Savills World Research

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 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 , 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 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 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 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. Overall, projects in prime Puxi have continued to attract Goodyear The Centre Xuhui 4,800 strong levels of demand, giving Worley Parsons Mapletree Business City Minhang 2,300 landlords the confidence to raise rents or, at the very least, maintain Hirose Electric Kerry Everbright City Ph3 Zhabei 1,300 rents at their previous levels. Rents in non-prime Puxi have come Covington & Burling LLP Shanghai IFC II Pudong 1,300 under pressure due to the influx of Source: Savills Research

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new supply in these submarkets supply, rental growth is expected newer projects increasingly offer and growing competition from to stagnate over the short term as incentives. Business areas with a decentralised business areas, forcing existing projects lower face rents and greater number of older projects, landlords of existing projects to offer increase fit-out and rent-free periods such as Old Huangpu and , more rental concessions. to attract and retain large anchor should see vacancy levels rise in tenants. However, even under these response. The national real estate industry’s new market conditions, demand for transition from a business to new high-quality buildings will remain The further tightening of regulations value added tax (VAT) in 2016 also strong. towards the peer-to-peer (P2P) increased face and effective rents lending industry affected city-wide in the second half of the year. The Old Huangpu district witnessed vacancy levels, with many such However, while the VAT allocates a an increase in vacancy rates during companies forced to reduce office greater burden of real estate costs the past quarter, following the exit sizes or exit the market entirely. to the tenants, it can be offset as of several key tenants from the However, as a relatively small part of business expenses, keeping overall market, such as Amore Pacific, which the city’s financial services sector, operational costs at the same level relocated from the Old Huangpu the withdrawal of P2P tenants for corporations. At the same time, area to HKRI Taikoo Hui Tower One had a greater impact on certain landlords have increasingly offered at the end of 2016. The trend of submarkets, such as the Hongqiao longer rent-free periods to balance tenants moving from older buildings area, which saw vacancy rates out the new tax system, helping to newly-constructed projects is increase by 4.4 ppts over the year to to lower the price of their tenants’ expected to continue, especially as 10.1%. leases without affecting the values of their assets by restricting rental growth. GRAPH 3 Business district comparison, rent vs. vacancy rate, Submarkets Q3/2016 and Q4/2016 RV CBD EN Due to the influx of new supply in Q3/16 rent (LHS) Q4/16 rent (LHS) Q3/16 vacancy (RHS) Q4/16 vacancy (RHS) Q4/2016, the vacancy rate of the 12 30% Nanjing West Road increased by 4 10.9 11.1 ppts, to 7.2%. This is the highest the 10 25% 10.0 10.2 10.0 10.2 vacancy rate has been in the Nanjing West Road since the entrance of 8 20% 7.8 7.8 7.8 7.8 7.8 7.9 Kerry Centre Phase II Tower 2 and 7.3 7.3 3, Garden Square and Henderson 6 15% 5.9 5.9 688 between 2013 and 2014. After occupancy levels in these projects 4 10% RMB psqm per day stabilised, the vacancy rate in the area fell to 3%, where it has remained 2 5% since the middle of 2015. In the next 0 0% two years, the Nanjing West Road Nanjing Rd Huaihai Rd Lujiazui Old Xujiahui Hongqiao Zhuyuan North CBD is scheduled to receive several (W) (M) Huangpu Station

new projects, including HKRI Taikoo Prime districts Non-prime districts Hui Tower Two, One Museum Place, Source: Savills Research and City Link. In response to new Page 1

TABLE 2 Notable sales transactions, Q4/2016

Total Price Property Location Buyer Usage (RMB mil) (RMB/sq m)

Central Plaza Huangpu 2,414 60,000 V-Capital Lease

ARA Fund Management Century Link Pudong 20,000 74,543 Lease Limited

The Konnect Huangpu 520 51,348 Tianli Holdings Lease

State Development & Star Bund T1 Hongkou 5,288 80,121 Self-use Investment Corporation

Source: Savills Research

04 Briefing |Shanghai office sector February 2017

The Lujiazui CBD, which typically QoQ and 4.3 ppts YoY, ending the With relatively competitive rents records the lowest vacancy levels fourth quarter at 22.8%. Landlords and accommodating landlords, in the city, welcomed the arrival of of several projects with stable new projects in decentralised areas several large projects, including occupancy levels had the confidence have appealed to a growing number , which pushed to ask for higher rents, helping of domestic and multi-national vacancy rates up to an annual to raise the average rent of the companies with expansion needs. high of 6.5% in Q2/2016. With decentralised market to RMB5.5 per Notable relocations from core to strong take-up in new projects in sq m per day, up 2% QoQ and 3.4% decentralised areas in 2016 included the second half of the year, the YoY. Worley Parsons’ lease of 2,300 average vacancy rate of Lujiazui has sq m in Mapletree Business City, continued to slide down, ending the While the strong performance Thyssenkrupp signing 2,300 sq year at approximately 5.9%. The of several business areas m in Hongqiao Vanke Centre, and arrival of new supply in the Lujizazui helped improved overall market AECOM’s move into 6,000 sq m in and Nanjing West Road CBDs had performance, vast differences remain KIC. no noticeable effect on demand between individual submarkets in neighbouring districts, with net depending on the stage of Sales Market take-up levels in the Huaihai Middle development, as well as supply Overview Road, Zhuyuan and the North Station and demand balances. Given the Forty-two office projects, totalling (Zhabei) areas remaining stable. intensification of competition in 725,000 sq m, received pre-sales the decentralised market in 2016, certification in Q4/2016. The total Decentralised market developers in some submarkets have number of office projects to receive With the handover of a number been forced to adopt new strategies, pre-sales certificates in 2016 stood of projects in the Hongqiao such as delaying the handover dates at 97 (2.65 million sq m) at the end of Transportation Hub and World Expo of new projects in order to ensure the quarter, approximately 25% fewer Area delayed until 2017, the city’s higher pre-launch occupancy levels. than the annual number recorded decentralised Grade A office market Moreover, landlords of decentralised in Q4/2015. Only 30 of the projects, received no new supply in Q4/2016, projects continued to utilise a more accounting for less than half of the keeping total stock at 2.22 million flexible combination of lease and total GFA (1.03 million sq m), are sq m. strata-sales strategies, helping located within the middle ring road. maintain net take-up levels despite Decentralised market vacancy the large volumes of new supply. 1.04 million sq m of office space rates decreased by 0.5 of a ppt was transacted in Q4/2016. Annual

TABLE 3 First-hand, strata-title transactions Q4/2016

Transacted Transacted Price Project District GFA(sq m) （RMB per sq m）

Daning Central Plaza Zhabei 1,000 23,231

Hongqiao Zhenro Centre Minhang 3,100 40,459

Xingyue Tech Park Pudong 1,500 31,743

Source: Savills Research

TABLE 4 Key pre-sale supply, Q4/2016

Supply Average asking price Project District (sq m) （RMB per sq m）

Longfor Paradise Walk Minhang 25,080 40,000

Qibao Wanxin Int’l Centre Minhang 40,030 35,000

Orstar City Putuo 38,450 45,000

Source: Savills Research

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city-wide transaction volumes for Limited alternative investment m of new supply in 2017. The bulk 2016 stood at 2.77 million sq m, options continued to place of new supply is expected in the approximately 33% greater than downward pressure on yields, which Hongqiao and Expo areas, as well as 2015. The activity witnessed in the fell by 0.1 of a ppt QoQ to 5.1%, the Qiantan area, which welcomes its office sales market can be attributed while net yields stood at 3.9%. first Grade A office project. With the to the increase in the number of scheduled completion and handover large transactions and the growing Office assets continue to attract of the master-planned Qiantan frequency of landlords in emerging the majority of demand in the city’s business district, the landscape of areas to place their projects on the investment market, accounting for the city’s office market is expected to sales market in order to increase 61% of all transaction considerations change dramatically. occupancy levels. in 2016. With annual supply expected to peak The total consideration for first-hand International investors remain at a new historical level over the next office transactions was RMB43.1 bearish, given concerns of RMB two years, intensifying competition is billion in Q4/2016, with an average devaluations, future supply levels and expected to put continued downward transaction price of RMB41,300 per slowing economic growth. Domestic pressure on rental and occupancy sq m. In 2016, the total consideration investors, developers and large end- levels of existing Grade A projects. for first-hand office transactions was users remain active, chasing core Location is no longer a guarantee RMB97.5 billion, approximately 33% assets in prime areas for mid-to long- for success, as even landlords and greater than 2015, with an average term holds, or seeking alternative developers of high-quality projects in transaction price of RMB35,200 per asset classes which offer higher- core areas will have to provide rental sq m. yielding opportunities. concessions or improve management levels in order to maintain their edge. The above figures include all first- Strata-Sale: hand, strata-title and en-bloc asset Prices, which area based on a basket The growing need of occupiers for deals where property certificates of roughly 40 premium-quality office short-term rentals or more flexible exchanged hands. projects that were analysed on an expansion plans, as well as the un-weighted index basis, remained growth of SMEs and start-ups, will Large Transactions flat at RMB45,097 per sq m. present a new set of challenges and Thirteen major transactions occurred opportunities for traditional office in Q4/2016, for a total consideration One notable project to receive pre- landlords in the future. In order to of RMB42.1 billion, an increase of sales certification in Q4/2016 was capitalise on this trend, existing 190% QoQ. The largest deal was the Orstar City, located in the Zhenru property owners are expected to sale of Century Link by Cheung Kong area of the Putuo District, near increase flexible, shared office to ARA for approximately RMB20 Hutchison Whampoa’s Upper West offerings, leading to more frequent billion. development. Orstar City consists partnerships with co-working space of office blocks, a retail podium and operators.  Large buyers showed a tendency to residential apartments, with a total shop for newer projects in emerging GFA of approximately 200,000 sq m, areas for self-use, such as the with office space over 38,450 sq m. State Development & Investment Corporation’s purchase of Star Bund Market Outlook T1 for RMB5.2 billion, and Red The core office market is forecast Star Mecalline Group’s purchase of to receive approximately 1.3 million Hongqiao R&F Centre for RMB2.1 sq m of new supply in 2017, of billion. which 65% will be located in Puxi. Hongkou’s North Bund business area Co-working operators and projects in particular has a number of notable have also attracted the interest projects in the pipeline, including of investors as a supplement to Shanghai Landmark Centre and Sinar traditional offices. For instance, Mas Centre. These buildings will be Kailong REI sold The Konnect for the first Grade A office projects to be RMB520 million after converting handed over in the the old hotel project into an office since 2012. building and leasing 10,000 sq m to New York-based co-working The decentralised market is expected company WeWork. to receive more than 1.95 million sq

06 Briefing |Shanghai office sector February 2017

Future project Sinar Mas Center

The 320-m Sinar Mas Centre is TABLE 5 scheduled to be handed over in Sinar Mas Center Q2/2017. Located in the North Bund Hongkou District, Dongdaming business area, the project is directly Location Rd/Xinjian Rd connected to Guoji Kequan Metro Station on Line 12, linking it directly Developer Sinar Mas Group to both the Huaihai Middle Road and Handover date Q2/2017 Nanjing West Road CBDs. Xinjian Road

tunnel to the south also connects the Office GFA Approximately 140,000 sq m project to one of the city’s most iconic areas: . Sinar Mas Centre has No. of storeys 5F - 67F a total floor area of 420,000 sq m, which includes 140,000 sq m of Grade A office Typical floor plate Approximately 2,200 sq m

space. The project also has an 110,000 Typical Clear 3.0 m sq m retail podium, and the city’s first ceiling height

W Hotel. Asking rent RMB8.5-11.5 per sq m per day

Source: Savills China Research

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