Savills Q1/2016 Shanghai Property Market Overview

Shanghai Grade A office market

- Four projects were launched onto the core office market in Q1/2016, bringing 140,000 sq m of supply to the market, and pushing total stock to 6.5 million sq m.

• Star Bund Tower 1 in North Bund, Hongkou District
• UOB Plaza, part of the CITIC Pacific Shipyard Project in Lujiazui, Pudong New Area
• Poly International Plaza Tower 3, Pudong New Area
• Crystal Galleria, in Jing’an District

- Net take-up in core office areas totalled 162,000 sq m, with Pudong accounting for 82% of all transactions, of which 78% occurred in non-prime area.

- Vacancy rates in core areas fell by 0.4 percentage points (ppts) quarter-on-quarter (QoQ) to 5.7%, as a result of strong take-up in projects handed over in the past few quarters.

- Average rents in core areas increased by 0.1% QoQ to RMB8.71 per sq m per day.

- Three new projects were launched onto the decentralised market in Q1/2016, bringing 180,000 sq m of supply to the market, pushing total stock to 2.04 million sq m.

• The first phase of Mapletree Business City
• The first phase of Vanke Centre Riverside
• Shanghai Bay Tower 1

- As a result of new supply, vacancy rates in decentralised areas increased by 3.3 ppt QoQ to 30.4%, while rents stood at an average of RMB5.10 per sq m per day.

Forecast

- Close to one million sq m of new supply is expected to enter the core market in the remainder of 2016, including the 280,000 sq m Shanghai Tower.

- Decentralised areas are expected to receive roughly two and half million sq m of sellable and leasable supply in the remainder of 2016, with around 50% of the supply located in Hongqiao Transportation Hub.

- Despite strong new demand, landlords of new projects are anticipated to increase various incentives to attract tenants, especially larger occupiers, in preparation of the continued supply influx. Among new projects in emerging business areas, those with better traffic access and commercial facilities will have obvious advantages over competitors.

- Despite an increase in citywide supply, landlords of prime projects in core areas will retain leverage in rent negotiations, as rent and occupancy levels are expected to remain flat.

Shanghai retail market

- Retail sales grew by 7.0% year-on-year (YoY) in the first two months of 2016, 1.1 of a percentage point (ppt) lower than the same period in 2015.

- Wujiaochang receives the first new quality retail supply in over nine years with the completion and opening of the 140,000 sq m Hopson One.

- First-floor shopping mall rents in prime retail areas increased by 0.3% QoQ to an average of RMB48.6 per sq m per day, while non-prime areas increased by 0.3% QoQ to RMB17.0 per sq m per day.

- Vacancy rates in prime areas increased by 1.0 percentage point (ppt) in Q1/2016 to 4.8%, while non-prime areas (including downtown and decentralised areas) fell by 0.5 ppt QoQ to 9.0%.

- Super-regional malls continue to outperform the wider market with vacancy rates falling to historical lows.

- New tax policies bring new challenges especially to the landlords and online cross-border traders.

Forecast

- Around one million sq m of retail space is expected to launch in the remainder of the year.

- More new projects are considering sacrificing higher rents for to attract the most suitable tenants for a projects and achieving higher occupancy rates. This strategy is likely to drag down average citywide rents though the index, which analyses rental movements on a like for like basis, is expected to maintain moderate growth.

- 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 cultural and tourist spots that have been developed or renovated.

Shanghai residential leasing market

- No new serviced apartments entered the market in Q1/2016, with the next supply expected to launch in Q2/2016.

- Overall residential rents rose 1.9% to an average of RMB186 per sq m per month, up 2.8% YoY, while vacancy rates fell 1.1 ppt QoQ to 8.2%, down 2.6 ppts YoY.

- Serviced apartment rents increased by 2.2% QoQ to an average of RMB224.60 per sq m per month, up 3.2% YoY, while vacancy rates decreased 0.3 ppts QoQ to 8.5%, down 3.6 ppts YoY.

- Strata-title apartment rents increased by 2.7% QoQ to an average of RMB178.90 per sq m per month, up 5.7% YoY, while vacancy rates decreased 1.7 ppts QoQ to 12.3%, down 0.7 ppts YoY.

- Villa rents increased 1.1% QoQ to an average of RMB152.3 per sq m per month, up 0.5% YoY, while vacancy rates saw a decrease of 2.4 ppts QoQ to 3.5%, down 3.6 ppts YoY.

- Two serviced apartment investment deals were concluded in Q1/2016. Rainbow Plaza in Changning District to the Fuxing Group (阜兴) for a total of RMB1.35 billion and the Grand Pujian Residence (serviced apartment and commercial) in Pudong to Top Spring for a total of RMB573 million.

Forecast

- Three new serviced apartment projects are scheduled to be handed over to the market in Q2/2016. These include two projects by Lanson Place: the 196-unit Sunland Serviced Suites and 182-unit Parkside Serviced Suites. Diamond Court Pudong is also reopening after renovating its 280 units.

- This 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.

- The falling number of expats living Shanghai will continue to be a challenge in the residential leasing market. In addition, expats here on a short secondment will require smaller apartments and shorter term leases.

Shanghai residential sales market

First-hand mass commodity residential market

- New commodity residential supply decreased 59.7% QoQ totalling 1.4 million sq m in Q1/2016, down 20.9% YoY.

- Despite traditional off season, market demand was phenomenal with first-hand commodity residential transaction volumes increasing 117.7% YoY to 4.3 million sq m in Q1/2016, down 12.8% from the five-year quarterly high in Q4/2015.

- Average transaction prices continued to increase, but at a slower rate of 2.0% QoQ to RMB34,500 per sq m in the first quarter.

First-hand high-end apartment market

- No new high-end apartment supply was seen in the first quarter, partly resulting from stricter issuance of presale certificates by the government.

- First-hand high-end apartment transaction volumes totalled 257,100 sq m in Q1/2016, down 27.4% QoQ but up 62.3% YoY.

- First-hand high-end apartment transaction prices increased 2.9% on an index basis in Q1/2016 to an average of RMB79,700 per sq m. Transaction prices in primary residential areas remained high at RMB100,000 per sq m while emerging areas witnessed the biggest price increase of 6.1% averaging RMB57,800 per sq m.

Land market – residential zoned

- Eight residential (including pure residential and mixed-use) land plots were transacted in Q1/2016 totalling 469,100 sq m of buildable area, over 60% of which were in Qingpu District.

- Accommodation values (AV) averaged RMB19,400 per sq m, up 4.4% QoQ.

- Developers competed fiercely for prime land plots, pushing up premiums to 93.8% from an average of 73.8% in Q4/2015.

Forecast

- The second quarter is expected to see a large influx of new supply after several projects being delayed from Q1/2016. Located in Huangpu District, Fuxing Royale is scheduled to launch its new batch of 137 larger-unit (3-4 bedroom: approx. 150-275 sq m) apartment products in the second quarter.

- The latest “3·25” policy tightening is likely to reduce transaction volumes in the short- to mid-term, slowing market activity and cooling price growth, though prices are not expected to adjust down.

- The ongoing massive urban redevelopment has helped and will continue to add value to certain areas such as Suhe Creek, Dongjiadu and East Bund. More high-end residential products, as a result, are expected in these areas.

Shanghai investment market

- Four key deals were concluded for a total consideration of RMB4.3 billion in the first quarter, down 34% YoY.

- Decentralised office and serviced apartments drew the most attention in Q1/2016, accounting for 55% and 45% of total sales consideration, respectively.

- Domestic investors were active at the beginning of this year, with three deals concluded, taking up over 80% of total transactions.

- The red hot land auction market continued, with accommodation values (AVs) of four land plots exceeding RMB20,000 per sq m.

- The consolidation of key developers persisted in Q1/2016, with COLI’s buying CITIC’s residential development assets. Developers are expected to continue to rationalise development portfolios while developers with lower financing costs are likely to gain the upper hand on more indebted rivals.

- The awaited transition from Business Tax to Value Added Tax for real estate sectors finally released, with effect from May 1st. Developers and investors are exploring the potential implications and this could slow deal activity in the short term.

Forecast

- Shanghai's property market, downtown office assets in particular, remains an attractive market for international investors, in the context of comparatively low yields in other global market, and the expected interest cuts.

- Retail and logistics market are expected to see more portfolio and platform deals, as international investors want strategic interest in these sectors.

- The VAT reforms will likely be fraught with teething issues as companies search for the best way to minimize their tax exposure, while it is believed to cut the overall tax burden significantly in the long term.