New Office Supply Concentrated in Pudong and Minhang in Q2 2018

Published on 2018-07-11

Knight Frank has reviewed the performance of Shanghai’s real estate market in the second quarter (Q2) of 2018.

While Grade-A office rents dropped 1% quarter-on-quarter (Q-o-Q) to RMB9.5 per sqm per day, ground-floor prime retail rents decreased by 0.7% Q-o-Q to RMB58.1 per sqm per day. In the investment market, the office and retail property sectors recorded four major en-bloc transactions respectively.

Grade-A office

In Q2, the new supply in Shanghai's Grade-A office market was approximately 250,000 sqm, a 46% decrease from the previous quarter. There were no new projects in core CBDs, with the new space mainly concentrated in Pudong and Minhang, accounting for about 60% of the total new supply. Building 3 of Pudong Financial Plaza in Century Avenue, Pudong was completed and delivered, bringing 48,000 sqm of office space to the market. The third phase of Mapletree Business City Shanghai (MBC Shanghai) in Minhang also came online, providing 101,476 sqm of office space. We expect over 800,000 sqm of new supply to be completed in the second half of the year, with that in emerging business districts such as Hongqiao CBD and Qiantan accounting for more than half of the total.

In Q2, the average Grade-A office rent fell another 1% Q-o-Q to RMB9.5 per sqm per day. Amid weakening demand for office leasing and increasing vacant space along with the relocation of tenants, many office landlords tried to improve occupancy by lowering asking rents and offering better incentives. In Q2, the overall occupancy rate in Shanghai's office market increased by 0.6 percentage point to 94.5%.

Peter Zhang, Senior Director and Head of Office & Industrial Services at Knight Frank Shanghai, says, “Co-working remained one of the industries demonstrating strong leasing demand in the office market. Supported by venture capital and fund companies, co-working companies had high rental affordability and large space demand, making them attractive to landlords. Co-working space users were no longer limited to small and micro start-ups. Flexible lease terms and rental plans have made such space an alternative for tenants in need of temporary office space during lease renewal and office expansion. Therefore, the maturing co-working industry is expected to become a stable demand driver for the office leasing market in the next few years.”

Retail properties

In Q2, three shopping malls officially opened or soft opened, bringing 320,200 sqm of new retail space to the market. The malls were Jing'an Imix Park in Jing’an District, Junxin Times Square in Yangpu District and Lidoway in Qingpu District. In addition, after one-and-a-half-year’s renovation, Changfeng Joy City officially reopened in Q2, with a total retail area of approximately 120,000 sqm. Retail consumer demand was booming. During the Jingdong 618 Online Shopping Festival, the accumulated orders on the Jingdong platform increased by 33% compared to the same period last year. According to the Shanghai Municipal Commission of Commerce, 412 retail and catering operators in the city achieved total retail sales of RMB3.78 billion during the Labour Day holiday period (29 April to 1 May), an increase of 15.9% year on year.

Shanghai remained the first choice for domestic and foreign retailers to open stores in China. In Q2, a number of first stores in the city or in the nation opened in Shanghai. For example, American sportswear manufacturer Champion's first store was launched in K11 Art Gallery Mall. Xiaomi's "Something Seen", the world's first smart home furniture house, was settled in Qibao Vanke Plaza. Carrefour's first smart store also opened in Shanghai.

The average ground-floor rent in Shanghai’s prime retail areas fell 0.7% to RMB58.1 per sqm per day. The average ground-floor rent of major shopping malls increased by 0.3% quarter on quarter to RMB61.9 per sqm per day, whilst that of prime street shops fell 1.8% to RMB54.0 per sqm per day. In Q2, the overall vacancy rate of shopping malls increased by 0.4 percentage point from the previous quarter to 14.8% due to partial renovations in some shopping malls.

Regina Yang, Director and Head of Research & Consultancy at Knight Frank Shanghai, says, “In the third quarter (Q3), we expect retail rents in Shanghai's prime retail areas to remain stable. With limited supply of new malls in prime areas, the average rents of major shopping centres will continue to rise, while street shop rents may continue to decline slowly. Shopping malls scheduled to open in Q3 include CapitaLand LuOne (86,000 sqm) in Huangpu District, Magnolia Square (110,000 sqm) in Hongkou District and LC Mall (130,000 sqm) in Pudong. The Galeries Lafayette department store from Paris, France, will open at the end of the year at L+ Mall in Lujiazui Centre, covering around 20,000 sqm of space. The first warehouse retail store of Costco in Mainland China will open in Kangqiao, Pudong in the second half of 2018.”

Investment Market

In Q2, Shanghai's commercial investment market was active. Amcorp Properties and Chelsfield Group jointly bought five storeys in LL Land Building on Nanjing West Road, covering a total gross floor area of 9,769 sqm. Singapore Alpha Investment Partners sold Shanghai International Capital Plaza, comprising a 24-storey office building and a six-storey retail podium, to LaSalle Investment Management in an equity transaction. The Lanzhou Minbai Group, controlled by Honglou Group, sold Shanghai Plaza in Huaihai Middle Road and Fudu Building in Renmin Road to Shanghai Shangmin and Shanghai Changchu for RMB1.86 billion and RMB603 million respectively.