Knight Frank Launches Shanghai Office Market Report Q3 2019: The Decline in CBD Office Rents Narrowed

Published on 2019-10-16

Knight Frank releases the latest Shanghai property market updates. In the third quarter (Q3) of 2019, Grade-A office rents decreased 1.1% QoQ to RMB9.3 per sqm per day.

In the retail property market, the average rent of prime retail areas ground-floor increased 0.3% QoQ to RMB60.4 per sqm per day. In the investment market, the commercial property sectors recorded ten major en-bloc transactions.

Policy Review

On 26 July, the Shanghai Municipal Government published “the opinions of Shanghai’s promoting the development of multinational corporation (MNC)’s regional headquarters by Shanghai Municipal People’s Government”, which was implemented on 1 September. According to the opinions, more asset-light enterprises in emerging sectors, including Internet and digitalisation, will benefit from the relaxation of the standards for the classification of regional headquarters by receiving fiscal subsidy and enjoying tax reduction. Favourable business environment will foster the development of enterprises, which is of great benefit to drive the office leasing demand on the expansion or the setup of new offices and branches.

On 6 August, the State Council approved the setup of Lingang area of the Shanghai Pilot Free Trade Zone (FTZ) and released a series of favourable policies aimed to establish a cluster featuring international business, cross-border financial services, frontier technology research and development (R&D) as well as cross-border trade in services. Given the development opportunities of industries brought by the gathering of enterprises, the commercial properties in Lingang area have also attracted attention from the market. More enterprises locate their offices in Lingang area, which will have a positive impact on the development of Shanghai’s overall office market in the future.

Grade-A office

In Q3, Lujiazui Binjiang Centre, as the only new project in Shanghai’s Grade-A office market, was completed and delivered in Pudong Yangjing area, bringing approximately 72,000 sqm of office space to the market and driving up the total stock to 18.72 million sqm. Lujiazui Binjiang Centre, acquired by Lujiazui Group from Greenland Group for RMB3.413 billion in 2016, was developed and constructed by Greenland after acquisition. The Grade-A new supply continued to decrease by quarter in the previous three quarters in 2019, reaching approximately 758,000 sqm, 21% lower than the average level of 960,000 sqm in the same period since 2016.

In Q3, the average rent of Grade-A office continued to fall by 1.1% QoQ for the consecutive fourth quarter since the fourth quarter of 2018 to RMB9.3 per sqm per day. The average rent in Core Business Districts decreased 0.9% QoQ to RMB11.3 per sqm per day, but the decline slowed down. Among them, the average rents in Nanjing West Road and Huaihai Middle Road remained at the same level as the figures in Q2. Some landlords in Little Lujiazui with higher office rents began to reduce asking rents, dragging the average rent down 1.2% QoQ to RMB12.2 per sqm per day. Due to the limited number of new projects and the stable leasing demand from frontier sectors including technology, pharmaceutical and artificial intelligence (AI), the overall vacancy rate in Grade-A office market in Q3 decreased by 1.4 percentage points QoQ to 12.1%.

Peter Zhang, Senior Director and Head of Office & Industrial Services at Knight Frank Shanghai, says, “It is expected that there will be another 900,000 sqm of new projects to be completed in Q4, of which most new supply will be concentrated in Xuhui Binjiang and the Post-Expo areas. The above submarkets will face downward pressure on rents due to the increase in new supply. Given the weakening demand and lack of new demand sources, the market rent will continue to drop 1-2% QoQ in Q4 while the overall vacancy rate will increase due to the huge amount of new supply. Furthermore, with the support of incentive policies, AI and related industries will remain a major source of leasing demand of Grade-A offices for a long term.”

Retail properties

In Q3, a total of eight shopping malls opened in Shanghai, adding 418,000 sqm of retail space to the market. The new supply area is about 75% of that in Q3 2018, and the new shopping malls are all with sizes less than 100,000 sqm. As the only new shopping mall opened within Inner Ring Road in Q3, the six-storey One Museum Place Mall developed by US-based developer Hines officially opened in Jing’an District.  Co-developed by US-based Tishman Speyer and Shanghai Lujiazui Group, Crystal Plaza in Pudong Qiantan Area had its soft opening in August with a total retail gross floor area of 68,000 sqm. Other six new shopping malls are Shanghai Jiuting Gemdale Plaza in Songjiang, Lihpao Land, Starry Street and Bailian South Shopping Centre Zone 2 in Minhang, Huajing Paradise Walk in Xuhui and Shanghai Sunye Shopping Mall in Jiading.

In terms of retailers, various supermarkets were active in expanding their network. For example, on 5 July, Hema Supermarket’s 30th store in Shanghai, the Imago Plaza Store officially opened, covering a site area of 2,400 sqm. On 27 August, Costco, the world's second-largest hypermarket retailer opened their first store of Chinese Mainland in Minhang District with a site area of 20,000 sqm. On 31 August, as one of the Parkson Group’s key retail projects in 2019, Parkson Supermarket on Huaihai Road was opened after six months’ preparation.  On 22 September, Hongkong Land opened a fresh supermarket LCMart in LC Mall in Pudong with a total gross floor area of 3,000 sqm.

In Q3, the average rent of ground-floor space in Shanghai’s prime retail districts grew slightly by 0.3% QoQ to RMB60.4 per sqm per day.  The average street shop rents in prime areas remained stable whilst the average ground-floor rents of shopping malls increased 0.6% QoQ to RMB64 per sqm per day. In prime areas, as Grand Gateway 66 is approaching the end of three years’ renovation with a number of retail stores’ opening gradually, the average ground floor rents of shopping malls in Xujiahui increased 2.9% QoQ to RMB78.6 per sqm per day. In recent years, Xintiandi has gradually replaced the Huaihai Middle Road area as a new shopping area, thus the average ground floor rents of shopping malls in Xintiandi increased 1.7% QoQ. In Q3, the overall vacancy rate of prime shopping malls grew 0.1 percentage point QoQ to 11.3%.

Regina Yang, Director and Head of Research & Consultancy at Knight Frank Shanghai & Beijing, says, “Looking forward to Q4, as the retail property market reached a high level of inventory, both CRC Times Square in Pudong and Grand Gateway 66 in Xuhui will reopen after the largest renovation since their openings. Technology retailers are planning to set up more flagship stores in Shanghai. Huawei will join hands with New World Group to open the world's largest Huawei flagship store at the previous site of FOREVER 21, Nanjing East Road, covering a store area of over 5,000 sqm. In Q4, the average rent of prime retail areas will remain stable. Due to the high vacancy rate of newly opened shopping malls, the overall vacancy rate is expected to increase slightly by 0.2 percentage point QoQ to 11.5%.”

Investment Market

In Q3, the Shanghai property investment market recorded ten en-bloc sales for a total consideration of over RMB10 billion. Most of the transacted properties were mixed-use commercial developments. Though most investors in the quarter were domestic developers, institutional funds from the US and South-East Asia were also active. Amprop, together with Chelsfield Group, KHI Holdings and Pamfleet Asset Management purchased office blocks in Daning International Commercial Plaza of Jing’an Daning from Sino Ocean for RMB1.454 billion. KKR, a global investment firm, purchased Fudu Commercial Building in Yu Garden with HiTone Capital. The building will be converted into a mixed-use development called as “Neo Bund”. Garbo Commercial, an overseas mergers and acquisition (M&A) and transformation fund jointly established by Singapore Government Corporation (GIC) and Joy City Property acquired Changfeng Joy City in Putuo District from Joy City Property. GIC will jointly operate the retail project with Joy City Property in the future.