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News Release

Hong Kong and Macau

Office demand strengthens in Puxi; newly-released policies will slow residential sales

According to Jones Lang LaSalle Third Quarter Property Review

Demand from foreign companies in Puxi expanding and upgrading their office space led to a rental increase in Puxi of 6.6%. “Foreign retailers in particular are securing larger office space to help support their growing nation-wide chains of retail stores,” noted Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai. Prime shopping malls continued to experience strong demand, leading to a rental increase and a continued sub 1.0% vacancy rate. Sales volume in the residential mass market recovered through August and September, but newly announced policies at quarter-end will likely push down sales volume once again. Meanwhile the luxury residential market remained quiet throughout the quarter. Sentiment in the en-bloc investment market picked up as foreign investors became more confident in the outlook for China’s growth and guidelines for domestic insurance company purchases of commercial real estate assets were finally promulgated. Rents in Shanghai’s bonded logistics market grew by 3.8% on the back of export growth and strong demand for space.


Puxi rents rise 6.6% on strong demand. Average Grade A rents continued to rise across the city overall in 3Q10, growing by 5.1% to RMB 7.0 per sqm per day. In Puxi, strong demand from multinational companies for expansion and upgrading was the driving force behind a 6.6% q-o-q growth in average rents to RMB 7.0 per sqm per day, the fastest pace of growth observed since early 2008. In Pudong, rental growth slowed slightly to 3.2% q-o-q, bringing average rents to RMB 6.9 per sqm per day. After outperforming the regular Grade A market for three consecutive quarters, Premium Grade A office rents grew by only 2.7% q-o-q and 1.9% q-o-q in Puxi and Pudong, respectively.

Expansion and upgrade demand from multinationals drives Puxi demand.  Demand from foreign multinationals in Puxi continued to strengthen as many companies resumed expansion after a two-year hiatus. Foreign retailers were particularly active in the market as they secured larger, higher-quality office space in order to support their growing national retail store footprints. Puma leased 3,000 sqm in The Headquarters Building while another foreign retailer pre-leased 2,900 sqm in Henderson Metropolitan, both upgrading and relocating from Grade B offices. Demand from other industries in Puxi also increased as companies expanded into larger offices, showing evidence of a broad-based demand recovery.  For example, a domestic law firm pre-leased 6,000 sqm in Sun Hung Kai’s ICC (International Commerce Centre) and a multinational manufacturing company expanded into a 2,670 sqm space in Wheelock Square. Henderson Metropolitan, a premium Grade A building in Huangpu, was completed at the end of the quarter, adding 39,038 sqm GFA to the market. The balance between the completion of Henderson Metropolitan and the strong market demand left the Puxi vacancy rate stable at 11.0%. 

The Pudong market showed smaller deal volume and lower net absorption compared to the previous quarters, but significant demand remains in the pipeline for the rest of the year. SWFC, DBS Bank Tower and Two ifc are in the midst of late-stage negotiations for numerous floors. “The majority of demand in Pudong continues to be from domestic companies, particularly in Zhuyuan, where demand from local securities and futures companies resulted in several new deals in Chamtime and GC Tower,” Anthony added. Continuing the trend from the previous quarter, foreign financial companies were a significant demand driver as well. Bank of America and Bank of Tokyo-Mitsubishi both expanded in-house within Azia Center, each taking an additional 2,400 sqm of space each. Hongjia Tower, located in Zhuyuan in Pudong was handed over, adding 38,672 sqm GFA to the market.


International retailers continue to enter the market.  Demand from both luxury and mid-market brands for space in the Shanghai retail market remained strong in the third quarter. International luxury brands including Balmain, Céline, Salvatore Ferragamo and Bulgari opened in Shanghai ifc Mall in Pudong this quarter while brands such as MCM, Tom Ford and Roger Vivier opened in various Puxi properties. In addition to these high profile international luxury brands, Shang Xia, a new China-specific luxury brand created by Hermes, opened its first store in Hong Kong Plaza. “Mid-market retailers were also active in the market in 3Q10. UGG Australia also debuted in the Shanghai market this quarter, opening its first stores in Hong Kong Plaza and Plaza 66. The long-awaited American fast fashion brand Gap finally secured two Shanghai locations. Gap stores are scheduled to open in the China Venturetech Plaza on West Nanjing Road and in Hong Kong Plaza on Huaihai Road in 4Q10, ” noted Eugene Tang, Head of Retail for Jones Lang LaSalle, Greater China. With the sustained demand for space, average ground floor rents in the Shanghai prime retail market increased by 1.9% q-o-q on a like-for-like basis to RMB 49.9 per sqm per day in 3Q10.

Retail vacancy rate remains low.  The market vacancy rate remained at 0.8%. No new prime retail supply reached full completion this quarter. However, Xintiandi Style had a soft opening on the final day of September. With retail space of over 29,000 sqm, Xintiandi Style has secured international fashion tenants such as LeSportsac, Calvin Klein Jeans and Bread n Butter as well as designer fashion brands such as DBHK, Zuczug and La Vie. Bund 27 finished its refurbishment and began operating this quarter. Rolex will set up a 1,000 sqm flagship store on the ground level of Bund 27 in space that Saks Fifth Avenue Department Store was previously rumored to be planning to move into. In the non-prime retail market, SML Central Plaza, located on top of the Dapuqiao metro station, opened this quarter. SML Central Plaza is positioned to target nearby residents with mass market fashion brands and mid-end restaurants.

Residential sales sentiment improved significantly, but is set to drop again.  The third quarter started with weak sentiment on the sales side with transaction volume staying low in July as government tightening measures continued to weigh on buyers’ confidence. However, transaction volume began to creep up in August as first-time homebuyers gradually returned to the market. Entering the traditional high season for home sales in September, sentiment in the sales market improved further, resulting in a significant growth of 88.8% m-o-m in sales volume of new commodity housing in September although prices saw little movement. The government’s CREIS index showed that prices declined slightly, falling 0.7% m-o-m in July and remaining steady in August.

On the back of increasing transaction volumes and improved sentiment in August and September, the Central government issued new nationwide policies on 29 September, tightening further the restrictions on the market. In addition to forbidding mortgages for buyers of third (or more) homes, the policies also raised the minimum down payment for first home buyers from 20% to 30%. In Shanghai, each family is now limited to purchasing one additional unit as long as the policy is in effect. Michael Klibaner, head of Research for Jones Lang LaSalle China, pointed out: “As a result of the new policies, home buyers are likely to again adopt a “wait and see” attitude, delaying purchases until they can assess the impact the policies have on prices. Transaction volumes are expected to fall significantly, similar to the period after the April round of tightening measures.”  

Luxury market remains quiet.  The luxury residential sales market in Shanghai remained subdued throughout the quarter due to greater restrictions on mortgage loans for investors. This was evident in several luxury projects currently on the market, including 1 Xinhua Road, Central Residence II and Tomson Riviera, which all recorded only one or two transactions in 3Q10. Due to the continued weak sentiment in the luxury sales market, no major new luxury units were put onto the market for sale. Developers opted to further delay new launches, awaiting the luxury market to regain momentum. Although the luxury market witnessed sluggish sales in 3Q10, few developers and individual sellers in the secondary market were motivated to lower their prices to spur sales. As a result, capital values of luxury apartments remained largely unchanged in the quarter at an average of RMB 55,255 per sqm. The new tightening policies will cause a prolonged period of slow sales in the luxury market.

In the luxury rental market, strong leasing demand from expatriate workers pushed down the vacancy rate by an additional 1.4 percentage points. With the falling vacancies and enhanced landlord confidence, rents for luxury apartments grew by 0.9% q-o-q, marking the third consecutive quarter of rental growth. 


Investment activity picks up.  Preliminary figures indicate that the total sales value of en-bloc transactions has reached RMB 24.3 billion year-to-date in Shanghai. After foreign investors became more cautious in 2Q10 because of the European debt crisis and the introduction of tightening measures in the residential market, many resumed an aggressive search for suitable investments in 3Q10 on the back of expectations for buying demand from domestic insurance companies. As an example of the improved investment sentiment, a JP Morgan fund acquired Shama Century Park, a serviced apartment project in Pudong, from a Morgan Stanley fund for approximately RMB 1.2 billion in July. The Morgan Stanley fund previously purchased this project for about RMB 700 million in 2006. The bulk of foreign investor attention, however, is focused on the retail and office sectors.  For example, Singaporean fund Ascendas Commercial Fund acquired Cross Tower in Huangpu District for about RMB 1.3 billion in September. With only a limited number of assets available in Shanghai for purchase, those assets that are available have been attracting strong investor interest, particularly in the office sector which is clearly in a phase of rental growth. Yields again remained largely steady this quarter, but the release of rules allowing insurance companies to invest in commercial real estate is likely to compress yields in the future. “Insurance company purchases are likely to be slow in the near term, as they develop teams to manage these assets, but strategic partnerships with other investors are a strong possibility in the interim,” noted Greg Hyland, head of Investment for Jones Lang LaSalle Shanghai. Domestic companies continue to be keen to acquire office space in prime locations in Pudong for self-use, preferably with signage rights on Shanghai’s skyline.


Bonded logistics market recovery solidifies.  Exports from Shanghai have continued to grow strongly in recent months, with y-o-y increases in exports in June, July and August of 44.2%, 38.8% and 25.5%, respectively. Exports are now above pre-global crisis levels, with volume, in value terms, from January to August 3.0% higher than in the same time period in 2008. Trade with ASEAN countries grew by 68.2% y-o-y in 1H10 and continued to play a crucial role in the overall increase in Shanghai’s trade volume. Export values generated by transit storage trade grew by 98.0% in 1H10, significantly outpacing growth in general trade and processing trade. Transit storage trade is an important driver of demand for bonded warehouse space, which is reflected in the increasing net absorption in the bonded warehouse market. While demand remained strongest in the Waigaoqiao sub-market, demand in the Lingang sub-market also began to recover. After bonded rents grew last quarter for the first time since 3Q08, bonded rental growth sped up to 3.8% q-o-q this quarter. In the non-bonded market, rents grew for the fourth straight quarter. This quarter’s 2.6% q-o-q rental increase was the quickest growth since 4Q07.

Business Parks

Business park zone evolution strengthens demand.  After a down period of two years, demand from multinational companies in Shanghai’s business park leasing market has returned in full force. Many business parks are seeking to change their business mix. The identity of these zones is undergoing an evolution as they become less industrial and more focused on high tech R&D and headquarters functions. As a result, the zones are restructuring and some existing tenants not matching the new positioning are being forced to relocate. These restructurings are helping to drive demand for new space and facilities as the affected companies are now evaluating relocation opportunities both inside and outside of Shanghai. On the investment front, while buyers have been actively looking for business park space, seller expectations are high and no sales have been completed recently.

Companies remain involved in site selection.  Companies are still interested in manufacturing space, with new inquiries from companies remaining strong. At the same time, there are many companies that began looking for space in previous quarters are currently undergoing the site selection process both in the greater Shanghai area and throughout the Yangtze River Delta. Companies in the bio-tech, pharmaceutical, FMCG, and auto parts industries are particularly active in seeking manufacturing space.