Savills China Research Shanghai

Briefing Office sector November 2018

Image: Xuhui ASE SUMMARY Prime areas witnessed office space being handed back to the market in Q3/2018. Location is no longer everything as tenants now have plenty of options and new business areas are maturing.

 Three new projects were launched currently averaging RMB9 per sq m onto the core office market in Q3/2018, per day. “Co-working supply is adding 127,000 sq m of new office space and bringing the core Grade A  There was no new supply in the reaching saturation point in office stock to 8.8 million sq m. decentralised market in Q3/2018. Total decentralised stock remained at 4.1 downtown locations, so future  Net take-up totalled 132,600 sq million sq m by the end of Q3/2018. m in Q3/2018, down 65% from a high Decentralised stock now accounts for new openings are expected base in Q2/2018. over one-third of the market. to extend to decentralised  Demand outstripping new supply resulted in a decline of 0.2  As the market continued to areas and focus on second- percentage points (ppts) in vacancy absorb current stock, vacancy rates rates, to 12.2% in Q3/2018. in decentralised areas fell by 2 ppts in Q3/2018 to 33.8%. However, rents tier cities.” James Macdonald, Savills  Core market rents remained remained flat on an index basis, Research flaton an index basis in Q3/2018, averaging RMB5.8 per sq m per day.

savills.com.cn/research 01 Briefing |Shanghai office sector November 2018

Leasing market vacant. The project was developed Nanjing Road, next to Hines’ One Core Market – Supply, take-up and by Lujiazui Group. Museum Place. The project is currently vacancy vacant as the landlord is considering Three new Grade A office projects - City Link, Nanjing Road (W), Jing’an selling the project en-bloc. were launched onto the core market district in Q3/2018, adding 127,000 sq m Developed by Hutchison Whampoa, Despite these new projects, the of new office space. The city’s core the project is a 24-storey (actual floor) vacancy rate declined further by 0.2 Grade A office stock, as a result, office building in the north of West of a ppt in Q3/2018 to 12.2%, due to increased to 8.8 million sq m by the end of Q3/2018. New projects included: GRAPH 1 Grade A office core market supply, take-up and

- Shimao Tower, Pudong New Area vacancy, 2000-Q3/2018 STV EN The project is located on West Weifang Road, south of the Lujiazui Supply (LHS) Take-up (LHS) Vacancy (RHS) area. The developer, Shimao Group, 1.2 18% relocated its headquarters here from One Lujiazui in Lujiazui and occupies 1.0 15% around 30% of total office space.

0.8 12% - Lujiazui Fuhui Tower, Lujiazui, Pudong New Area 0.6 9% With 42,000 sq m of office space, this project is on Dongchang Road million sq m metro station (line 2) in Lujiazui, 0.4 6% opposite the Pudong Financial Square, which was handed over in 0.2 3% Q2/2018. The project consists of

three for-lease office buildings, one 0.0 0% of which has been wholly leased out 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Q3

to WeWork while the other two are Source: Savills Research Page 1

TABLE 1 Grade A office core market performance, Q3/2018

Supply (sq m) Take-up (sq m) Vacancy Stock (sq m)

Pudong 78,000 49,400 10.9% 4,248,600

Puxi 49,000 83,300 13.4% 4,558,000

All 127,000 132,600 12.2% 8,806,600

Source: Savills Research

TABLE 2 Notable leasing transactions, Q3/2018

Tenant EN Tenant industry Project Business district Leased area (sq m)

Chanel Retail and trade HKRI Taikoo Hui Nanjing Road (W) 7,000

Business centres and WeWork The Centre Huaihai Road (M) 6,800 co-working spaces

Dyson Retail and trade China Overseas Int’l Centre South Huangpu 4,200

J.K Life Insurance Finance One Museum Place Nanjing Road (W) 2,700

Franklin Templeton Finance Shanghai IFC II Lujiazui 2,500 Sealand Fund

Source: Savills Research

02 Briefing |Shanghai office sector November 2018

strong demand. Net take-up totalled accounting for 24% of total recorded Despite a limited number of deals, 132,600 sq m in Q3/2018, down 65% take-up in Q3/2018. Leasing co-working operators tended to take from a high base in Q2/2018, but activities were focused mostly in up relatively large amounts of office still a strong performance in terms of Pudong, with notable deals including: space (generally two to three floors) the history of the market. Non-prime Franklin Templeton Sealand Fund in Grade A office buildings. Distrii areas experienced strong demand, renewing 2,500 sq m in IFC phase 2 took up 6,000 sq m of office space while prime areas (Lujiazui, West in Lujiazui; and Aegon THTF leasing in Brick Tower (previously known as Nanjing Road and Middle Huaihai one whole floor in Century Link in Oriental Financial Centre) in Lujiazui. Road) all recorded office space Zhuyuan. Kr Space, one of the most aggressive being handed back to the market, operators in the sector, leased two an indicator of companies relocating Business centres and co-working whole floors or 5,200 sq m in Infinitus to newer and more cost-efficient spaces, one of the fastest growing Tower in the Middle Huaihai Road (M) buildings away from the city centre. sectors in 2018, and the retail and area. trade category accounted for an The financial sector continued equivalent proportion (21%) of Foreign companies accounted for to dominate core office demand, leasing activity during Q3/2018. half of core take-up in Q3/2018. However, leasing activities in decentralised areas were dominated GRAPH 2 by domestic companies, accounting Core Grade A office transactions* by industry, for 64% of total decentralised take- Q3/2018 up tracked during the same period. Core market – rent Others Core market rents remained flat on 11% an index basis in Q3/2018, with rents IT 5% Finance currently averaging RMB9 per sq m 24% per day, up 0.5% on a year-on-year

Manufacturing (YoY) basis. 9% Prime Pudong and Puxi rents Commercial & professional services averaged RMB11.3 and RMB10.3 9% Business centres & co- per sq m per day in Q3/2018, working spaces 21% respectively, while non-prime Pudong and Puxi rents averaged RMB8.2

Retail & trade and RMB7.5 per sq m per day, 21% respectively. Decentralised market Source: Savills Research There was no new supply in the decentralised market in Q3/2018. GRAPH 3 Total decentralised stock remained Grade A office core market rental indices, at 4.1 million sq m by the end of Q1/1999-Q3/2018 Q3/2018. However, Q4/2018 is scheduled to receive as much as All Puxi prime Pudong prime Puxi non-prime Pudong non-prime 376,100 sq m of new office space, 220 with new projects including CIFI’s 200 Office Park in Xinzhuang, as well as Q2/2010–Q3/2018 38.8% increase from trough Guohua Plaza in Wujiaochang. 180 As the market continued to absorb 160 current stock, vacancy rates in 140 decentralised areas fell by two ppts in Q3/2018 to 33.8%. All of the 120 decentralised locations recorded Q2 / 1999100 Q2 / = Q3/2008–Q2/2010 36.8% decrease from peak decreases in vacancies. However, 100 rents have remained flat on an index 80 basis at around RMB5.8 per sq m per day for 18 months (see Figure 5). 60 With the market still maturing, there is limited scope for rental increases.

Source: Savills Research

savills.com.cn/research 03 Briefing |Shanghai office sector November 2018

Decentralised market take-up totalled GRAPH 4 80,600 sq m in Q3/2018, down from Rent and vacancy by business district, Q2/2018 vs a high base in Q2/2018, which was Q3/2018 RV CBD EN primarily a result of pre-commitments Q2/18 rent (LHS) Q3/18 rent (LHS) in new projects. Manufacturing and Q2/18 vacancy (RHS) Q3/18 vacancy (RHS) professional services sectors took 12 50%

the biggest share of tracked deals, 11.311.3

accounting for 22% and 21%, 10 10.310.3 10.310.3 40% respectively. Master-planned areas such as Qiantan and Hongqiao 8 30% 8.2 8.2 8.1 8.1 8.1 8.1 Transportation Hub (HTH) remained 7.9 7.9 7.2 7.2 7.1 7.1 particularly attractive to occupiers. 6 6.6 6.6 20% Notable deals included Qoros, a 5.8 5.8 RMB psm per day domestic automobile manufacturing 4 10% company, taking up 10,000 sq m of office space in Green Valley in 2 0% HTH, and Cadence, an American IT company, taking up 12,000 sq m in World Trade Centre in Qiantan.

Prime areas Non-prime areas Sales market Source: Savills Research En-bloc Page 1 The en-bloc office investment GRAPH 4 market remained slow with a total Grade A office decentralised market, consideration of only RMB5.2 billion Rental index (LHS) Vacancy rate (RHS) in Q3/2018. Q3/2016-Q3/2018 135 40%

Investors are showing concerns that the negative impact from a variety 130 35% of factors—oversupply, the US- China trade war, a slowing domestic 125 30% economy and financial de-risking— could result in slower lease take-up and a downward trend in rents in the 120 25% Q3/ Q3/ 2009 = 100 office market. Business parks are still drawing investment interest because 115 20% of their growing rental projections, which are driven by demand from R&D and tech companies. But tough 110 15% credit conditions are making it hard for domestic funds to secure deals, Source: Savills Research thus giving international investors more opportunities since they face GRAPH 6 less competition from domestic Decentralised Grade A office transactions by investors. Generally speaking, industry, Q3/2018 international pension funds and sovereign wealth funds (SWFs) have Business centres & Others co-working spaces 5% an interest in core assets given their 4%

long investment cycles while PE Healthcare funds remain interested in platform 5% investments and value-added Manufacturing 22% opportunities. Finance 13% Yields remained stable in Q3/2018, while the NOI yield was Commercial & approximately 3.4%. professional services 21% Transportation Market outlook 15% A total of 784,000 sq m of Grade A office space (including core and IT decentralised locations) is scheduled 15% to launch in Q4/2018. Future projects Source: Savills Research

04 Briefing |Shanghai office sector November 2018

include the 268,300 sq m of office sustained growth and generate new prices, especially in the early stages space in the Shanghai International demand for office space. Microsoft, of leasing promotions. Financial Centre in Pudong’s Amazon, Alibaba and several other Zhuyuan area. However, the large tech giants have recently announced More developers and investors are volume will have a very limited their intentions to establish artificial becoming cautious about the future impact on the overall vacancy rate as intelligence (AI) innovation centres market. They are looking to pay nearly 90% of the space is planned and research institutions in the city. down debt, and are therefore looking for self-use. to crystallise the capital value growth Judging from the looming new they’ve realised in previous years, a Given the big support from the supply, Shanghai office rents are move that could potentially benefit government, new economy unlikely to increase in the next 12 the sales market.  industries—such as IT and new months. Large-space occupiers will energy vehicles—are likely to see have more room to bargain on rental

TABLE 3 Notable en-bloc sales deals, Q3/2018

Total value Project District Buyer Usage (RMB mil)

Alpha Investment Partners and Bay Valley C6 Yangpu 554 Lease Allianz Insurance

Crystal Plaza one building Pudong 1,517 COMAC Partial self-use

Greenland Jinchuang Building Changning 908 N/A Partial self-use

Poly Greenland Plaza one Yangpu 850 N/A Partial self-use building

Source: Savills Research

Project Focus Shimao Tower (世茂大厦)

Shimao Tower is a new Grade A office project handed over in Q3/2018. The project is located at Location Weifang Road (W), Pudong the intersection of Weifang Road (W) and Pucheng Road in Pudong New Area. South of Lujiazui, the Developer Shimao Group project is 15 minutes’ walking distance to the nearest metro (Shangcheng Road, Line 9), and a Handover date Q3/2018 50-minute drive to Pudong International Airport. Office GFA 36,000 sq m Developed and owned by Shimao Group, the Typical floor project consists of a 27-storey (nominal floor) 1,500-1,800 sq m plate office building and 31,000 sq m of retail space, Typical clear which is scheduled to open on 31 December Approx. 2.9 m ceiling height 2018. The developer, Shimao Group, relocated its Starting from RMB9 per sq m headquarters here from One Lujiazui in Lujiazui Asking rent per day and occupies around 30% of total office space. Management Asking rents started from RMB9 per sq m per day RMB36 per sq m per month fees in Q3/2018, while management fees were priced at Management RMB36 per sq m per month. Shimao Group company

Source: Savills Research

savills.com.cn/research 05 Briefing |Shanghai office sector November 2018

Definitions

Core markets: Prime and non-prime markets. - Prime markets: Nanjing Road (W), Huaihai Road (M), Lujiazui. - Non-prime markets: Old Huangpu, South Huangpu, Hongqiao, North Station, North Bund, Zhuyuan, Xujiahui.

Decentralised markets: All areas outside of the core markets including: Hongqiao Transportation Hub (HTH), Century Park, Former Expo, Yaohua Pujiang, Qiantan, Xuhui Bingjiang, Minhang, Caojiadu, Zhenru, Wujiachang.

Rent: Achievable effective rents for a 500-sq m unit in the mid-zone of an office building signed for a three-year lease.

Rental index: A reflection of rental movement calculated upon a basket of projects. Notes

Rents are collected six months after project launch.

Basket of monitored projects includes self-use for vacancy rate calculation purposes.

Please contact us for further information Research Commercial

James Macdonald Cary Zheng Peter Sheng Senior Director Senior Director Director China Central China Shanghai +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 [email protected] [email protected] [email protected]

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