Shanghai Grade A office market
SOHO Gubei was launched onto the core office market in Q2/2019, adding 70,300 sq m of new office space and pushing the core Grade A office stock up to 9.0 million sq m by Q2/2019.
Net take-up increased by 24% in Q2/2019 totalling 108,700 sq m, though it remains down 72% year-on-year (YoY). Secondary 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.
Thanks to stronger take-up, vacancy rates fell by 0.5 percentage points (ppts) in Q2/2019 to 11.9%.
Core market rents continued to decrease by 0.1% on an index basis in Q2/2019, currently averaging 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. Notably, Pudong’s Qiantan and Houtan recorded significant improvements (15-20%) in occupancy, though they were still low compared to other decentralised markets in the city.
Rents remained flat on an index basis to an average of RMB5.82 per sq m per day.
The 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, tap into a new pool of financing enabling them to grow faster. This is also in accordance with China’s goal to upgrade its economy by shifting from more labour-intensive industries to innovation-driven growth.
The city’s office market is expected to receive about 1.5 million sq m of new supply in the second half of 2019. Continuous oversupply has intensified competition for tenants and, consequently, landlords are willing to pay more higher commissions (1.5X to as high as 3-4X) to brokers.
Shanghai retail market
Retail sales grew by 7.1% year-on-year (YoY) in the first five months of 2019, 0.2 of a percentage point (ppt) lower than the same period in 2018.
Just one new project, Life Hub @Upbund in Hongkou District, was launched onto the market in Q2/2019, adding 44,400 sq m of space to the market.
First-floor rents increased 0.4% QoQ in Q2/2019 to RMB27.8 per sq m per day.
Vacancy rates decreased by 0.1 ppts QoQ to 6.8% in prime retail areas, and 0.2 ppts QoQ to 7.8% in non-prime retail areas.
The luxury market still looks positive with leading landmark projects welcoming new brands, although the market size remains limited, with only a few developers able to successfully capitalise on the luxury market.
Around 800,000 sq m of new supply is expected to open in 2H/2019, two of which will be over 100,000 sq m and located in Pudong.
Although economic concerns remain, more government initiatives including tax cuts and innovations from retailers could bring increased confidence to the consumer market.
Shanghai residential leasing market
Three serviced apartment projects opened in Q2/2019—two renovations and one new opening.
Joyride Residences (悦樘玲珑服务式公寓) which was formerly the Elite Residences, added 119 units.
Tower 3 of Central Residence II finished renovations for their 2-and 3-bedrooms units for a total of 154 units
The new project was the Landsea Serviced Apartments (朗诗阁服务公寓) in Putuo, which added 250 units to the market.
Citywide average rent increased 1.0% quarter-on-quarter (QoQ), to RMB 207.1 per sq m per month.
Serviced apartment rents increased 0.3% QoQ to an average of RMB246.2 per sq m per month, while strata apartments increased 1.4% QoQ to RMB186.6 per sq m per month and villas increased 1.7% to RMB158.6 per sq m per month.
Citywide vacancy rates increased by 0.2 of a percentage point (ppt) QoQ to 14.9%, with serviced apartments seeing a 1.0 ppt decrease to 16.8%, while strata apartments and villas saw significant increases of 1.7 ppts to 14.7% and 1.4 ppts and 9.9%, respectively.
Many developers are waiting till more favourable market conditions to release units onto the market, resulting in some projects being delayed, although Ascott is expected to open Citadines Gubei (192 units) fully in Q3/2019. Ongoing uncertainties in the overall global economic environment are trickling down to the Shanghai high-end residential leasing market. Many MNCs are relocating personnel, though they may retain some senior management.
Companies are opting for shorter-term leases (less than two years) and downsizing properties to single occupancy units.
These trends are expected to continue for the rest of the year.
Shanghai residential sales market
First-hand mass commodity residential market
By June 23rd, overall commodity residential supply increased by 43.6% QoQ to 2.09 million sq m, up 43.6% YoY.
First-hand commodity residential transaction volumes increased by 32.9% QoQ to 1.89 million sq m, up 30.4% YoY.
Average transaction prices fell by 4.1% QoQ to RMB54,200 per sq m.
First-hand high-end apartment market
By June 23rd, the first-hand high-end apartment supply totalled 33,000 sq m in Q2/2019, down 38.6% QoQ. Supply came from new batches of existing projects like Joffre Classic (淮海名邸) and Jing’an Prime Land (静安府), adding 185 units to the market.
By June 23rd, first-hand high-end apartment transaction volumes totalled 169,000 sq m in Q2/2019. The total transaction volume in Q2/2019 is anticipated to be roughly the same as the transaction volume Q1/2019.
First-hand high-end apartment transaction prices remained relatively unchanged in Q2/2019 at an average of RMB110,000 per sq m.
Land market – residential zoned
By June 23rd, nine pure for-sale residential land plots had been sold in Q2/2019, with a total site area of 605,000 sq m and buildable area of 945,000 sq m. Most land plots were located in fringe districts such as Jinshan and Chongming. Two plots, however, were located in central areas: One in Shibei High-tech Zone, Jing’an District, with an accommodation value (AV) of RMB47,100 per sq m and another one in Jiangpu Community, Yangpu District, with an AV of RMB35,000 per sq m.
Four pure for-lease residential land plots were sold at their reserve price with a buildable area of 151,000 sq m. Two plots were located in Songjiang and Qingpu with an AVs of about RMB3,500 per sq m, and two were located in Shibei High-tech Zone, Jing’an District, and Liangcheng, Hongkou District, with average AVs of RMB7,500 per sq m and RMB9,400 per sq m, respectively.
Pricing remained stable in the first half of 2019 amid a relatively unchanged policy environment and an increase in new supply being met with a corresponding uptick in demand.
Given stable pricing, there is unlikely to be any significant policy shift specific to the Shanghai market in the second half of the year.
More than 10 (pre-sale price higher than RMB100,000 per sq m) land plots are expected to launch onto the high-end market in the second half of the year, totaling more than 3,000 developable units. The submarkets along Suzhou Creek and Lujiazui Riverside are expected to be the focus of the new supply.
Shanghai investment market
Total consideration of around RMB19.8 billion of deals was concluded in Q2/2019, pushing the first half of 2019 total amount to RMB71.0 billion. Brookfield’s purchase of Greenland Huangpu Centre from Greenland alone accounted for over RMB10 billion.
Though the market remained active, there is a difference in price expectation between buyers and sellers equivalent to 50 bps in yield terms, which leads to protracted deal negotiations.
International investors remain interested in the Shanghai market, accounting for around 78% of the transaction consideration in Q2/2019. International investors focused on properties in secondary locations with yields in primary locations remaining stubbornly low and significant new supply forecasted for decentralised areas.
Investors start to reconsider the feasibility of the converting properties to alternative uses as problems arise when projects kick off. This could be delays in getting government approvals or construction delays, both reducing the potential rate of return. At the same time, sellers consider the potential after-conversion asset value when disposing of assets, leaving limited upside for buyers.
Yields could compress further in 2H/2019 as market fundamentals remain challenging as a result of significant supply pipeline and uncertain demand, partially resulting from the ongoing trade dispute.
More funds are expected to be made available for elder care sector as the government pushes to accelerate the development of the industry and ensures the needs of an aging population are met.