Prime assets in first tier cities continue to attract capital on the loosening of monetary polices

06 January 2016

Savills Shanghai Property Market Overview - Q4 2015

Shanghai Grade A office market

Five projects were launched onto the core office market in Q4/2015, bringing 280,000 sq m of supply to the market, pushing annual supply to 670,000 sq m and total stock to over 6.3 million sq m.
- Lilacs International Commercial Centre
- Bund IFC north plot
- Century Grand Metropolis
- Kerry Everbright City Ph3 T1 & T2
Net take-up in core areas totalled 325,000 sq m, with around 90% of all transactions seen in non-prime areas, and around 60% of all transactions seen in Pudong.
Vacancy rates in core areas fell by 1.0 percentage point (ppt) quarter on quarter (QoQ) to 6.1%, down 2.0 ppt year on year (YoY), as a result of strong take-up in projects handed over in the past few quarters.
Average rents in core areas increased by 0.5% QoQ to RMB8.70 per sq m per day, up 1.4% YoY.
Six new projects were launched onto the decentralised market in Q4/2015, bringing 380,000 sq m of supply to the market, pushing annual supply to 650,000 sq m and total stock to over 1.88 million sq m.
Decentralised rents remained flat at an average of RMB4.9 per sq m per day.
Domestic investors continue to focus on new builds in non-prime and decentralised locations, while international funds focus on add-value & core assets in core locations.

Forecast

An influx of supply is expected to continue with the completion of projects totalling around 1.8 million sq m expected to enter the core markets in 2016, including the 280,000 sq m Shanghai Tower.
Decentralised areas are also anticipated to see around 2.3 million sq m of sales and leasable supply expected to enter the market in 2016, with half of the supply located in Hongqiao Transportation Hub.
As a direct consequence of the influx of supply, regardless of the strength of demand, a downward pressure will be placed on rents and occupancy rates as new projects compete to attract and retain tenants.

Shanghai retail market

Retail sales grew 8.1% YoY in the first 11 months of 2015, 0.6 of a ppt lower than the same period last year.
285,200 sq m of new supply launched onto the market in Q4/2015, with annual supply totalling at 621,400 sq m
First-floor shopping mall rents in prime retail areas increased 0.9% YoY to an average of RMB48.4 per sq m per day, while non-prime areas remained stable at RMB17.2 per sq m per day.
2015 saw vacancy rates in prime areas increase 1.0 ppt to 4.8% while non-prime areas (including downtown and decentralised areas) fell 0.8 of a ppt to 9.5%.

Forecast

20 new shopping mall projects (1.3 million sq m of new space) are expected to launch onto the market in 2016, 10% of which will be located in prime areas.
Qibao will receive the most new supply of any region with 230,000 sq m
Wujiaochang will receive its third 100,000 sq m+ retail project with the opening of Hopson One, the area will then be the only one in the city with three or more projects in excess of 100,000 sq m.
Though pressure from supply persists, the market will also welcome some new momentum in coming years with the tourism market boosted by the opening of Disneyland and more culture centric spots developed or renovated.
Tourism consumption is expected to receive a big push from the government in coming years as a key driver of growth in leading cities.
Prime retail areas will benefit more from the opening of Disneyland with average rents expected to grow 1.5-2.0%. Non-prime area continues to be flat in general at around 0.5-1.0% due to disparities at a project level and competition from continuous arrivals of better facilitated projects. Super-regional mega malls are expected to outperform others.

Shanghai residential leasing market

One new serviced apartment, Green Court Place, launched in Q4/2015, adding 482 units to the leasing market.
Overall residential rents rose 0.8% in Q4/2015 to an average of RMB182.3 per sq m per month, up 1.2% YoY, while vacancy rates saw a slight increase of 0.1 of a ppt QoQ to 9.2%, down 1.8 ppts YoY.
Serviced apartment rents increased by 1.6% QoQ to an average of RMB221.2 per sq m per month, up 1.8% YoY, while vacancy rates fell 1.4 ppts QoQ to 8.8%, and remained down 3.6 ppts YoY.
Strata-title apartment rents increased by 1.9% QoQ to an average of RMB175.0 per sq m per month, up 2.4% YoY, while vacancy rates increased 3.7 ppts QoQ to 14.0%, up 1.8 ppts YoY.
Villa rents fell 0.7% QoQ to an average of RMB149.6 per sq m per month, down 0.2% YoY, while vacancy rates saw a decrease of 0.1 of a ppt QoQ to 6.3%, down 1.2 ppts YoY.
One serviced apartment investment deal was concluded in Q4/2015, namely the sale of China Garden in Changning District to Lasalle Investment for a total of RMB309 million.

Forecast

The 280-unit Diamond Court in Pudong is expected to reopen in 1H/2016 after renovation. The project is owned by Bao Steel Group and will be managed by the Jinqiao Group.
The coming year will continue to see increasing demand from Chinese entrepreneurs establishing businesses in Shanghai as the government looks to promote start-ups and SMEs as a future driver of growth. These individuals are often independently wealthy and are able to afford premium housing, with the cost often being attributed to part of the company’s on-going expenses.

Shanghai residential sales market

First-hand mass commodity residential market

New commodity residential supply remained unchanged at 3.6 million sq m in Q4/2015.
Benefiting from a combination of seasonal factors, further monetary loosening and rising buying sentiment, first-hand commodity residential transaction volumes increased 22.1% QoQ to 4.9 million sq m in Q4/2015, the highest quarterly level over the past five years.
Average transaction prices unsurprisingly continued an upward trend of 5.9% QoQ to RMB33,900 per sq m in the fourth quarter, bringing the annual price growth rate to 18.3% in 2015.

First-hand high-end apartment market

Brand new projects accounted for a larger percentage (41%) of new high-end supply volumes. Five new high-end apartment projects were launched in the fourth quarter adding 695 new units (139,000 sq m) to the sales market.
Demand remained robust with transaction volumes totalling 354,000 sq m, up 5.5% QoQ, close to market all-time highs.
First-hand high-end apartment transaction prices increased 2.4% in Q4/2015 to an average of RMB78,400 per sq m.

Land market – residential zoned

21 residential (including pure residential and mixed-use) land plots were transacted in Q4/2015 totalling 1.9 million sq m of buildable area, up 47.7% QoQ.
Accommodation values (AV) averaged RMB18,500 per sq m, down 12.8% from Q3/2015, mainly held back by the relatively inexpensive land prices (<RMB5,000 per sq m) of land deals in suburban areas.
Average premiums over reserve prices reached 73.8%, up from an average of 71.0% in Q3/2015, evidence of developers’ confidence and enthusiasm for the Shanghai market.
One notable deal was the acquisition by Cinda Real Estate of a pure residential land plot in New Jiangwan City, Yangpu District for RMB7.3 billion on 25 November 2015. The site has an area of 132,000 sq m and a plot ratio of 1.125, giving it an AV of RMB49,200 per sq m (RMB61,400 after a reduction for affordable housing allocation) which marked a new AV record for the area.

Forecast

While the central government has sent a clear message to support the property market through clearing unsold inventory, Shanghai, as one of the country’s hottest markets is expected to continue to enforce existing restrictions to prevent overheating.
Long-term policies designed to ensure a healthier long term market, despite a delay, are still expected to be rolled out, including the implementation of property tax and the transition from business tax to valued added tax (VAT) in the property sector.
The removal of the one-child policy is expected to spur upgrading demand as parents look to buy bigger homes to accommodate larger families.

Shanghai investment market

Eight key deals were concluded for a total consideration of RMB16 billion in the fourth quarter. The landmark deal was the acquisition of Corporate Avenue #3 by Lee Kum Kee (90%) and Vanke (10%) for RMB 6.7 billion.
2015’s total en-bloc transactions reached RMB52 billion, up 21% YoY, with a focus on office acquisitions and a rising appetite on serviced apartments
Acquisitions for investment purposes made up 85% of the total sales consideration in 2015. International players accounted for 52% of the total consideration. Meanwhile, more domestic private equity funds are chasing asset acquisitions and management opportunities.
International REITs have concluded three premium office property acquisitions – 21% of 2015’s total considerations, focusing on stabilised rental-generating assets and long-term holds.
Insurance companies have sparked off a buying spree in property firms’ stock shares and land auctions, increasing their exposure on the real estate sector.
Land prices hit new highs in Q4/2015, with accommodation values (AVs) of four land plots outside the outer ring road exceeding RMB20,000 per sq m.
The People’s Bank of China (PBoC) cut interest rates by 25 basis points (bps) once more in October bringing the over-five-year lending rate down to 4.9%, the lowest ever.

Forecast

Quality assets in first tier cities, Shanghai in particular, will continue to attract capital looking for safe havens as investors look to capitalise on the loosening of monetary polices and look for protection from the weakening markets in lower tier cities.
Downtown office assets will remain top choices, thanks to the depth and liquidity of the market as well as the ease of management and market transparency.
Domestic funds are increasingly seeking value-add opportunities and getting involved in asset management, a divergence from the previous opportunistic strategies.
International funds will keep an eye on currency movements as they make their future investments in China. Domestic developers and investors will conversely find overseas investments more lucrative should the RMB devalue against the currency of the of investment destination country.