Savills World Research Shanghai Briefing Office sector February 2015 Image: Shanghai Skyline SUMMARY Shanghai’s office market is expected to undergo a remarkable transformation over the next two years as the city experiences peak supply levels and the coming of age of the decentralised market, spearheaded by schemes such as the Hongqiao Transportation Hub. Lujiazui Century Financial Plaza Gross reversionary yields increased Tower 1 and Oriental Financial Centre to 6.0% in Q4/2014, as a handful of were launched onto the market in investment funds came to the end of Q4/2014, adding 187,500 sq m and their fund life. bringing annual supply to 523,000 sq m. 2015 is expected to see an influx “Landlords will have to become Net take-up totalled 126,000 sq m in of supply, with the completion of 15 Q4/2014, bringing total annual take-up projects adding 886,500 sq m of space more accommodative towards to 457,300 sq m, up from 323,000 sq m to the core market. in 2013. tenants moving forward, Sky SOHO and MTR City Plaza were Core vacancy rates increased by 0.8 launched into the decentralised market as new supply generates of a percentage point (ppt) quarter-on- in Q4/2014, adding 242,000 sq m. Total quarter (QoQ) to 8.6%, up 0.4 of a ppt supply witnessed in 2014 was 731,000 renewed competition.” year-on-year (YoY). sq m, bringing total stock to 1.29 million sq m. James Macdonald, Savills Research Average rents increased by 0.3% QoQ to RMB8.6 per sq m per day, up The decentralised market is expected 1.8% YoY. to receive 22 projects in 2015, adding 1.61million sq m to the market. savills.com.cn/research 01 Briefing |Shanghai office sector February 2015 Market commentary GRAPH 1 Core market Grade A office supply, take-up and vacancy rate, The core office market received Lujiazui Century Financial Plaza Tower 2000–2014 STV Chart EN (2) 1 and Oriental Financial Centre (OFC) in Q4/2014, adding 187,500 sq m. In Supply (LHS) Take-up (LHS) Vacancy (RHS) 2014, eight projects were launched 900 18% onto the core market, adding 523,000 800 16% sq m. These projects were evenly 700 14% distributed between Puxi / Pudong and also prime / non-prime locations. 600 12% 500 10% Net take-up reached 126,000 sq m 400 8% in Q4/2014, 50% higher than the sq'000 m third quarter, and primarily focusing 300 6% on recently launched projects in 200 4% prime Puxi. Domestic financial and 100 2% professional services companies continued to be the main demand 0 0% drivers in 2014, taking up significant space in Lujiazui and prime Puxi. This Source: Savills Research trend is set to continue as measures Page 1 put in place to develop these sectors in 2014, Puxi received ample coming onto the market in these persist. supply of high quality projects at decentralisation areas, using these reasonable pricing. Multinational emerging areas as secondary office While Pudong saw limited available corporations (MNCs) took a more space for back-end operations, space and continued rental growth cautious approach to office expansion such as marketing and finance and capital expenditure in 2014, departments; low-cost businesses as they remained uncertain about may also consider these locations GRAPH 2 economic and business prospects. for their entire operations given the Business district comparison, rent vs Nevertheless, as the new economic potential for lower overheads. norms are realised and understood, vacancy rate, Q3/2014RV CBD EN (2) and Q4/2014 MNCs are beginning to look into more Market news Q3 rent (LHS) Q4 rent (LHS) Q3 vacancy (RHS) Q4 vacancy (RHS) business opportunities and office The emergence of the 12 30% space options, whether that be in core decentralised market 10 10.5 25% or decentralised locations. Shanghai is witnessing the evolution 10.2 10.5 9.9 9.7 9.7 of its office market. In the past, 8 20% Decentralised more than 90% of the city’s Grade A 7.8 7.7 7.8 7.8 7.1 7.1 6.9 Prior to 2010, only a handful office stock was located within the 6 6.8 15% of developers were looking at inner ring road and Hongqiao areas. 4 10% opportunities within decentralised However, recent office completions RMB psqm per day areas, however, as land within are increasing the proportion of Grade 2 5% core areas became more limited A office stock located outside these 0 0% and expensive, developers started areas. Nanjing Rd Huaihai Rd Old Huangpu Xujiahui Changning 'Little' Lujiazui Pudong (W) (M) Others looking to emerging areas such as Minhang and Yangpu for development The main decentralised areas which Puxi districts Pudong districts opportunities. are witnessing this influx of new Source: Savills Research Page 1 Grade A specification projects include 2014 witnessed the handover of Minhang – primarily the Hongqiao GRAPH 3 a number of these projects that Transportation Hub, Putuo – with were started in 2010 and 2011, with new supply such as MTR Plaza and Core market Grade A office rental around 730,000 sq m added to the Global Harbour, Yangpu –primarily indices, Q2/1999–Q4/2014 decentralised markets, doubling The Springs development by Tishman the amount of stock within these Speyer and Xuhui – with the expected All Prime Puxi Non-prime Puxi Prime Pudong Non-prime Pudong Q2 / 1999 = 100 areas. Decentralised supply in 2014 Greenland Centre. 200 focused largely on Puxi with this 180 expected to continue through into One of the most significant master- 160 140 2015. The Minhang district received planned areas in Shanghai to be 120 the majority of new projects in 2014, developed over the next decade will 100 with Hongqiao Transportation Hub be the Hongqiao Transportation Hub. 80 seeing its first two projects launched. The scheme is located close to the 60 In 2015, Pudong is expected to see most significant intra and intercity 40 the launch of the first decentralised infrastructure in Shanghai, tying in 20 project in two years. the city’s domestic airport with the 0 main high-speed railway terminal, Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Many companies are taking a long distance coach terminal and 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 advantage of the new supply two existing metro lines (line 2 and Source: Savills Research 02 Briefing |Shanghai office sector February 2015 10), one under construction (line 17) The expansion of the FTZ should wanting to be close to Lujiazui but not and a further two under planning prove beneficial to the Zone the FTZ willing to pay the higher rents. (line 5 extension and line 20). The overcoming the stigma associated area plans to attract overseas and with the zone being located so far Net take-up totalled 126,000 sq m in domestic companies from industries away from the city centre. It should Q4/2014, bringing year-to-date (YTD) most crucial to the development of also present an opportunity to the take-up to 457,300 sq m. Lujiazui Shanghai and the Yangtze River Delta areas included in the enlargement, area. both from the actual tangible policy IMAGE 1 benefits and the association with the Nike is a prime example of a FTZ. Proposed enlargement of Shanghai company relocating from a central FTZ office space to a more decentralised The FTZ is still in its early years and premises. Prior to relocation they were further reforms and opening up are occupying roughly 15,000 sq m of expected to continue reaping benefits office space on Nanjing Rd (W); their for companies, areas and landlords new premises is roughly 55,000 sq associated with the zone. m on the new Springs Development in Wujiaochang. The relocation, while Lujiazui Century Financial Plaza Tower moving further away from the city 1 and OFC were handed over in centre, enables them to provide more Q4/2014, adding 187,500 sq m to the space to employees, landscaped core market. A total of eEight projects grounds and room for future were handed over to the core market expansion. The development consists in 2014, totalling over 523,000 sq m, of three office blocks and a five-story with the largest project, at 312,000 sq conference centre to host clients and m, being Lujiazui Century Financial promotional events, as well as an F&B Plaza. The project is located in area, a football pitch and a basketball Zhuyuan district and consists of five court. office buildings. It is the only project launched onto the non-prime Pudong Moving to decentralised locations market since Q3/2012 and has helped may not be for everyone as there are to meet some of the spill overspill advantages and drawbacks to any over demand from companies Source: Savills Research decision. However, the key challenge faced by decentralised locations will TABLE 1 be less about convincing occupiers to move and more about how to best Selection of leasing transactions, Q4/2014 differentiate themselves from all the Area leased other projects scheduled to come Tenant Project Location (sq m) onto the market in the next few years. Uniqlo Henderson Metropolitan Huangpu 4,500 优衣库 China (Shanghai) Pilot Free Trade Wuxi PRA SOHO Fuxing Huangpu 3,000 Zone (FTZ) 康德新药 The China (Shanghai) Pilot Free Trade CICC AZIA Centre Pudong 3,000 Zone was approved by the State 中国国际金融有限公司 Council and officially launched in 2013 Changxin Asset Management One Lujiazui Pudong 2,200 as a platform for the testing of new 长信基金 economic and social reforms.