Briefing Investment July 2018

Image: Bay Valley, Yangpu district SUMMARY Shanghai’s investment market saw only RMB24.2 billion deals concluded in 1H/2018, around half that of 1H/2017, due to a slowdown in transaction volume due to the lack of debt availability and rising costs.

 13 key deals were concluded for a  Shui On Land sold 49.5% of total consideration of RMB15.7 billion the Ruihong Xincheng Project that “Insurance funds were allowed in Q2/2018, down by 34% year-on- comprises of two land plots with a total year (YoY). buildable GFA of 269,000 sq m to Joy to invest in the for-leasing City Property for RMB4.59 billion. In market in large and medium-  The market saw more transactions early July, Shui On Land, in partnership concluded for office properties located with China Pacific Life Insurance and sized cities such as Beijing in decentralised locations with a low Shanghai Yongye Enterprise, acquired and Shanghai. The increasing accommodation value (AV) as there is three land plots in Xintiandi for over a price gap between buyers and sellers RMB13.6 billion. injection of capital will further concerning core assets. grow the sector.” James  Gross yields for Grade A office assets stayed stable at 4.8% in Macdonald, Savills Research Q2/2018, while net yields were around 3.4%. savills.com.cn/research 01 Briefing |Shanghai investment July 2018

Market commentary GRAPH 1 Shanghai’s investment market Number of office transactions by unit price range remained slow in Q2/2018, with 1H/2018 vs.2017 a total consideration of RMB15.7 billion, down by 34% YoY. Outer circle: 1H/2018 Inner circle: 2017 Though office properties located 9% 4% in core areas are considered to be 33% 9% 0-20K 23% more insulated from downward rental 20K-30K 44% pressure, the compressed yields 11% 30K-40K they offer do not make sense for 40K-50K 50K-60K investors, especially when financing 60K-70K over 70K cost increase. Meanwhile, limited 21% 23% available core office properties (RMB per sq m） have also contributed to the low 22% transaction volume of such assets. Many investors have changed Source: Savills Research tack, seeking opportunities in more decentralised office markets as well as in business park areas where per acquired Hongkou Bailian Shopping Sectors and deals sq m valuations are lower and there Mall with plans to convert it into a The second quarter saw 13 key deals are still perceived chances for value rental apartment complex supported concluded for a total consideration of growth. In Q2/2018, IDG Capital by retail amenities. RMB15.7 billion. acquired Bay Valley B7 for RMB726 million and Gopher Asset purchased The year 2018 saw the government’s Office market Qibao Powerlong Building T2 for continued effort to deleverage Market fundamentals RMB452 million. the property sector, including a Five new projects were launched crackdown on M&A loans used onto the core office market in Retail properties are offering more to buy land, a ban on non-bank Q2/2018, adding 426,300 sq m of value-added opportunities and financial institutions from channelling new office space and bringing the remain popular among investors, funds into the property and core Grade A office stock to 8.7 especially international investors infrastructure sectors via entrusted million sq m. Net take-up picked up, who have the expertise to upgrade loans, and restrictions on real estate totalling 369,500 sq m in Q2/2018. and manage retail malls or convert developers from using funds raised The growth in demand was largely retail properties into other asset via international debt for real estate driven by pre-commitments in new types. Such retail properties usually investments or for working capital. supply and strong take-up in Puxi are underperforming but located Unable to access previously plentiful non-prime areas. Strong market in central locations. Five retail sources of financing, some highly absorption offset the pressure from properties that fall in this category leveraged Chinese borrowers are large supply, resulting in stable were transacted in Q2/2018 with a under significant stress, especially vacancy rates at 12.4%. Core market total consideration of RMB4.4 billion. when they are also facing large rents remained flat in Q2/2018 with For example, Nova and InfraRed NF amounts of debt coming due.

TABLE 1 Yields and capital values by sector*, Q2/2018

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% 5.5-6.5% 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% 5.0-6.0%

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 with a clean holding structure owning 100% of the building and assuming 100% occupancy. Capital values refer to the average for the building on an above-ground GFA basis – retail assets will have higher capital values for lower floors.

02 Briefing |Shanghai investment July 2018

rents currently averaging RMB9.0 per Deals the launch of several new projects in sq m per day. Three key deals were concluded the second half of the year. in the office market in Q2/2018, The second quarter saw 563,400 including: Investor sentiment sq m of new office space added to A few international investors with the decentralised market with five - IDG Capital purchased Bay Valley expertise in managing shopping new projects being handed over. B7 from Shanghai SMI Holding malls and converting retail Total decentralised stock, as a for RMB726 million. Bay Valley is properties are interested in acquiring result, was pushed up to 4.1 million located in the New Jiangwan Town underperformed retail properties that sq m by the end of Q2/2018. Due submarket of Yangpu District, and are located in core locations. Such to the large supply, vacancy rates Building 7 has a total GFA of 28,000 investments traditionally offer higher in decentralised areas continued sq m. The building was vacant when yields and face less competition from to rise 1.7 percentage points (ppts) sold. Top Spring purchased Bay domestic capital. in Q2/2018 to 35.5%, the highest Valley A4/C4 and C7 buildings with a level over the last three years. Rents total GFA of around 100,000 sq m for Deals remained flat, averaging RMB5.8 per RMB2.4 billion in Q3/2017. Five key retail deals were concluded sq m per day. in Q2/2018, including: - Gopher Asset purchased Qibao A total of nearly 1.4 million sq m Powerlong Building T2 from - A joint venture of Sunac, Nova, of Grade A office space (including Powerlong Property for RMB452 Metro and Hualing purchased a core and decentralised locations) million. Qibao Powerlong Building portfolio from Honglou Group which is scheduled to launch in 2H/2018. is located in HTH submarket and is included a 90% stake in Shanghai Vacancy rates, as a result, are adjacent to Hangzhong Road Metro Plaza for RMB2.5 billion and Fudu forecasted to rise. Station (Line 10) and Qibao Metro Plaza for RMB700 million. Shanghai Station (Line 9). T2 has a total GFA Plaza is located in Middle Huaihai Investor sentiment of 14,583 sq m. Qibao Powerlong Road with a total saleable GFA Given its market transparency, high Building T3/4/5 have a total GFA of 40,693 sq m from B1 to F6. In liquidity, and comparative ease of of 40,400 sq m and were sold for 2005, Morgan Stanley purchased management, office properties are RMB1.1 billion in Q1/2017. the property for RMB928 million still the most sought-after asset type and refurbished the mall’s interior, for investors. Potential buyers and - Cura Investment acquired Hongqiao renaming the building Infiniti Plaza sellers of core assets continue to World Centre F4-10 with a total before reopening it in late 2007. At have a difference of opinion on the GFA of 9,589 sq m from Greenland the end of 2009, Honglou Group prospects of the market and current Holding for RMB403 million. acquired the mall for RMB1.42 market values. Meanwhile, properties Hongqiao World Centre is located billion and managed to boost its in decentralised areas that offer in HTH submarket next to National occupancy rate to around 90% over higher yields and have more capital Exhibition Centre the past decade. The Sunac/Nova/ value appreciation potential are Metro/Hualing JV plans to convert popular among investors. In addition, Retail market the upper floors of the mall into co- business parks are drawing a lot of Market fundamentals working space with retail facilities investment interest because of the Three new projects launched onto on the lower floors. Fudu Plaza is growing rental projection, which is the market in the Q2/2018, adding located near Yu Garden in Huangpu driven by demand from R&D and a total retail GFA of 314,380 sq District with a total saleable GFA of tech companies and higher yields. m, while two projects completed 16,783 sq m. renovation and upgrading. Vacancy The co-working market is still seeing rates increased by 1 ppt in Q2/2018 - Morgan Stanley purchased the 608 an injection of capital and the to 6.2% in prime retail areas, while Xikang Road project for RMB260 industry is going through rounds of they fell by 0.2 ppts to 6.6% in non- million and Jinkaili Square for consolidation as the market matures. prime retail areas. Overall rent on the RMB430 million. 608 Xikang Road Sino-Ocean Capital and Huarong first floor space increased 0.4% QoQ has four floors with a total GFA of Rongde Asset Management led a to RMB27.9 per sq m per day. 6,662 sq m and is located in Jing’an RMB500 million round of financing in District close to Changping Road Beijing-based flexible office operator New retail and new innovations are Station (Metro Line 7). Jinkaili Square Nashwork that was founded in 2013 expected to stimulate both leasing has five floors with a total GFA of and operates more than 800,000 and consumption demand. However, 10,513 sq m and is located in South sq m of properties across Beijing, overall rent and vacancy rates are Xizang Road, Huangpu District. Tianjin, Shanghai and Shenzhen. expected to be adversely affected by

savills.com.cn/research 03 Briefing |Shanghai investment July 2018

- Nova and InfraRed NF purchased totalling 1.45 million sq m, down Apartments partnered with Far East Hongkou Bailian Shopping Mall 30.1% YoY. Average transaction Horizon to create a RMB10 billion for RMB465 million with plans to prices rebounded by 12.9% QoQ to fund that will acquire land plots for convert the property into a rental RMB49,800 per sq m, an increase of developing for-leasing apartments. apartment complex supported by 4.8% YoY. Moreover, Canada Pension Plan retail amenities. Investment Board (CPPIB) and Citywide high-end residential rents Longfor Group announced an Hotel market remained virtually flat, declining just agreement to jointly invest at least Market fundamentals 0.6% QoQ to an average RMB198.6 US$817 million in building rental The hotel market in first-and second- psm pmth but were up 0.8% YoY. housing projects in China. tier cities remains one of the most Overall vacancy rates fell 1.5 ppts challenging real estate sectors in QoQ. Industrial market China. Shanghai’s five-star market Market fundamentals ended May with Average Daily Rates Investor sentiment The rapid growth of e-commerce (ADRs) of RMB992 and an average Although investors remain interested combined with tight supply in first occupancy rate of 70.7%, while in serviced apartments, there remain and second-tier cities continues to four-star hotels achieved ADRs of a limited number of opportunities draw investors to logistics assets. RMB541 and an average occupancy available for en-bloc sales. Investor Rising demand, together with rate of 69.7%. The revenue per interest in the long-term rental the lack of supply, has resulted available room (RevPar) decreased apartment market continued in increased rents for logistics by 2% and 3% YoY respectively for in Q2/2018 on the back of the properties. five-star and four-star hotels. The government’s sustained support for market saw retail brands such as the sector’s development. Shanghai has been striving Muji and BVLGARI get involved in to develop into an advanced hotel business by promoting their Deals manufacturing centre in response brand image, culture and unique Joy City Property purchased a 49.5% to the government’s Made in China experience. Baidu also cooperates stake in a land project that includes 2025 initiative. Demand is on the with hotels to promote their smart two land plots under the Ruihong rise for manufacturing centres that home devices. Xincheng project from RMB4.59 combine multiple functions under billion. Land plot No.1, with a total one roof, such as manufacturing, Investor sentiment buildable GFA of 110,000 sq m, R&D and logistics. Tesla will establish Interest in purchasing hotels will feature high-end residential its first overseas Gigafactory at located in core areas for the intent apartments while No. 7, with a total Lingang, Shanghai. The wholly of converting them into other buildable GFA of 159,000 sq m, is foreign-owned plant will also be asset classes – mostly for-leasing expected to finish relocating the the largest overseas manufacturing apartments – still remains the main current occupants of the land by investment in China. The lifting of purpose for purchasing hotels in the end of 2018. In the end of 2017, foreign ownership limit is expected to China. Meanwhile, some domestic Shui On Land sold 49.5% stake in pave the way for global companies to developers are seeking opportunities the retail portion with a total saleable set up their own production plants in to rebrand and revitalise hotel GFA of 393,460 sq m in Ruihong Chinese cities. portfolios. Xincheng for RMB3.87 billion to China Life. Data centres have experienced a Deals surge in demand as China continues There were no hotel transactions in The market saw continued to be one of the world’s leading this quarter. Shimao Group unveiled growth in the for-leasing sector. countries for new technology two select service hotel brands, Singaporean sovereign wealth fund developments; in addition, cyber MiniMax Hotel and MiniMax Premier, GIC established a joint venture security regulations require as two “inspirational” hotel brands of with Nova to invest up to RMB4.3 companies to store all Chinese Shimao Star Hotels Group. billion in acquiring, renovating and customers’ data within China. The operating rental apartment projects strong underlying fundamentals of Residential market in major cities in China. In addition, data centres – higher yields and Market fundamentals Shanghai-based co-living operator typically longer lease terms– are New commodity residential supply Harbour Apartments is setting motivating asset owners to redevelop rebounded by 110.5% in Q2/2018 up a US$1 billion fund with Gaw existing properties into data centres. to 1.42 million sq m. First-hand Capital dedicated to buying existing However, the fact that heavy capital commodity residential transaction properties for conversion into for- expenditure needed to set up the volumes increased by 21.4%, leasing apartments. Also, Harbour facilities requires longer investment

04 Briefing |Shanghai investment July 2018

TABLE 2 Key investment deals, Q2/2018

90% of Shanghai Plaza Fudu Plaza Bay Valley B7 Qibao Powerlong Building T2 上海广场90% 股权福都商厦湾谷科技园 B7 七宝宝龙2号楼

138 Middle Huaihai Road, 1688 Guoquan North Road, Location 399 Renmin Road, Huangpu 1399 Xinzhen Road, Minhang Huangpu Yangpu

Date May, 2018 Jun, 2018 Apr, 2018 Q2/2018

Property type Retail Retail Office Office

Transacted price 2,500 700 726 452 (RMB mil)

Sellable GFA 40,693 16,783 28,042 14,583 (sq m)

Seller Honglou Group Honglou Group Shanghai SMI Holding Powerlong Property

JV (Sunac, Nova, Hualing, JV (Sunac, Nova, Hualing, Purchaser IDG Capital Gopher Asset Metro) Metro)

Deal Structure Onshore equity Onshore equity Asset Asset

Hongqiao World Centre 608 Xikang Road Project Jinkaili Square Hongkou Bailian Shopping 虹桥世界中心 4-10层西康路608号项目金开利广场 Mall百联虹口购物中心

1588 Zhuguang Road, 608 Xikang Road, 758-2 South Xizang Road, 699 Tongfeng Road, Location Qingpu Jing’an Huangpu Hongkou

Date Apr, 2018 Q2/2018 Q2/2018 Jun, 2018

Property type Office Retail Retail Retail

Transacted price 403 260 430 465 (RMB mil)

Sellable GFA 9,589 6,662 10,513 31,645 (sq m)

Seller Greenland Individual Individual Ping’an Bank

Purchaser Cura Investment Morgan Stanley Morgan Stanley Nova and InfraRed Nan Fung

Deal Structure Asset Onshore equity Onshore equity Onshore equity

Source: Savills Research

savills.com.cn/research 05 Briefing |Shanghai investment July 2018

timelines might be an issue for some FIGURE 2 short-term funds. Land transaction area and AVs, 2008–1H/2018

Investor sentiment Commercial GFA (LHS) Residential GFA (LHS) Industrial GFA (LHS) Commercial AV (RHS) Residential AV (RHS) Industrial AV (RHS) The market is dominated by a 45 33,000 handful of players, such as GLP 40 30,000 and E-shang, who are responsible 27,000 for most investment deals. These 35 24,000

players typically look for acquisitions 30 m sq per RMB 21,000 of individual assets and development 25 18,000 sites or opportunities for platform equity injections. Properties located 20 15,000 million sq m 12,000 in the satellite cities of Shanghai 15 9,000 are very popular among investors. 10 Overall, the market saw sustained 6,000 5 international demand as well as 3,000 domestic institutional investors’ 0 0 growing appetite for high-quality core logistics assets.

Source: Savills Research Deals Hong Kong-based logistics firm Tigers acquired two-warehouse RMB12,640 per sq m, respectively. The project, comprising a pair of 20 sites with a combined 3,779 sq m There was one for-leasing land sold floor residential towers and a 24 floor in Shanghai in order to increase its in Q2/2018. office building, is located in Qiantan. capacity by 34 percent. This quarter saw an increasing Outlook There are also a couple of funds supply of industrial land as the total Highly capitalised investors, such specifically raised for logistics industrial land sales consideration as insurance companies, SOEs and investment. GLP set up a RMB10 reached RMB1.44 billion in Q2/2018, pension funds are expected to take billion property equity fund in up by 67% QoQ. The supply was up more transactions in the market China to invest in logistics-related focused in Songjiang, Minhang, and in the coming years as financing businesses with a focus on Fengxian districts. remains a challenge for developers companies employing technology and domestic funds. to enhance logistics efficiency. The Market news announcement of the new fund Australia’s largest senior housing Developments tied to the sharing comes three months after GLP provider Lendlease entered the economy, such as co-working and teamed up with China Life to form Chinese market co-living, are expected to continue a US$1.6 billion value-add fund Lendlease, which manages more to draw interest from investors. PEs focused on logistics opportunities in than 70 senior living communities and VCs continue to back these China. In addition, logistics developer totalling 12,500 retirement living units companies in the uncompromising ESR joined with Beijing Properties to with 16,500 residents in Australia, bid to claim market share. set up a US$1 billion offshore fund signed a contract with the Qingpu that would acquire logistics projects government for 50-year land-use Given limited supply and growing in China. rights to develop a RMB1.9 billion demand, the logistics market will senior-living community in Zhujiajiao, remain attractive to many investors. Land market 1 Qingpu. The construction work is Yields of such investments are Total land sale consideration expected to start early next year and expected to continue to compress reached RMB13.9 billion in Q2/2018, provide approximately 900 living as value growth continues to exceed down by 21% YoY. Commodity units. rental growth.  residential and commercial sectors accounted for 40% and HNA offloaded another project 49% of total sales in Q2/2018. HNA offloaded another project Residential2 and commercial AVs in Q2/2018 with the sale of a averaged RMB22,898 per sq m and mixed-use project (currently under

1 Land sales exclude public and economic housing construction by local developer 2 Residential excludes public housing Fusheng Group) for RMB2.9 billion.

06 Briefing |Shanghai investment July 2018

TABLE 3 Key land deals, Q2/2018

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

Yangpu Binjiang Dinghai c2-2a Yangpu Commercial 27,0 01 810 30,000 Investment and Development

Huangpujiang South Xuhui Commercial 76,894 1,961 25,500 163.com (网易） Extension ws5/188s-q-1

Linteng Investment Meilong mhp0-0307/07-03 Minhang Commercial 42,584 429 10,081 (上海林腾投资）

Xinjiangwan n091104/a3-05 Yangpu For lease 84,515 676 8,000 Shanghai City Land

Source: Savills Research

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