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MARKETIN
MINUTES
Savills Research
Office Shanghai – July 2019
Office rents continue to fallCore office rents fell by 0.2% in Q2/2019 despite a dip in vacancy rates.
Savills plcSavills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.
Peter ShengDirectorShanghai+8621 6391 [email protected]
Cary ZhengSenior DirectorCentral China +8621 6391 [email protected]
COMMERCIAL
James MacdonaldSenior DirectorChina+8621 6391 [email protected]
RESEARCH
Please contact us for further information
Savills team
“ China’s increasing importance to global retail brands is translating into stronger office demand from these companies, both for new leases and upgrades.” JAMES MACDONALD, SAVILLS RESEARCH
• SOHO Gubei launched onto the core office market in Q2/2019, adding 70,300 sq m of new office space and pushing core Grade A office stock up to 9.0 million sq m by the end of Q2/2019.
• Net take-up increased by 24% in Q2/2019, totalling 108,700 sq m, though it remained down 72% year-on-year (YoY). The prime Puxi recorded positive absorption for the first time in a year, absorbing 18,800 sq m of vacant stock.
• Thanks to stronger take-up, vacancy rates fell by 0.5 of a percentage point (ppt) in Q2/2019 to 11.9%.
• Core market rents continued to decrease by 0.2% on an index basis in Q2/2019, to an average of RMB8.96 per sq m per day.
• Three new projects were handed over in the decentralised market in Q2/2019, adding 171,200 sq m of new office space. Total decentralised stock totalled 4.2 million sq m by the end of Q2/2019.
• Vacancy rates in decentralised areas fell by 3.6 ppts quarter-on-quarter (QoQ) to 30.3% in Q2/2019, while rents remained flat at RMB5.82 per sq m per day.
• Economic uncertainties and more availability lead to longer decision-making periods by tenants. Landlords increased concessions due to fierce competition from abundant new supply.
Leon FuSenior DirectorShanghai+8621 6391 [email protected]
2savills.com.cn/research
Source Savills Research
GRAPH 1: Grade A Office Core Market Supply, Take-up And Vacancy, 2014 to 1H/2019
0%
2%
4%
6%
8%
10%
12%
14%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2014 2015 2016 2017 2018 1H/2019
mill
ion
sq
m
Supply (LHS) Take-up (LHS) Vacancy (RHS)
GRAPH 2:Grade A Office Core Market Rental Indices, Q3/2014 to Q2/2019
Source Savills Research
100
120
140
160
180
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220
Q3
Q4 Q1
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Q4 Q1
Q2
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Q2
2014 2015 2016 2017 2018 2019
Q2/1
99
9=
100
Core areas average Prime Puxi Prime PudongNon-prime Puxi Non-prime Pudong
Source Savills Research
GRAPH 3: Grade A Office Core Market Vacancy, Q3/2014 to Q2/2019
Source Savills Research
0%
5%
10%
15%
20%
25%
Q3
Q4 Q1
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2014 2015 2016 2017 2018 2019
Core areas average Prime Puxi Prime PudongNon-prime Puxi Non-prime Pudong
CORE MARKETSOHO Gubei launched onto the core office market in Q2/2019, adding 70,300 sq m of new office space. Located in Changning’s Hongqiao area, the project has direct access to the Yili Road Metro Station (Line 10) and consists of two towers—a 38-storey tower for office use and a 12-storey building which was wholly leased to Joya Hotel by Huazhu Group. As a result, the core Grade A office stock was pushed up to 9.0 million sq m by the end of Q2/2019.
Net take-up increased by 24% in Q2/2019, totalling 108,700 sq m, though it remained down 72% YoY. Non-prime Puxi contributed 65% of total take-up, while prime Puxi recorded positive absorption for the first time in a year, absorbing 18,800 sq m of vacant stock. Xujiahui saw office space being handed back to the market with landlords losing 1,900 sq m of tenants in Q2/2019, compared to 31,600 sq m of net absorption in Q1/2019 thanks to the handover of ITC Ph2.
As global retail brands continue to expand in the city, so do their office premises. Following Under Armour’s leasing of three whole office floors in South Huangpu in Q1/2019, Lindor leased 800 sq m of office space in Taikang Insurance Building while Giorgio Armani took up 1,500 sq m in Wheelock Square, relocating from Plaza 66 in the same business area. L’Oréal was rumoured to be expanding in the city as well.
The average vacancy rate fell by 0.5 ppts in Q2/2019 to 11.9%. Core market rents continued to decrease by 0.2% on an index basis in Q2/2019, currently averaging RMB8.96 per sq m per day.
DECENTRALISED MARKETThree new projects were handed over in the decentralised market in Q2/2019, adding 171,200 sq m of new office space. New projects included: Guohua Plaza in Wujiaochang, EBA Centre in East Bund and R&F Centre in Hongqiao Transportation Hub (HTH). Total decentralised stock increased to 4.2 million sq m by the end of Q2/2019.
Despite the new projects, the average vacancy rate in decentralised areas fell by 3.6 ppts in Q2/2019 to 30.3%. Notably, Pudong’s Qiantan
and Houtan recorded significant improvements in occupancy (each up 15-20 ppts), though rates remain low compared to other decentralised markets in the city. Future projects in the remainder of 2019 will concentrate in the Expo and Houtan areas in Pudong, and Xuhui Riverside in Puxi area.
Decentralised office rents remained flat on an index basis at an average of RMB5.82 per sq m per day. However, several landlords have started to consider lowering rates and relaxing their rules when it comes to preferred tenant background and covenant strength, given sluggish leasing performances and looming supply.
MARKET OUTLOOKThe Shanghai Stock Exchange launched the Sci-Tech Innovation Board (SSE STAR Market). The new exchange will help small- and medium-sized innovation companies—especially high-tech and emerging industries such as artificial intelligence, biomedicine and new energy vehicles—to tap into a new pool of financing enabling them to grow faster. This could also prove important in generating new business opportunities for securities companies, investment banks, and other entities that will facilitate the listing of these companies.
The moderating vacancy rates in Q2/2019 are believed to be temporary, as the second half of 2019 is expected to receive about 1.5 million sq m of new supply in both the city’s core and decentralised office markets. Continuous oversupply has intensified competition for tenants and, consequently, landlords are willing to pay more inspection incentives and higher commissions to brokers, while simultaneously increasing concessions when negotiating with potential occupiers.
Definitions
Core prime: Nanjing Road (W), Huaihai Road (M), Lujiazui
Core non-prime: Old Huangpu, South Huangpu, Hongqiao, North
Station, North Bund, Zhuyuan and Xujiahui.
Decentralised markets: All areas outside of the core markets
including: Changfeng, Hongqiao Transportation Hub, Xuhui
Riverside, Xinzhuang, Zhenru, Wujiaochang, Former Expo,
Qiantan, Houtan and Huamu.
Office
TENANT TENANT INDUSTRY PROJECT BUSINESS
DISTRICTLEASED
AREA (SQ M)
County Media Media SOHO Gubei Hongqiao 2,000
Giorgio Armani Retail & Trade Wheelock Square
Nanjing Road (W) 1,500
Groz-Beckert Manufacturing SOHO Gubei Hongqiao 1,200
Jiangsu International Trust Finance IFC Ph2 Lujiazui 1,000
Lindor Retail & TradeTaikang
Insurance Building
Zhuyuan 800
TABLE 1: Notable Leasing Transactions, Q2/2019
