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 flat on 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.