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News Release

Hong Kong and Macau

Shanghai Office demand remains strong; non-bonded warehouse rents increased at the fastest pace in more than three years

According to Jones Lang LaSalle Shanghai’s Second Quarter Property Review

Hong Kong & Macau, 7 July 2011 – Office rents increased 4.6% q-o-q due to sustained demand from MNCs that continue to implement expansion plans.  “Limited new supply in the leasing market means that market conditions will remain tight for the remainder of the year, boosting landlord confidence and fuelling rental growth,” noted Anthony Couse, Managing Director of Jones Lang LaSalle Shanghai. Robust sales revenues have led to increased demand in the Retail leasing market, driven primarily by fast fashion and F&B.  In the residential market, government tightening policies have suppressed demand, leading to very low sales volume in the high end segment.  Meanwhile, the arrival of new expatriates to Shanghai allowed landlords to raise rents in serviced apartments by 2.1% q-o-q.  In the en-bloc investment market, both domestic and foreign investors were active this quarter. With demand strong for a limited amount of vacant space, rents in Shanghai’s non-bonded logistics market grew at 4.4% q-o-q, the fastest pace in more than three years.

Robust demand leads to rental growth of 4.6%. With strong expansion demand and limited available space in both Puxi and Pudong fuelling landlord confidence, rents increased city-wide in 2Q11. The overall average rent grew to RMB 8.3 per sqm per day, an increase of 4.6% q-o-q. In Puxi, rents rose steadily by 4.4% q-o-q and 13.5% y-t-d. In the Pudong market, rents grew faster than last quarter at 4.9% q-o-q and are up 8.7% y-t-d. Average rents in the Premium Grade A market reached RMB 9.6 per sqm per day, an increase of 4.8% q-o-q and 13.0% y-t-d.
Expansion demand drives net take-up. In Puxi, MNC tenant expansion demand continued to drive net take up, with new Premium Grade A buildings enjoying particularly active leasing activities and enquires. For example, the newly-completed International Commerce Centre (ICC) Phase I was steadily filling up with tenants. Henderson Metropolitan, which was completed three quarters ago, reached a commitment rate of 98% this quarter. In Pudong, leasing activity was robust in both Two ifc and Tai Ping Finance Tower. In-house expansion activity also strengthened as existing tenants quickly back-filled space left by tenants relocating to new buildings. For example, Lianhua Trust leased an additional 2,000 sqm in One Lujiazai, expanding by almost 50%. Bayer also expanded in-house in Citigroup Tower after several tenants moved to larger spaces in Two ifc.  Demand from both foreign and domestic investors remained robust due to a positive outlook for rental and capital value growth.
Two new Premium Grade A office buildings were completed in 2Q11. ICC Phase I in Puxi and Two ifc in Pudong, two long-awaited Premium Grade A projects, were handed over in 2Q11. Both new projects were developed by Sun Hung Kai and together added a total office GFA of 176,627 sqm to the Premium office market. Strong pre-leasing activities in both buildings meant that the market vacancy rate increased to only 7.3%. Vacant space in the market was mainly concentrated in several recently-finished projects. In the decentralized Grade A market, Bund Square was completed this quarter, adding a GFA of 77,000sqm.

Strong retail leasing demand was led by fast fashion and F&B.
F&B and fast fashion retailers continued to be the main drivers of leasing demand in the prime retail market. For example, GAP is actively pursuing new space for expansion in areas such as in Xujiahui and in Hongkou District after opening two stores last year. The West Nanjing Road area has become a key location for fast fashion retailers to open flagship stores, with Uniqlo, GAP, Marks & Spencer, American Eagle and H&M stores all now located near the West Nanjing Road Metro station. Hollister, owned by A&F, finally secured approximately 1,000 sqm to replace Giordano in Raffles City and will open in the coming months. F&B retailers remained active this quarter. Infiniti saw several new F&B brands including Enjoy Fish and 57 Degrees lease space. Jade Garden will open its second store in the Xujiahui area after leasing around 450 sqm in Grand Gateway 66 this quarter. The prime retail market’s vacancy rate decreased slightly by 7 basis points to 0.8% mostly due to expansion demand from F&B retailers.  Average ground floor rents in the Shanghai prime retail market increased steadily to RMB 51.5 psm per day, up 1.7% q-o-q. CRC Times Square, Grand Gateway 66, and Citic Square are all actively seeking to upgrade their tenant mixes, contributing to the upward trend in rents.
Several major retail projects have been delayed. No prime projects were completed this quarter, leaving the total stock unchanged at 2,962,995 sqm.  Henderson Metropolitan on East Nanjing Road, which was originally scheduled to open in June, has been postponed to September. Only around 55,450 sqm of prime retail space is expected to enter the market in 2H11, as several major projects such as Agile and Park Place have delayed their openings to next year.  With new supply limited and a number of mature projects upgrading tenants, the landlords are likely to continue to seek higher rents.  In decentralized precincts, Lotus International Plaza in Minhang district and Jiangqiao Wanda Plaza in Jiading district opened this quarter, adding 50,000 sqm and 210,000 sqm of retail space, respectively.
Government tightening policies continue to weigh on residential demand.
Government purchase restrictions along with other tightening measures continued to suppress buying demand in Shanghai’s residential market in 2Q11. Although sales volume in the primary sales market increased by 61% m-o-m in April and 29% m-o-m in May, total sales volume for the whole quarter only totalled 2.2 million sqm, one of the lowest levels since 4Q05.  Similarly, sales volume in the high-end segment declined 27% q-o-q in 2Q11 to the lowest level since 4Q05.  Nearly 60% of the high-end projects we track reported only one or two units sold this quarter. For instance, Park View Phase II only sold one unit in 2Q11 after selling 50 units in 1Q11. We expect that the current tightening measures will remain in place for the remainder of 2011 and likely into 2012.
Leasing demand continues to grow. Leasing momentum in the high-end market continued to increase in 2Q11 as MNCs from a broad range of industries brought more new expatriates to Shanghai to facilitate their business expansion plans. This was evidenced by the continuing decline in the serviced apartment vacancy rate, which edged down a further 30 basis points to 12.1% for the quarter.  Rising demand coupled with falling vacancy rates further enhanced landlords’ confidence, resulting in a 2.1% q-o-q increase in rents for serviced apartments.  Rents are anticipated to continue to move upwards in the short term due to growing leasing demand from new expatriates in Shanghai.  In the medium to long-term, a growing future supply of apartments for lease will likely slow the pace of rental growth. 
Developers hold prices steady in the face of weak demand. Despite the pessimistic sentiment in the high-end sales market, capital values for high-end apartments in Shanghai’s primary market remained largely unchanged in 2Q11 as developers did not believe that small price cuts would effectively boost sales under the current regulatory environment which has restricted the number of qualified buyers. Two high-end residential projects launched new units this quarter. City Castle Phase II in Jing’an District launched 186 units in April while The Bay in Pudong launched 204 units in May. The weak market sentiment, though, led to delays in other upcoming projects. In the secondary market, negotiation power gradually shifted towards buyers, but most sellers still remained reluctant to lower their prices. As a result, average capital values for high-end apartments in the primary and secondary markets remained largely flat this quarter at RMB 67,000 and RMB 56,000 per sqm, respectively. Looking forward, in the primary sales market, developers are likely to hold firm to their prices.  In the secondary market, a minor correction in price can be expected in the second half of the year as the market increasingly favours buyers.

Investment activity in Shanghai remains strong.
Preliminary figures indicate that the total sales value of en-bloc transactions reached RMB 7.7 billion in 2Q11, up 175.0% y-o-y from 2Q10. In 1H11, the total transaction volume has reached RMB 20.5, nearly equal to 1H10. Domestic buyers again made up nearly 60% of the transacted value this quarter. Among these buyers, companies purchasing space for self-use were particularly active. For example, a floor was sold in both SWFC and Jasper Tower in Lujiazui at approximately RMB 80,500 and RMB 70,000 per sqm, respectively. SOHO China continued buying office assets in the Shanghai market this quarter. In addition to purchasing two commercial-use land plots in Hongkou District, SOHO purchased the New World Changning Commercial Center on Zhongshan West Road for RMB 3.2 billion. Among foreign buyers, interest in both office and retail assets remains strong, especially as many funds raised in 2008 begin to run into the end of their investment horizons. One asset that was sold was Silver Court, a mixed-use development in Luwan District, which was sold to Mapletree’s MIC Fund. In addition, SK Group purchased Rainbow Plaza, a serviced apartment block in Changning District. The stock of tradable office and retail assets in prime areas, though, remains quite limited. Foreign investors increasingly have opportunities to either form JVs with or lend to domestic developers who need to raise cash in light of the government’s tightening policies restricting bank lending. As evidence that the tightening policies are having an effect, total land sales in Shanghai in 1H11 were RMB 37.8 billion, down 38.3% from 1H10.

Non-bonded rents increased at the fastest pace in more than three years.
In the non-bonded market, four new projects with a total of 163,725 sqm of space were completed in 2Q11. Three of the projects are located in the West Shanghai market. These projects are the 26,465 sqm AMB Qingpu Chonggu Distribution Centre, the 27,260 sqm Pinuo Shanghai Logistics Park and the 50,000 sqm Phase II of GLP Park Songjiang. Also completed in the non-bonded market this quarter was the 60,000 sqm Phase II of Ouluo Logistics Centre near Pudong International Airport. In the non-bonded logistics market, the vacancy rate rose to 7.2% from 5.8% due to new completions. Demand remained particularly strong in West Shanghai, with the vacancy rate there staying close to 0% despite the opening of three new projects. For example, in AMB Qingpu Zhonggu Distribution Centre, which opened this quarter, One Five One Ten and CEVA both leased 12,000 sqm of space. In the bonded market, the vacancy rate stayed steady at 22.6% with no new projects completed. Average non-bonded and bonded rents both continued to rise in 2Q11. Non-bonded rents increased at their fastest pace in more than three years, rising by 4.4% q-o-q to RMB 1.10 per sqm per day. Bonded rents increased by 2.6% q-o-q to RMB 1.05 per sqm per day.
Business Parks
Shanghai’s industrial zones are focusing on value-added functions.
Many of Shanghai’s industrial zones are restructuring, reducing the number of lower value manufacturing plants and focusing on sales and R&D functions. Factories producing high-tech and high-value goods are encouraged to stay in Shanghai’s industrial zones. At the same time, a number of companies in Shanghai are increasingly exploring their options to consolidate their office, R&D, and manufacturing operations in one location. Recently Medtronic announced a consolidation of its office and R&D functions into its manufacturing site in Zhangjiang. Similar examples are found in Jinqiao with Alcatel Lucent and Huawei. However, more and more companies are finding it attractive to consolidate outside of Shanghai because of the difficulty in locating manufacturing plants in many industrial zones. As more companies move their factories to Tier 2 and Tier 3 cities, some owner-occupiers are looking to sell their manufacturing plants to buyers who will then use the space and land for other value-added purposes like R&D.

Companies continue to expand manufacturing throughout East China.
Much of the demand for manufacturing space within Shanghai continues to come from companies that are already located in the city. These companies are seeking to expand, often relocating within the city at the same time. For example, two of Parker Hannifan’s business units are expanding, one of which is relocating in Pudong and the other is relocating from Minhang to Qingpu.  Benteler, meanwhile, completed a deal to establish a new plant in the Jiading Industrial Zone. Most new entrants and existing companies looking for manufacturing space, continue to focus their efforts outside of Shanghai. Companies in the pharmaceuticals, medical device, auto parts, machinery, and fine chemicals industries are particularly active in seeking manufacturing space in East China mostly in order to produce for the domestic market.