tianfu CBD 018 TFNA Customs Building TFNA Investment Group International Business 41 019 East Zone Center 16 020 CSCEC Southwest Headquarters 021 MCC Tianfu Building 3332 38 022 Western Equity Fund Headquarter 024 CREC Center 31 23 025 Tianfu Xiechuang 30 25 026 SCTIG International Innovation Center 39 43 37 29 027 Furun Project 27 24 28 028 CREC Excellence Centre 26 42 22 029 CCC International Center 21 030 34 Transfar Center 031 Poly Center 20 17 032 Huaxi Shanghe Genesis Building 40 033 Jinyide International Center 042 Tianfu International Financial Center 36 043 SCIG Headquarter

35 Other commercial projects

No. Project Name 19 023 Yanjiyou Cultural & Creative Center 18 034 Marriott Hotel Tianfu International Bonded Commercial 035 Center 036 Holiday Inn 037 Joy City 00 Developed by state-owned enterprises 038 Xueliantang Art Museum 00 Developed by private enterprises 039 Grand Theatre 040 Tianfu International Conference Center 00 Other business supporting facilities 041 Wanda International Hospital

Source: Colliers International, Tianfu New Area Official Website, Mapbox, publicly available information. Project names may not be final. 7 COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

Chart 5: Tianfu CBD (West Zone) project distribution (Signed projects, Q4 2019)

Office projects

No. Project Name Tianfu CBD 001 China Merchants Group Headquarter 002 New Hope Group Headquarter West Zone 003 Chia Tai Group Headquarter 004 Chengdu Perform&art Group Headquarter 005 Dongfang Electric Corporation Headquarter 006 China Resources Headquarter China National Building Material Group 007 Headquarter 008 Deloitte “One Belt & One Road" Service Center 009 Aluminum Corporation Of China Headquarter 010 Leading Group Headquarter 011 Lanrun Group Headquarter 012 Lancy Industry Headquarter 013 Chengdu Road&bridge Headquarter Sichuan Railway Industry Investment Group 014 Headquarter 8 1 015 Chengdu Environment Group Headquarter 9 7 6 5 4

2 10

12 13 14 3 15 11

00 Developed by state-owned enterprises

00 Developed by private enterprises

Source: Colliers International, Tianfu New Area Official Website, Mapbox, publicly available information. Project names may not be final. 8 COLLIERS RADAR OFFICE | RESEARCH | CHENGDU | 10 FEB 2020

Appendix 1: Existing tenant profile in Tianfu New Area (Q4 2019) Appendix 2: Potential residential population in Tianfu New Area

2023-2025 residential population forecast:

Others 80,000 29% TMT 40% additional households Tenant breakdown by 175,000 industry total residential population

Residential stock of Tianfu New Area core areas Real Estate & (10,000 sq metres) Architecture 31% 404 399

Total Stock: 400,000 sq metres 122

Vacancy Rate: 35% 43.8 Xinglong Lushan Qinhuangsi Lake Zhengxing Rent: 74.5 RMB per sq m per month, about USD10.7 per sq m per month.

Source: Colliers International, Chengdu Planning and Natural Resources Bureau.

9 Primary Author: For further information, please contact:

Donna Zhang Sean Sun Senior Manager | Research | West China Managing Director | West China +86 28 8658 6288 +86 28 8658 6288 [email protected] [email protected]

Liya Ye Senior Associate Director | Office Services-TR | Chengdu +86 28 8658 6288 [email protected]

Fiona Fan Associate Director | Capital Markets | Chengdu +86 28 8658 6288 [email protected]

About Colliers International Group Inc. Colliers International (NASDAQ, TSX: CIGI) is a leading global real estate services and investment management company. With operations in 68 countries, our 14,000 enterprising people work collaboratively to provide expert advice and services to maximize the value of property for real estate occupiers, owners and investors. For more than 20 years, our experienced leadership team, owning approximately 40% of our equity, have delivered industry-leading investment returns for shareholders. In 2018, corporate revenues were $2.8 billion ($3.3 billion including affiliates), with more than $26 billion of assets under management. For the latest news from Colliers, visit our website or follow us on

Copyright © 2020 Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.