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Knight Frank lauches Shanghai Commercial Property Market Overview Q2 2019

19 July 2019

Grade-A office

In Q2, two new office projects were completed in Shanghai’s Grade-A office market, bringing approximately 136,000 sqm of office space to the market and driving up the total stock to 18.65 million sqm. The new supply decreased significantly by 75% compared with the previous quarter. CapitaLand Raffles City the Bund East Tower, located in the North Bund, Hongkou, was completed in May with an office area of 91,000 sqm. It has become the third Raffles City Mixed-use Project in Shanghai after the Raffles City in the People’s Square area and the Raffles City Changning in Zhongshan Park area. The Crystal Plaza Phase Four in Qiantan of Pudong, which was developed by Tishman, was also completed in Q2, adding approximately 45,000 sqm of office space to the market. This is the final phase of the office portion in the Crystal Plaza mixed-use development.

In Q2, the average Grade-A office rent continued to drop 1.1% QoQ to RMB9.4 per sqm per day. The average rent in Core Business Districts decreased 1.7% QoQ to RMB11.4 per sqm per day, and the decline was higher than the market average. Amongst, the average rent in Little Lujiazui decreased 2.4% QoQ to RMB12.4 per sqm per day. Peter Zhang, Senior Director and Head of Office & Industrial Services at Knight Frank Shanghai, says, “In Q2, due to the new completions and the weak leasing demand, the overall vacancy rate in Shanghai’s Grade-A office market increased slightly by 0.4 percentage point QoQ to 13.5%. However, as the leasing demand from TMT and co-working space remained stable, the increase in vacancy rates has slowed down.”

“It is expected that there will be over 1.5 million sqm of new projects to be completed in the second half of 2019, of which more than 60% will be situated in the emerging business districts. The Grade-A office market will face downward pressure on rents and the vacancy rate will continue to rise.”

Retail properties

In Q2, six retail malls opened in Shanghai, adding 423,000 sqm of retail space in total to the market, down 9.5% YoY. Amongst, three are located within Inner Ring Road, one is located between Inner Ring and Middle Ring Road and two are situated outside Outer Ring Road. The retail space of each new mall within Inner Ring Road are all smaller than 50,000 sqm. Public holidays and online shopping festivals including “1 May” Labor Holiday, “1 June” Children’s Day, Dragon Boat Festival and “618” JD.com’s anniversary celebration have boosted retail sales in Q2. Total retail sales of the 386 retail and catering enterprises in Shanghai reached RMB3.65 billion with a YoY increase of 11.8%; during the Dragon Boat Festival, Shanghai achieved a total retail sale of RMB10.658 billion, an increase of 7.7% YoY.

In Q2, the average rent of ground-floor space in Shanghai’s prime retail areas grew 1.7% QoQ to RMB60.2 per sqm per day. In Nanjing West Road retail area, the upgrading In Point Project and the well-performed HKRI TaiKoo Hui supported the growth of the street shop rents along Nanjing West Road, while the street shop rents in other prime retail areas remained stable. After partial or overall tenant and brand adjustments, the average rents of shopping malls in each prime retail area experienced different increases, leading to an overall increase of 2.7% QoQ to RMB63.6 per sqm per day. In Q2, the overall vacancy rate remained unchanged at 11.2%.

Regina Yang, Director and Head of Research & Consultancy at Knight Frank Shanghai, says, “Looking forward, the retail market is expected to face continuous reshuffle. After the withdrawal of 10 Corso Como, Forever 21, Carrefour and Takashima from China, more foreign retailers are likely to struggle for survival in China. In the second half of 2019, we expect that new retail supply will remain high and the number of renovated projects will rise. New retail malls set to open include Love@Metropolitan in Putuo, Jing’an International Centre (JAIC) in Jing’an and Sunland Garden City in Waigaoqiao.”

Industrial properties

In Q2, the Shanghai industrial property market remained buoyant with solid performance. In terms of logistics warehouse, the average rent increased by 1.9% QoQ to RMB1.61 per sqm per day, with the growth rate 1.9 percentage points higher than that in the previous quarter. Strong leasing demand of logistics warehouses led to a Q-o-Q decrease in the vacancy rate of 0.3 percentage point to 7.2%. Demand for high-quality logistics warehouses from retailers remained robust. For examples, B&Q leased 20,000 sqm of warehouse space at Prologis’s Shanghai Jinshan Logistics Centre; the BEAST leased 10,000 sqm of warehouse space at GLP Lingang Logistics Park.

In terms of factories, rents increased steadily in Q2 with the average rent of single-storey factories rose to RMB1.27 per sqm per day, a QoQ increase of 0.8%. Multi-storey factories also have gained popularity in the market. A total of approximately 15,000 sqm of multi-storey factory space has been leased out at Shanghai Scientific Research Innovation Base Phase One of the College of Science from Northeastern University in Baoshan City Industrial Park.

Peter Zhang, Senior Director and Head of Office & Industrial Services at Knight Frank Shanghai, says, “An recently updated version of the 2019 version ‘Negative List’ jointly released by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) trimmed down restrictive measures to 40 from the 190 as six years ago, in an effort to further open up sectors including agriculture, mining, manufacturing and services.  Consequently, growth prospects of industrial enterprises received considerable boost. However, taking into consideration the uncertainty brought by trade disputes between China and the U.S., in the second half of 2019, we expect the rents of factory space to stay flat, while the rents of logistics warehouse keep moderate growth as vacancy rate slightly drops.” 

Investment Market

In Q2, the Shanghai property investment market recorded four en-bloc sales for a total consideration of over RMB15 billion. Most of them were commercial mixed-use developments. Institutional funds and developers based in USA, Canada and Singapore were active in the first half of 2019 with a total investment volume of over RMB35 billion.  In April, Phoenix Property bought four Grade-A office buildings including retail space in One Financial Street Shanghai located at the north of Shanghai Railway Station for at least RMB3 billion. The company will develop this mixed-use development together with the developer Financial Street Holdings. In the same month, Greenland Hong Kong sold Greenland Huangpu Binjiang Project to Canadian Fund - Brookfield Asset Management. In May, Singapore’s City Developments Limited acquired 70% equity in Shanghai Hongqiao Sincere Centre Phase Two which is located in Hongqiao CBD for RMB1.2 billion. The business park market also recorded an en-bloc sales. In June, Medicilon purchased five R&D office buildings in Kailong Nanhui Business Park for RMB360 million.