Something Is Brewing in the City of Shanghai

COLLIERS RADAR BUSINESS PARK | RESEARCH | EAST CHINA | 24 MARCH 2020

Yihong Song Senior Manager | Research | East China +86 21 6141 3508 [email protected] SOMETHING IS BREWING IN Peng Jiang Associate Director | Research | East China +86 21 6141 3623 [email protected] THE CITY OF SHANGHAI Opportunities and market trends that reshape Shanghai business parks Candice Yang Senior Analyst | Research | East China +86 21 6141 4308 [email protected] COLLIERS RADAR BUSINESS PARK | RESEARCH | EAST CHINA | 24 MARCH 2020

Summary & Recommendations 59% of net Star Board, China’s Being a global centre of innovation is an important strategic mission for Shanghai, absorption NASDAQ as it provides a foundation for the city’s technology R&D centres and headquarters During 2018-2019, software and IT services, As of February 2020, Shanghai of advanced industries. To better highlight electronics and telecommunication expanded hosted 14 STAR-listed companies that focused opportunities in Shanghai’s business park rapidly in Shanghai business parks, together on three fields including integrated circuits (BPs) market, Colliers has redefined BPs accounting for 59% of total net absorption in (IC), computers and biopharmaceuticals. Shanghai business parks. T Shanghai’s STAR-listed companies are all into three segments, namely the Core BP headquartered in business parks. submarket, the Emerging BP submarket and Single BP projects. Based on our new definitions, we recommend: > Government-backed developers Sprinting with Three market should plan value-added amenities at launch and continuously invest in the a CAGR of 21% segments improvement of public facilities and Driven by the expansion of the metro Colliers has redefined Shanghai business parks services to remain competitive. network and the government’s initiative to into three segments, expanding our coverage boost industrial development on the outskirts beyond the Core BPs to include Emerging BPs > Investors should also look at of Shanghai, stock in Emerging BPs expanded and Single BPs, providing a clearer picture of investment opportunities in emerging at a CAGR of 21% in the past decade, much future growth and opportunities. Details of our business park submarkets to best higher than Core BPs’ 10% growth. methodology are on page 10. capture long term gains. Business parks are a growing sector with limited Business parks play a significant role in Shanghai’s transition to a global centre of innovation by hosting downside, as the sites are government most of the city’s advanced industry headquarters and technology enterprises. During the past decade, planned and regulated to attract talent Shanghai business parks have grown their landscape rapidly as well as improved their amenities and and businesses, which should help lift services. Meanwhile, the electronics hardware, pharmaceuticals and TMT sectors have actively expanded property values. in Shanghai’s BPs, have shown resilient demand during the recent outbreak of COVID-19, and should support Shanghai’s industry transformation in the long run. Therefore, we delve deeper into the trends > Tenants looking for office space should that reshaped Shanghai business parks and developed a new framework to define the current market, in consider business parks in order to order to better capture the upcoming opportunities in the next wave of innovation. benefit from the clustering effect and favorable government policies Yihong Song available. Senior Manager Research | East China

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TRENDS RECOMMENDATIONS

Clustering Effect > Major business park submarkets in Shanghai are Government-Backed Developers housing industry leaders that attract businesses > Integrate value-add amenities at the preliminary on their value chains and foster industry stage of district planning and invest in continuous clusters. improvement of the public facilities and services, An Expanding Landscape in order to promote the value of the business park’s whole neighborhood. > With the expansion of the metro network over the past decade, business parks on Shanghai’s > Work closely with the Business Park Management outskirts grew rapidly with a large number of Committee to attract tenants, striving to appeal premium new completions. to sectors in line with the district’s industrial plan.

Improved Amenities and Service > Provide tenants with policy incentives and full- scope services, including SMEs and start-ups, > With government-backed development, state which require more support from the government. owned developers intensively invested in the improvement of public facilities and services throughout whole business park areas. Developers / Investors > In the due diligence phase, take into consideration the potential of the whole business park neighbourhood regarding the improvement REDEFINED BP LANDSCAPE of public facilities and amenities. > Look at opportunities in the Emerging submarkets New Criteria > Colliers developed twelve new criteria to to capture long-term returns, driven by the evaluate a business park’s competitiveness in continuing maturity and improvement of capturing advanced industry and the capabilities supporting facilities and amenities. to ensure persistent amenity and service improvement. More details on page 10. Tenants > While looking for office space consider business Three Business Park Segments parks which benefit from favourable government > Colliers’ new definition expanded the business policies and industrial incentives. park landscape to include Emerging BP submarkets and Single BP projects, providing a > Focus on industry clusters when considering clearer picture of future growth and business park options to be close to upstream and opportunities. downstream companies.

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Figure 1: Major science corridors in YRD and added value & SHANGHAI BUSINESS PARKS: LEADING GDP proportions of service sectors in YRD major cities, H1 2019 REGIONAL ECONOMIC TRANSFORMATION Driving YRD’s economic and technological transformation The newly released Yangtze River Delta (YRD) Master Plan from the State Council in Nanjing December 2019 pins Shanghai to lead the region’s technology innovation, in part by Hefei Shanghai-Nanjing-Hefei cooperating with surrounding major cities that are connected by highways and high-speed Sci-Tech Corridor rails to form sci-tech city clusters. Under the proposals, two major science corridors would Suzhou Wuhu stem from Shanghai, namely the G60 Sci-tech Corridor and Shanghai-Nanjing-Hefei Sci- G60 Shanghai Technology Huzhou tech Corridor, planned as a new regional technology cluster, with a geographic Corridor Xuancheng concentration of interconnected companies, institutions and supply chains. Jiaxing Shanghai business parks are home to most of the city’s technology enterprises, R&D Hangzhou G60 centres, and promising tech startups, forming sci-tech hubs that lead the regional Technology technology innovation. They also house many headquarters which play a key role in Shanghai Corridor business decision-making, regional resource allocation and integration, and drive the Jiangsu Province Zhejiang Province Jinhua regional economic transformation. Anhui Province

Realizing Shanghai's vision: a global innovation centre Added value of service sectors GDP proportion 71% 64% The Shanghai Master Plan 2035 states the city’s vision of becoming a global centre of 1,500 62% 52% 80% science and technology innovation, with three major tasks: 1) enhancing technology and 1,000 60% 40% innovation to support the city’s economic transformation; 2) to foster advanced 500 1,167 448 415 194 20% manufacturing business clusters and empower traditional industries; and 3) to lift total Billion RMB 0 0% R&D expenditures to 5.5% of Shanghai’s GDP by 2035. Since R&D and business innovation Shanghai Hangzhou Nanjing Hefei activities often take place in business parks, the continuous improvement of amenities and Source: Shanghai, Hangzhou, Nanjing, Hefei Bureau of Statistics services in Shanghai’s business parks is key to succeeding in the master plan’s goals. Figure 2: R&D expenditures as a percent of Shanghai GDP Supporting STAR board by housing listed entities 6% 4%

By Feb. 2020, Shanghai hosts 14 companies on China’s fast-growing sci-tech stock 5.5% exchange, the STAR board. This is the second largest number of companies after Beijing. : 2%

Shanghai’s STAR-listed companies are all headquartered in business parks (see figure 3)

Target

3.1% 2.5% 2.8% 2.8% 3.3% 3.5% 3.6% 3.7% 3.7% 3.9% 4.2% including Zhangjiang, Jinqiao, Caohejing, Kangqiao, Zizhu, Yangpu and Songjiang. 0% Shanghai’s STAR-listed entities focus on three fields, semiconductor and integrated circuit 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2035 (IC) manufacturing, computer engineering and biopharmaceuticals. Source: Public information, Colliers International

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Figure 3: Shanghai STAR-listed companies by sector THREE TRENDS RESHAPING Shanghai’s Industry Company Business Park share of total SHANGHAI BUSINESS PARKS AMEC Jinqiao Montage Technology Caohejing Trend 1. Shanghai business parks: the clustering effect Espressif Zhangjiang 7 out of 13 Major business park submarkets in Shanghai are housing industry leaders Semiconductor Anji Microelectronics Jinqiao, Zhangjiang (53.8%) that attract businesses on their value chains and foster industry clusters. For and Integrated Amlogic Zhangjiang example, Zhangjiang has fostered industry clusters of IT, pharmaceuticals and Circuit Giantec Semiconductor Zhangjiang integrated circuits, and houses several Fortune Global 500 companies in Bright Power Semiconductor Zhangjiang these fields, including IBM, Lenovo, SAP, Novartis, and Roche. Caohejing, on Primeton Zhangjiang the other hand, has mature microelectronics, new materials, biomedicine 3 out of 17 Ucloud Yangpu (17.6%) and automotive clusters, attracting leading enterprises such as Tencent, Computers Friendess Zizhu Cisco, Philips, and 3M. Endovastec Kangqiao During 2018 to 2019, led by Huawei, Tencent, Bytedanceand SenseTime, the Shen Lian Biomedical Zizhu 4 out of 18 electronics hardware and TMT sectors actively expanded in Shanghai BPs, with Biopharma- (22.2%) Medicilon Zhangjiang a significant leap in their net take-up. As one of Shanghai’s strategic industries, ceuticals Haohai Biological Technology Songjiang the pharmaceutical sector also expanded substantially. These sectors are Source: Public information, Colliers International showing resilient demand during the recent outbreak of COVID-19, and should Figure 4: Advanced industries congregate in major Shanghai business parks support Shanghai’sindustry transformation in the long-run.

Zhangjiang Caohejing Jinqiao Figure 5: Net absorption by sector in Shanghai business parks Software and IT services Electronics Telecommunication IT Electronics Automobile and auto parts Biopharmaceutical Advanced manufacturing Others Pharmaceuticals New material Pillar Digital Information industries Automobile and Pharmaceuticals 23% auto parts Household Advanced Appliances Civil aviation manufacturing 46% 46% Pharmaceutical 7% No. of Fortune 11% Global 500 134 84 52 9% 6% 15% No. of regional 50+ 28 28 8% 8% MNC headquarters 7% 9% 17% IBM, Lenovo, Cisco, Tencent, Huawei, China 10% T-Head, General Sense Time, Mobile, GM, 7% Electric Company, Bytedance, 3M, Siemens, Sharp, Key Tenants 21% 23% 27% Roche, Novartis, Philips, Emersion, Toshiba, Volvo, AstraZeneca， Johnson & Johnson, Jaguar Land Rover, COMAC MSD Bayer 2014-2015 2016-2017 2018-2019 Source: Public information, Colliers International Source: Colliers International

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Case Study: Caohejing Figure 6: Tenant mix of Caohejing Modern Service Complex,Source: Public as of information, 2019 year Colliers-end International Caohejing is a congregation of advanced technologies Technology Others , Technology Located in the centre of Caohejing High-tech Park, the Modern Others , Service, 171 Service, Service Complex area (see figure 7) covers a total land area of 39% 29% 108 230,000 sq metres (2.48 million sq feet) and has a total office stock of over 800,000 sq metres (8.61 million sq feet). As one of Caohejing’s key projects, the Modern Service Complex accommodates industry leaders such as Tencent, MSD, By leased area By number of Emerson and Micron Semiconductor as key tenants, attracting tenants similar businesses and their supply chains to relocate nearby. Advanced Advanced This is evidenced by the tenant profile of this area. The four Manufacturing, Manufacturing, leading industries combined, which include technology 14% services, advanced manufacturing, electronics and medical and Medical & Health, Electronics , 39 Medical & Health, Electronics , health, account for over half of total leased area and number 7% 11% 14 29 of registered companies. Source: Colliers International

Figure 7: Anchor tenants in Caohejing Modern Service Complex

Technology Service Electronics 1 1 Byte Dance 1 Quectel 2 360 2 Cisco 7 2 3 Tencent 3 Inventec 2 4 Sense Time 4 Jabil Circuit 8 3 3 1 5 58.Com 5 TEL 5 7 8 3 4 6 WeDoctor 6 Micron 4 7 Partner X 7 Avnet 8 Lilith Game 1 2 Medical & Health 1 4 6 3 Advanced Manufacturing 1 1 Johnson & Johnson 2 6 Fosun pharma 7 5 1 3M 2 4 Henlius 5 2 Emersion 3 2 MSD 5 6 3 Thyssenkrupp 4 Ossur Asia 4 Rockwell 5 5 Honeywell Automobile 6 Philips 7 Danfoss 1 NIO 8 MTS 2 PSA Source: Public information, Colliers International 6 COLLIERS RADAR BUSINESS PARK | RESEARCH | EAST CHINA | 24 MARCH 2020

Trend 2. How infrastructure facilitates expansion Figure 8: Shanghai metro network and major business parks

Shanghai has been developing an efficient urban transportation system, 11 7 1 3 especially the metro network. This has included running metro lines to the 6 suburbs, where most business parks are located, fundamentally improving 10 8 Waigaoqiao their access. The buildout of public transport has increased companies’ Taopu & Shibei willingness to occupy space in previously far flung BPs. This is especially Nanda Jinqiao true for established enterprises and MNCs. 11 Jiading 14 9 The expansion of the metro network has led to business park development 14 13 further from the city centre. In the past decade, the Emerging submarket’s Linkong stock grew at a CAGR of 21%, much higher than the Core submarket’s Zhangjiang 2 CAGR of 10%. Emerging business parks growing rapidly with premium 2 13 projects benefiting from increasing infrastructure include Pujiang, M 10 Songjiang, Zhoukang, Jiading and Taopu & Nanda (see figure 8). 17 Caohejing 16 12 1 Zhoukang Figure 10: New supply of Emerging submarkets, 2009-2019 Songjiang Pujiang Pujiang Waigaoqiao Zizhu Jiading 700 Songjiang Zhoukang Taopu&Nanda 9 8

600 15 Zizhu 18 162 Core business park 5 Metro lines in operation before 2009 Emerging business park 5 Metro lines in operation between 2009-2019 500 Source: Public information, Colliers International Metro lines under construction Figure 9: Total stock and new supply of Core and Emerging submarkets m 400 180

sq Core submarkets Stock at the end of 2008 New supply in 2009-2019 2008-2019 CAGR 18 Emerging submarkets 300 110 Stock at the end of 2008 New supply in 2009-2019 2008-2019 CAGR

63 Thousand 6,000 25% 181 200 40 25 84 20% 95 147 240 60 137 4,000 70 15% 100 40 195 74 40 10%

Thousand sq m sq Thousand 2,000 114 70 50 75 87 90 82 86 5% 47 46 15 27 - 0 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Core Submarkets Emerging Submarkets Source: Colliers International Source: Colliers International 7 COLLIERS RADAR BUSINESS PARK | RESEARCH | EAST CHINA | 24 MARCH 2020

Trend 3. Successful Figure 11: Key players and their responsibility in development and operation of business parks government and private Business park management committee industry collaboration (government) Business parks in China are planned, • Policy development and implementation developed and managed by a Business • Regional preliminary Park Management Committee and a planning Business park government-backed developer. This is development

Tax contribution and • Development and

different from Grade A office buildings economic growth operation supervision administrator which are mainly developed by private • Business enticement developers. The Business Park Developer / Investor Management Committee oversees • Project development Government-backed policy development and decision- • Project operation developer making, and the government-backed • Regional planning developer is responsible for • Project development developing and operating the park, services Government • Project operation the maintenance and improvement of • Amenity and service amenities and services as well as continuous improvement complying with government planning. This development and management model provides high-quality services and amenities that are in line with the Tenants Source: Colliers International needs of target tenants.

Figure 12: Business park occupiers benefitting from surrounding amenities Business park supports occupiers with… Hardware Software

Infrastructure Business Lifestyle Government Financial Corporate service service operation service • Transportation • Hotels • Shopping centers facilities • Convention and • Cafeteria • Policy making and • Equity financing • Agency services • Energy facilities exhibition centers • Recreation centers implementation • Debt financing • Business advisory • Communication • Incubators • Housing • Administration • IPO services • Legal advisory facilities • Product testing • School and services • Other services • Financial advisory • Public environment centers Education • Industry • Technology • Public space • Financial • Hospital and clinics conferences services • Smart technology Institutions • Resource platform • Talent services application • Information services Source: Colliers International 8 COLLIERS RADAR BUSINESS PARK | RESEARCH | EAST CHINA | 24 MARCH 2020

Case Study: Zhangjiang Central Zone and Taopu Smart City Figure 13: Amenities of Taopu Smart City As a key part of Zhangjiang Sci-City, Zhangjiang Central Zone houses university and research institutes to promote the collaboration Residential between universities and enterprises, as well as various types of service facilities such as incubators, conference and exhibition R&D Complex centres, an art centre, library and shopping mall to provide Office & Retail Shanghai occupiers with full-scope amenities (see Figure 14). Office & Retail Thomas Central Park School In Taopu Smart City, value-add amenities were included in the preliminary stages of district planning. The comprehensive plan Retail focuses on mixed-use development with green space at the centre. Hotel Rental apartment The mixed-use plots integrate offices with R&D centres with Research & design, Office & Retail accompanying retail, leisure and other amenities providing a office and retail welcoming atmosphere. Taopu Smart City also provides 0 400m residential buildings and rental apartments, to promote a healthy work-life balance. Source: Lingang Group, Public information, Colliers International

Figure 14：Amenities of Zhangjiang Central Zone An AI-themed A premium venue for business park with international science immersive and technology forums, experience. conferences and A green space with a exhibitions. library, an art centre, a Science Hall performing arts centre, AIsland recreational facilities and green belt.

Future Park

Shanghai National Centre Advanced for Protein INNOCAMP Research Science Institute Zhongke Road An innovation platform carrying Science Gate many incubators such as Zhangjiang Multinational Joint Incubation A premium twin-tower office Platform, Zhangjiang Venture Shanghai Tech project under planning stage, Workshop and Alibaba University completion planned in 2024. Innovation Centre. Jianping Experimental Middle School Greenland 0 600m Being Fun Plaza Source: Public information, Colliers International

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THREE BP SUBMARKETS HIGHLIGHT FUTURE OPPORTUNITIES New criteria for business park market segmentation

Colliers used the following framework to classify business parks into three include the Emerging BP submarket and Single BP projects. Business parks key segments, namely the prime Core BP submarket, the Emerging BP are segmented based on the criteria as listed in Figure 15. Core BP submarket and the Single BP projects. The four main criteria include location submarkets should include most of the criteria as they are already mature and size, real estate and supporting amenities, occupiers’ considerations, with full amenities. Emerging BP submarkets should meet specific sub- and developers’ objectives. These four main criteria include various sub- criteria including consistent supply in the next five years, which ensures Colliers’ new criteria to objectively evaluate a business park’s competitiveness in sufficient supply to accommodate fast growing industries. It is worth noting framework, capturing tenants from advanced industries, fostering clusters, and the that since many BP properties are state-owned, tenants can conveniently redefining the likelihood of continual amenity and service improvements. expand since they need to negotiate with just one entity, the government- back developer, regarding their expansion plans. three business This four criteria framework expanded our business park landscape to park segments, allows investors Figure 15: Colliers’ framework of Shanghai business park redefinition and developers to Core Emerging Single BP Main criteria Rational Sub-criteria objectively BP BP projects evaluate a BPs should be separate from the Main City Area (Inside Suburban Ring Road) manufacturing and logistic parks business park’s outside the suburban ring with Decentralized Area (Inside Outer Ring Road) competitiveness enough space to accommodate and opportunities Location and Size industry clusters. A sizable development cluster (2 sq km and above) The area is connected by subway or light rail line with stations within 15min BPs should have great accessibility walk and amenities in order to attract enterprises while providing various There is a healthy retail and restaurant presence in the area property types to fit with tenants’ Real Estate and needs for office and R&D facilities. Apart from office and retail, buildings can support production and R&D Supporting Amenities functions BPs should have long-term Landlords try to attract occupiers in industries with higher tax output, which industrial development plans and also effects the potential for leasing incentives provide tax incentives and industry subsidies in order to attract The area has clear and easily accessible tax incentives and industry subsidies Occupiers’ enterprises and foster industry The area has a clear industry positioning and cluster of prestigious Considerations clusters. enterprises (eg. Top 30 companies in their sector) There is a lead entity controlling the main development and planning, with BP development administrator enough authority to affect the masterplan, positioning and supply balance of should lead the development and the area management of BPs while continuously improving park-wide There is a lead entity that has the motivation for the continuous Developers' Objective public facilities and services, improvement of the public facilities/services of the area promoting the overall value the BP. There is consistent building supply in the next five years Source: Colliers International 10 COLLIERS RADAR BUSINESS PARK | RESEARCH | EAST CHINA | 24 MARCH 2020

Classifying business parks into Figure 16: Location of Core BP, Emerging BP and Single BP project submarkets three segments under new criteria Following our new definitions, Shanghai’s business park market is segmented into five Core BP submarkets, seven Emerging BP submarkets and seven Single BP projects (see Figure 16). Shanghai Bay Valley The five Core BP submarkets are Waigaoqiao Zhangjiang, Caohejing, Jinqiao, Linkong Baoshan Innovation Galaxy and Shibei, whose combined stock Taopu&nanda Shibei accounts for 73% of Shanghai’s BP market Changyang total. As first-generation business parks, Jiading Campus SMV they possess excellent locations, sufficient B Link Jinqiao stock of premium projects and massive government policy support. These parks, therefore, fostered mature industry Linkong clusters and attract many leading LJZ Software corporations. Park Zhangjiang Compared to the Core BP submarkets, the Emerging BP submarkets are newer, and Caohejing some are still transitioning from traditional manufacturing sites to hubs that are more connected to the YRD region’s technology Zhoukang innovation. With enough land for future Songjiang Beiyang AI Town development, the Emerging BP submarkets are well positioned to accommodate Pujiang future trends while enhancing their competitiveness in attracting leading advanced industries. Core BP Submarket Zizhu Emerging BP Submarket Single BP project 0 5 kilometers

Source: Colliers International

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Figure 17: Stock, average rent and vacancy rate by submarket, end-2019 Demand in both Core and Emerging BP submarkets have remained robust over Stock of Core BP Submarket Stock of Emerging BP Submarket Vacancy Rate Rent (RMB/sqm/day) the past decade, while Core submarkets saw more stable vacancy rates compared 3,000 6.00 to Emerging submarkets since the latter 5.00 2,500 4.59 5.00 have a relatively small stock and the m 4.13 4.16 vacancy rate was more likely to fluctuate sq 2,000 3.53 4.00 with the continuous supply influx. 3.17 2.91 2.81 2.46 Both Core and Emerging submarkets 1,500 2.42 2.38 60.9%3.00

To track and show have seen continuous rental growth over Thousand the market trend 1,000 2.00 the past decade. The average rent in 25.8% 29.5% 25.4% in the most 20.4% 21.4% Emerging submarkets remains at around 500 15.9% 13.8% 14.9% 14.2% 1.00

8.6% 60% of Core submarkets. By the end of

2,895 2,081 1,549 1,286

626 818 537 292 256 130 comprehensive 900 and accurate way, 0 0.00 2019, the average rent for Core please watch for submarkets was RMB4.39 (USD0.63) per sq meter per day, while rent in Emerging Colliers’ next submarkets were RM2.53 (USD0.36) per business park sq meter per day. update detailing Source: Colliers International specific Figure 18: Future supply by BP segment, 2020-2024 opportunities Sufficient new supply for next wave of innovation available in the Pujiang Zizhu Through 2020-2024, 4.74 million sq meters (51 million sq feet) of new Waigaoqiao 5% 3% 1% Core and Emerging supply is scheduled to enter the business park market in Shanghai, of BP submarkets. which 59% is planned in Core BP submarkets and 41% is planned in Caohejing Zhoukang 24% Emerging BP submarkets. The total stock of Shanghai business park is 7% planned to expand to 16.3 million sq metres (176 million sq feet) by the end of 2024. Songjiang 7% To fulfill the goal of becoming a global innovation centre by 2035, Emerging Core Shanghai is actively clustering industries and attracting talent. Looking BPs BPs forward, the Core BP submarkets should strengthen their capabilities in attracting MNC headquarters and cutting-edge R&D centres. The 41% 59% Zhangjiang Emerging BP submarkets, particularly those close to the major corridors 12% or key development areas such as the G60 Sci-tech Corridor, the Shanghai-Nanjing-Hefei Sci-tech Corridor, and the Lingang New Area, Taopu & Nanda should seize the opportunity of regional collaboration to attract 19% Jinqiao 13% headquarters and R&D centres of the YRD enterprises, and become the Linkong Shibei hub connecting scientific innovation in the YRD. 2% 7% Source: Colliers International 12 Primary Author: For further information, please contact:

Yihong Song Tammy Tang Senior Manager | Research | East China Managing Director | China +86 6141 3508 +86 21 6141 3625 [email protected] [email protected]

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