Shanghai’s decentralized office sector maintained its strong momentum and continued to see strong leasing this quarter. “Some of the strongest rental growth we observed in the first quarter took place in emerging CBD areas close to the traditional CBD, such as the Railway Station and North Bund areas,” said Eddie Ng, Managing Director for JLL East China. Residential sales continued to slow under tightening government policy, though continued demand from upgraders relieved pressure on developers to discount prices. Rental growth in the retail sector picked up as supply pressure eased and several properties finished tenant adjustment and repositioning. In the logistics market, pre-leasing in the first quarter’s new projects was limited, but this is considered less a sign of a slowing market than of seasonal effects related to the Chinese New Year holiday.


Decentralised market absorption outshines that of the CBD. Leasing demand overall remained stable in the first quarter. In the Pudong CBD, newly completed projects captured upgrade and expansion demand. “The legal, financial services, and the TMT sectors drove leasing demand in the Puxi CBD,” said James Allan, Head of Markets for JLL Shanghai.  “That said, demand in the Puxi CBD also faced competition from the rapidly growing decentralised market.” The decentralised market continued to see impressive leasing momentum, and recorded net absorption of over 162,000 sqm. Notable deals included PepsiCo’s 7,000 sqm lease in Gopher Center and Metlife’s 3,500 sqm lease in Landmark Center.

New wave of supply enters the market. Four projects with a total GFA of approximately 528,600 sqm reached completion in the CBD, including the skyscraper Shanghai Tower (204,500 sqm). In the decentralised market, seven projects with a total GFA of 442,000 sqm entered the market. The large volume of new supply led vacancy to increase in both the CBD and decentralised markets. Vacancy rose 5.2 pps q-o-q to 13.1% in the Pudong CBD, while Puxi CBD vacancy rose 3.0 pps to 12.1%. In the decentralised market, vacancy increased 4.5 pps q-o-q to 22.5%.

Emerging CBDs outperform. CBD rents remained flat as a large amount of supply entered the market, and landlords were conservative on pricing amidst increased competition. In the decentralised market, rents grew by a moderate 1.0% q-o-q, led by emerging CBDs such as the Railway Station cluster and the North Bund cluster.

Strata-titled Office

Robust demand fuels rise in capital values. Sales volumes in Shanghai’s strata-titled office market rose 10.1% y-o-y to reach 141,475 sqm in 1Q17.  Private domestic firms continued to be the major driver of demand.  SOEs also contributed to some of the quarter’s take-up as they sought space for both self-use and investment. Submarkets that saw the strongest buying activity included Hongqiao Transportation Hub (notably its low-rise buildings), as well as the northern area of Jing’an District and the East Bund. Robust demand led capital values to rise 2.3 % y-o-y to RMB 44,234 per sqm.  Looking ahead, we expect that uncertainty over the pace of China’s economic growth and the potential for tighter economic policy could lead investors to become more conservative about buying strata-titled office space. That said, high-quality properties in emerging CBD areas are likely to remain popular among buyers.


Sales continue to slide under tight policy stance. After a slew of restrictive measures were announced in 4Q16, Shanghai’s authorities increased scrutiny of sales of commercial-titled apartments in1Q17.The tighter policy stance combined with limited new supply and seasonal effects to cause respective sales contractions of 33% and 28% q-o-q in the mass market and high-end segments. In contrast to the decline in headline sales, the quarter’s newly launched project reported strong sales. All 294 units in Crystal Plaza Residences in Pudong were snapped up when they launched for pre-sale on 19 January. The strong sales reflect buoyant demand from end users, especially for good value units perceived to have high growth potential.

New supply remains low. New supply remained limited in 1Q17 as Shanghai’s authorities stepped up their efforts to manage pre-sales. New supply in the mass market fell 16% q-o-q or 25% y-o-y, while in the high-end segment, the aforementioned Crystal Plaza’s launch of 294 units for sale was the first quarter’s only major launch. In the land market, developers were still cautious towards land acquisitions, as the local government continued to monitor developers’ funding sources. As a result, 12 out of 18 residential-use land plots sold in 1Q17 were traded at only reserve prices.

Price growth further decelerates, while rents edge up. Under a tight policy stance, the average sales price in the high-end segment only posted 0.3% q-o-q growth in 1Q17, decelerating from last quarter’s 1.0%. While price growth is slowing, developers face little pressure to discount their sales prices, given solid upgrade demand and low inventories. In the leasing market, leasing activities improved after the Spring Festival holiday. As a result, rents edged up by 0.2% q-o-q after two quarters’ decline. As growth in capital values exceeded growth in rents, yields declined slightly in 1Q17.

Sales to stay low, while prices still expected to stabilize. We expect housing policy to remain tight in Shanghai throughout 2017. As such, we maintain our forecast that sales in the mass market will stay low in 2017. In the high-end segment, sales are expected to remain subdued in 2017, mainly due to limited new supply in the pipeline. “Although price growth has decelerated in the past few quarters, we do not expect prices to experience a correction over the rest of the year,” said Stephenie Zhou, Head of Project Sales for JLL Shanghai. Developers are unlikely to offer any price discounts in the following months, as upgrade demand remains largely intact.


Leasing environment stable. The first quarter saw a further improvement in retailer sentiment as several brands reported rising y-o-y sales. “This change has yet to translate into increased leasing activity, however, and we expect it will take more than a few quarters of rebounding sales for chains to reconsider expansion strategies,” said James Hawkey, head of Retail for JLL China. Food & beverage, children’ entertainment, and health-oriented tenants like gyms and sportswear continued to drive leasing activity. In the fashion category, domestic online designers’ brands began seeking space in prime malls in an effort to develop their offline brand presences.

Supply wave takes a breather. Lilacs International Plaza opened in the Century Avenue submarket in Pudong, catering to F&B and entertainment needs of nearby office workers and residents. Greenland Being Funny opened in the Xuhui Bund with at least 40% of NLA planned for F&B. The two projects had a combined GFA of only 127,000 sqm, giving the Shanghai market its lowest quarterly supply in over a year, following a massive 2016. Prime vacancy remained flat at 9.7% as projects in submarkets like West Nanjing Road saw rising occupancy, while occupancy in Xujiahui and Lujiazui slightly declined. Vacancy increased to 9.9% in the decentralized market as the quarter’s two new completions opened with vacancy above the market average.

Rental growth accelerates in both prime and decentralized markets. In the prime market, open-market ground floor base rents increased by 2.1% y-o-y to RMB 52.2 per sqm per day on a like-for-like basis. Decentralized rents rose 3.6% y-o-y to RMB 21.0 per sqm per day. Rental growth was driven by the Xujiahui and Wujiaochang submarkets, where foot traffic is high and major projects finished repositioning and tenant adjustment.


1Q17 net-absorption falls after strong fourth quarter. Seasonal effects due to the Chinese New Year led to a rare case in which the quarter’s new projects reached completion without pre-commitments. In addition, several 3PL tenants withdrew from projects in Lingang submarket upon the expiration of their leases. As a result, net take-up fell to negative 15,580 sqm, the market’s first negative absorption in three years. Stuart Ross, Head of Industrial for JLL China, noted “That said, projects in West Shanghai remained in high demand, recording positive net-absorption of over 5,000 sqm on the back of strong demand from 3PL tenants. This activity left the western part of the city with only frictional space available for lease.”

Four projects completed in the first quarter. 1Q17 saw four new completions which added a combined 250,000 sqm to the non-bonded market. Over half of the new supply this quarter entered East Shanghai, as GLP completed two projects in Pudong. Given a lack of committed space from the new projects and rising vacancy in the Lingang submarket, Shanghai’s overall vacancy rate climbed from 7.3% to 12.2%. Vacancy in West Shanghai remained near zero while vacancy in East Shanghai increased from 9% to 18%.

Rents mostly flat in the quarter. Rents edged up 0.3%, slightly slower than the previous quarter as most landlords kept their rental levels flat given the uptick in vacancy. Conversely, landlords in West Shanghai still had leverage to raise rents.

Capital Markets

Quiet start for 2017. Following a record high transaction volume of RMB 48.8 billion in 4Q16, Shanghai’s 1Q17 transaction volume fell to RMB 14.8 billion, down 69.7% q-o-q and 11.8% y-o-y. The office sector continued to dominate the Shanghai’s investment market with a total transaction volume of RMB 5.9 billion, or 40% of the total. Mixed-used properties accounted for RMB 3.3 billion, or 22 percent of the total. Retail space transaction volumes reached RMB 2.2 billion for a 15% share, and high-end residential transactions were not far behind with RMB 2.1 billion transacted, accounting for 14 percent of Shanghai’s total.

Investors remain interested despite high prices. Despite 1Q17’s lower transaction volume, investors continued actively seeking investment opportunities in Shanghai. The first quarter’s slowdown was attributed in part to the limited number of quality assets that were available for sale in the market, especially following investors’ 4Q16 buying spree. Another reason stemmed from sellers’ often standing firm on price, which left buyers with limited discounts and likely prolonged their decision making on potential deals.​

Source: JLL

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