Shanghai – April 2021

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RESEARCH James Macdonald Senior Director Rising interest for serviced apartments China +8621 6391 6688 Restrictions on new launches created an opportunity to buy existing assets to james.macdonald@ convert to strata sales opportunities. savills.com.cn

• 13 deals were concluded in Q1/2021, with a total consideration • Primary land sales in Q1/2021 totalled RMB85.9 billion, up by INVESTMENT of RMB12.8 billion, down by 51% year-on-year (YoY). However, 50% year-on-year (YoY). Nick Guan several deals are in the memorandum of understanding (MOU) Head of and due diligence (DD) phases. Shanghai Investment +8621 6391 6688 • Driven by the strong leasing performance in business parks, nick.guan@ savills.com.cn investors are still looking for business parks located in mature “The general financing submarkets. Five business parks projects were transacted in environment remains Q1/2021, with a total consideration of RMB5.2 billion. Savills plc Savills is a leading global real challenging at the start of estate service provider listed on • Long-term investors and end-use buyers remained the most the London Stock Exchange. The 2021 as the government company established in 1855, has active in the market. Zhongtai Securities announced that they a rich heritage with unrivalled growth. It is a company that leads are in the process of purchasing two building in Greenland Bund focuses on curbing the most rather than follows, and now has Centre for an estimated price of RMB2.7 billion. over 600 offices and associates egregious debt excesses in throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general • Some distressed sell opportunities appeared in the market as the market. The largest 100 informative purposes only. It may not be published, reproduced or financing became more challenging, including Sino-Ocean developers by sales volumes quoted in part or in whole, nor may it be used as a basis for any Capital’s purchase of an 18% stake of Macalline Real Estate for contract, prospectus, agreement around RMB1.03 billion. issued RMB187.3 billion of or other document without prior consent. Whilst every effort has debt in the first two months been made to ensure its accuracy, Savills accepts no liability • The Shanghai and Shenzhen Stock Exchanges issued new rules whatsoever for any direct or of 2021, down 34% year-on- consequential loss arising from its to improve the rule system for China infrastructure REITs and use. The content is strictly ensure the orderly development of the pilot program. year.” copyright and reproduction of the whole or part of it in any form is prohibited without written JAMES MACDONALD, SAVILLS RESEARCH permission from Savills Research. savills.com.cn/research 1 Investment

MARKET COMMENTARY 2020, or have recently listed, and are cash- GRAPH 1: Top 95 Developers Outstanding Debt rich and looking to acquire headquarter Composition, 2016 to Q1/2021 13 deals were concluded in Q1/2021, with a total consideration of RMB12.8 billion, down locations. End-users have been paying prices that far exceed values that a pure investor Q1 Q2 Q3 Q4 by 51% YoY. However, several deals are in would be willing to acquire the asset for, 120 the MOU and DD phase, and the market also saw a rebound of interest from international with theoretical yields potentially as low as funds thanks to China’s speedy economic 2.25-2.75% versus investors that require net 100 recovery, historic underweighting, economic yields closer to 4.0-4.5%. rebalancing and potential to secure good 80 deals as new opportunities surface in The general financing environment remains response to government debt curbs. challenging at the start of 2021 as the government focuses on curbing the most 60 Restrictions on new launches created egregious debt excesses in the market now

RMB billion an opportunity for investors to buy that the economy is back on its feet. The 40 existing assets to convert to strata sales “three red lines” policy is now in effect, as opportunities. Two assets were bought in well as bank lending limits to developers and home buyers. Developers are starting to feel 20 Q1/2021 by domestic buyers specifying for strata-sell. Both projects are located in the the pressure with China Fortune defaulting downtown area. At the same time, despite on a US$530 million bond in March. The 0 negative publicity, international buyers are largest 100 developers (by sales volumes) 2016 2017 2018 2019 2020 2021 stepping into the long-lease market as the issued RMB187.3 billion of debt (bonds, loans, securities, etc.) in the first two Source CRIC, Savills Research market matures and some poorly-managed platforms go bankrupt. The 14th Five Year months of 2021, down 34% YoY. Onshore Plan clearly promotes the development of bonds accounted for RMB41.3 billion while the rental housing market in terms of land offshore bonds accounted for RMB91.5 supply and equal rights for rent and sale. billion, down by 25% and 37%, respectively. With the rapid progress of urbanisation and Onshore and offshore bond coupon rates the relaxation of housing residency (hukou) stood at 4.42% and 6.65%, respectively. GRAPH 2: Land Transaction Area And AVs, 2012 to restrictions, the market is expected to see Q1/2021 rising opportunities for rental housing in OFFICE MARKET first-tier and key second-tier cities. Only one new project, Sunglow Riviera Commercial GFA (LHS) Residential GFA (LHS) Industrial GFA (LHS) (South Tower) in Xuhui Riverside, adding a Commercial AV (RHS) Residential AV (RHS) Industrial AV (RHS) End-user buyers are still active in the total office GFA of 65,500 sq m. Net market 40 32,000 market. After the eight buildings in absorption totalled 198,800 sq m in Q1/2021, 35 28,000 Greenland Bund Centre were sold to of which 77% of the space was contributed 30 24,000 end-users from 2019 to 2020 for RMB20.3 by decentralised areas. Retail consuer RMB per sq m sq per RMB companies remained active in taking up 25 20,000 billion, another two buildings are in the final stage of being sold to Zhongtai large office space in the city, with some 20 16,000 Securities for a reported RMB2.7 billion. eyeing recently completed developments. 15 12,000 million sqmillion m Finance companies, including banks, Citywide Grade A office vacancy rate fell

10 8,000 insurance and securities firms, have been a 1.0 percentage point (ppt) in Q1/2021 to mainstay of the end-user market for years 15.8%, while effective rents declined 0.3% in 5 4,000 now, but they recently stepped up their Q1/2021 to an average of RMB7.3 psm pday. 0 0 acquisitions, preferring landmark buildings with good signage. Relative newcomers are Faced with weaker fundamentals and the growing number of TMT companies significant supply volumes, investors are Source Savills Research who saw their businesses grow rapidly in paying greater attention to projects with

TABLE 1: Yields And Capital Values By Sector1, Q1/2021

PRIME HIGH-END PRIME HIGH-END GRADE A BUSINESS RETAIL SERVICED 5-STAR SHOPPING STRAT LOGISTICS OFFICE PARK STREET APARTMENTS HOTEL MALL APARTMENTS STORE

APPROX. GROSS 70-80% 80-90% 55-65% 70-80% 60-70% 80-90% 35-45% 80-90% TO NET RATIO2

NOI 4.0-4.5% 4.5-5.0% 4.0-4.5% 3.5-4.0% 2.5-3.0% 2.0-2.5% 1.5-2.0% 5.0-5.5%

APPROX. VALUE 20,000- 50-90,000 60-100,000 100–200,000 55-70,000 100-200,000 40-50,000 6-8,000 (RMB PER SQ M) 40,000

1 Yields refer to stabilised assets in downtown locations free of any impediments with a clean holding structure owning 100% of the building, and assuming 100% occupancy. Capital values refers to the average for the building on an aboveground GFA basis – retail assets will have higher capital values for lower floors. 2 Takes into consideration the costs, including taxes, fees, and other miscellanies.

Source Savills Research

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strong rent rolls, longer weighted average lease expiries (WALEs), and ­• Link REIT purchased a 50% stake of Qibao Vanke Plaza for RMB2.77 billion. industry clusters in growth sectors. Emerging locations, for the time being, Qibao Vanke Plaza is located in Minhang District with a total lettable GFA of are less favoured given the potential for significant lease-up challenges. 148,852 sq m. The five-storey shopping mall was 97.8 % occupied by the end of Business parks in mature areas such as Zhangjiang, Caohejing and Jinqiao are 2020. still popular with investors thanks to their active leasing performance. LAND MARKET1 RETAIL MARKET Primary land sales in Q1/2021 totalled RMB85.9 billion, up by 50% YoY, with No new projects opened in Q1/2021 within the outer ring road. 2021 scheduled commodity residential and commercial sectors accounting for 53% and 43% supply should be close to 1.5 million sq m with a total of 14 projects. Overall YoY, respectively. Residential for-sale and for-lease land plot AVs averaged shopping mall vacancy rates decreased by 0.7 ppts QoQ in Q1/2021 to 9.5%. RMB34,254 per sq m and RMB4,654 per sq m, respectively. Commercial land First-floor rents increased by 0.1% QoQ in Q1/2021 to RMB26.3 per sq m per plot AVs averaged RMB14,783 per sq m. day, down 2.0% YoY. The government announced a new land release system in Q1/2021 as 22 cities, Though investors remain cautious about retail investments, the market including Shanghai, will limit the time frames of land sales this year to three saw increasing interest from international funds for retail assets. While times, though details for land auctions in Shanghai has not been revealed the sector is faced with fierce online competition and a weakened economy, yet. It is expected to see further market consolidation with this new policy as some investors may feel the sector is undervalued, given the recent negative small-and medium-sized developers will find it even harder to bid for a good sentiment and that there are investment opportunities, both from an land parcel because they lack capital flow to compete. Meanwhile, AV premium intrinsic and sector recovery perspective, if the acquirer has a strong asset is also expected to decrease as there will be less competition for one land plot management team. as larger buyers will focus on key plots.

LOGISTICS OUTLOOK More investors are stepping into the logistics sector, attracted by the rising A sustained financial de-risking campaign is likely to throw up more demand for the sector despite fierce competition and compressed yields. investment opportunities at a discount to the market or which may have Canadian pension fund manager QuadReal Property Group partnered with otherwise not surfaced. The market is expected to see a pickup in transaction New Ease to invest in and develop logistics properties in China, with a total volumes in the remainder of 2021. equity commitment of up to $1 billion. Four of the 2021 vintage funds to date have exposure to the Chinese logistics market and are being managed by As work proceeds on laying the foundation for China’s first true REIT, the Sino-Ocean Capital, CLSA and Alpha Investment, as well as a fund of funds increasing certainty and the injection of new capital will give funds greater by Generali Real Estate. confidence that REITs represent a viable exit route.

KEY DEALS ­• Lanson Place-Jinlin Tiandi was purchased by a Shanxi domestic buyer for RMB1.34 billion. The 106 unit-serviced apartment project is located in Huaihai Road (M), Huangpu District., Zhong Rong Trust acquired the project 1 Land sales exclude public and economic housing from Morgan Stanley for RMB920 million back in 2015

TABLE 2: Key Land Deals, Q1/2021

GFA CONSIDERATION AV PLOT DISTRICT USE BUYER (SQ M) (Million RMB) (RMB PER SQ M)

HK193-02 HK193- 四川北路街道 、 03,* HK300-02 Hongkou Commercial 247,978 11,135 44,904 Shanghai Land 北外滩街道 、 HK300-03

land plots Huangpu Residential 196,500 17,600 89,567 Shanghai Chengtou 豫园社区

PDP0-0703 Pudong Residential 79,737 2,465 30,916 Shanghai Shengdi 川沙城东社区D05B-02 单元 地块

W060402 B3-2 Putuo Residential 76,495 6,452 84,346 Sunac, C&D 石泉社区 单元 地块

HK341-06 Hongkou Residential 61,156 5,666 92,648 CMSK 嘉兴路街道 号地块

Source Savills Research

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