Briefing Office Sector February 2017

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Briefing Office Sector February 2017 Savills World Research Shanghai Briefing Office sector February 2017 Image: HKRI Taikoo Hui TI SUMMARY The city’s core office leasing market recorded a strong performance in Q4/2016, but landlords are holding their breath as the city will enter a period of peak supply next year. One new project – HKRI Taikoo Prime projects in Pudong Hui Tower One – entered the market submarkets recorded strong rental in Q4/2016, adding 95,000 sq m and growth, helping increase core market “The city is expected to receive pushing core market stock to 7.04 rents by 1.1% QoQ to RMB8.9 per sq historic levels of supply in the million sq m. Following the delay of m per day, up 2.2% YoY. some projects, annual core market next year, the majority of which supply for 2016 stood at 680,000 sq m. No Grade A projects entered the decentralised markets in Q4/2016, will enter the market in new, Core market net take-up totalled keeping stock at 2.22 million sq m master-planned business areas. 130,000 sq m in Q4/2016. Annual core market net take-up reached 480,000 sq Decentralised market vacancy rates The emergence of new CBDs m in 2016, a decrease of 35% from the fell to 22.8% in Q4/2016, decreasing previous year. 0.5 of a ppt QoQ and 4.3 ppts YoY. is expected to have a significant Driven by stable occupancy levels of Vacancy rates in the Grade A core several projects, decentralised market effect on the development of the office market fell by 0.7 of a percentage rents rose by 2% QoQ and 3.4% YoY city’s office market next year.” point (ppt) quarter-on-quarter (QoQ), to to RMB5.5 per sq m per day. 8.4%, but remained up 2.3 ppts year- James Macdonald, Savills Research on-year (YoY). savills.com.cn/research 01 Briefing |Shanghai office sector February 2017 Market News year for both the national and the outflow of capital next year, as Malls join co-working craze global economy, total cross-border is expected, more money will be In the past year, co-working investment opportunities remained redirected into the local property companies such as New York- abundant, resulting in an increase market. As one of the most secure based Wework, have splashed in both foreign and outbound and transparent markets in China, down in the local market, attracting direct investment. Foreign direct Shanghai’s office market is forecast hundreds of millions of dollars of investment (FDI) in China remained to become the recipient of some of investment and opening centres at stable in 2016, increasing by this new capital. a remarkably quick rate, causing 4.1% YoY. FDI, which does not speculation that market supply may include investment in financial Core Market have far outpaced current demand. institutions, ended the year at Supply, take-up & vacancy Nonetheless, many developers approximately RMB813 billion. The handover of one project – HKRI remain eager to partner with co- Meanwhile, annual outbound direct Taikoo Hui Tower One – brought working companies, including investment (ODI) increased sharply, 95,000 sq m of new supply to Singapore-based CapitaLand, which catalysed by concerns of future the Grade A core office market, recently announced a deal with RMB devaluations and the lack of increasing stock to 7.04 million sq m. Chinese co-working space operator availability of mainland investments. URWork to provide space in its During 2016, ODI increased 44.1% Benefitting from the mature business malls across China. The venture YoY to USD170 billion. This figure environment of the Nanjing West between developer and shared does not include investments in the Road CBD, three nearby metro lines office provider may mark the next financial industry. and favourable rental strategies, step in the evolution of office space HKRI Taikoo Hui Tower One recorded across China as retail landlords Despite concerns of continued strong demand, with approximately move to capitalise on the shifting global economic stagnation and 50% of the building preleased before landscape of office demand and the, political upheaval in 2017, China handover. The building attracted supposed, lucrativeness of shared remains an attractive investment several large tenants, including office concepts. In addition to for many multi-national companies Amore Pacific, Eli Lilly & Company possessing larger, column-free floor (MNCs). While business sentiment and Jun He Law Firm. A second plans compared to standard office has become more bearish in the tower of the Taikoo Hui project is buildings, which are favoured by co- past several years due to greater scheduled to enter the market in working companies, retail podiums market saturation and increasing Q2/2017, bringing a further 65,000 also offer other incentives, such as competition from local competitors, and 100,000 sq m of office and retail typically offering lower face rents China remains a large, emerging space, respectively. on their upper-floors than traditional economy with many sectors ripe office space as well as an integrated for investment. MNCs will continue Total annual supply for the Grade retail setting for workers to shop, to expand their existing operations A office market in 2016 stood at dine and relax. or look to enter the market in the 680,000 sq m, showing a small future, increasing demand for increase over the previous year. The potential of the co-working- international-grade office space and Supply was dispersed evenly retail setup has already attracted helping to improve the overall quality between the prime and secondary interest in cities such as Beijing of the office market. markets, with Pudong accounting for and Wuhan, with retail developer approximately 60%. Longfor also announcing plans to Outbound capital controls drive develop its own line of co-working money into property sector Net take-up in the Grade A core offices in a number of its existing The property sector remains one of office market increased to 130,000 projects. The concept has already the key destinations for investment, sq m in Q4/2016, pushing vacancy appeared to have caught on in especially in Shanghai. The city rates down by 0.7 of a ppt QoQ to Shanghai with local co-working witnessed an influx of capital in 8.4%. However, core market vacancy operator, Fountown, leasing 7-9F in 2016, mostly from large domestic levels remain up 2.3 ppts YoY. the Golden Eagle Mall on Nanjing insurance companies looking to (W) Road. Naked Hub is rumoured buy stable income-producing Comparatively weak demand to have leased space in a mall in the assets, especially in the office caused by tight supply in the prime Caojiadu Road area, while Regus is market due to its relative stability. market in the first half of the year, in negotiations to open a 4,000-sq m Many Chinese developers and the loss of many P2P tenants due co-working centre in another mall. investors made headlines with large to government regulations, and purchases of overseas properties increasing competition from the Foreign direct investment stable as in 2016. If the government issues decentralised market saw annual outbound capital flows increase stricter regulations on overseas real core market net take-up fall to Although 2016 was a challenging estate purchases in order to stem 460,000 sq m in 2016. This marks a 02 Briefing |Shanghai office sector February 2017 35% decrease from 2015, when the GRAPH 1 core market recorded approximately Grade A Core Market Supply,STV ChartTake-up EN & Vacancy 2000-Q4/2016 740,000 sq m of net take-up. The non-prime market accounted for a Supply (LHS) Take-up (LHS) Vacancy (RHS) greater percentage of take-up (65%), 900 18% while Pudong remained more active Q4/2016 vacancy 800 16% than Puxi, accounting for 70% of the rates 8.4% total. 700 14% 600 12% The ongoing slowdown of the nation’s economy and the continued 500 10% development of the tertiary sector 400 8% remain the key factors influencing '000 '000 sq m the city’s Grade A office market. 300 6% Demand is largely driven by the 200 4% financial services and IT sectors, which tend to cluster in Pudong. 100 2% Other service related industries, 0 0% in particular retail, media and healthcare, account for the majority Source: Savills Research of demand in Puxi. A number of non- finance companies have continued Page 1 the trend of relocating from Pudong GRAPH 2 to emerging business areas within Core market Grade A office rental indices, Q4/1999-Q4/2016 the inner ring road, such as the South Huangpu and North Bund areas. All Puxi prime Pudong prime Puxi non-prime Pudong non-prime With the continued development 220 of the infrastructure and business environment, new business areas 200 Q2/2010–Q4/2016 are increasingly attracting large 36.7% increase from trough anchor tenants from more developed 180 CBDs who are looking for ways to better control the costs of their office 160 expansion needs. Large enterprises 140 also remained active, acquiring space in projects such as Start Bund Q2 / 1999 = 100 120 Q3/2008–Q2/2010 T1 and UOB Plaza for self-use last 27% decrease year, accounting for 30% of annual 100 net take-up. 80 Rent 60 City-wide average rents rose by 1.1% QoQ and 2.2% YoY in Q4/2016, to RMB8.9 per sq m per day. Source: Savills Research High rents in Lujiazui and strong TABLE 1 rental growth in Zhuyuan helped Selection of leasing transactions, Q4/2016 pull up city-wide rents. In contrast, rental growth in Puxi remains stable, Tenant Project District Area leased (sq m) although discrepancies remain between prime and non-prime Amore Pacific HKRI Taikoo Hui T1 Jing'an 10,500 submarkets.
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