Jan 18, 2016

Leading global commercial real estate services firm Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) issued its 2015 Q4 market research report and 2016 forecast on January 18th. The report covers all five major property segments in Shanghai, namely office buildings, shops, residential properties, commercial parks, and industrial properties. It also covers office buildings and commercial properties in second-tier cities in East China.

According to the report, there were 17 major transactions for Grade A office buildings in Shanghai's CBD during 2015 Q4. They amounted to RMB 37 billion in total transaction value. During Q4 of 2015 two new projects were completed. They are LJZ Century Metropolis in Pudong’s Zhuyuan submarket and Yong Feng Plaza Silver Tower in Xujiahui. The main source of demand for quality office space has continued to be domestic financial institutions. Overall the vacancy rate has dropped to 5.0% as of the end of the quarter; this is the lowest since 2008 Q3. City-wide the average rent has grown 2.3% on a year-on-year (YOY) basis, or 9.1% over the same period last year, to RMB 10.1 per square meter per day. It is in fact the first time since 2008 that rent has exceeded RMB 10 per square meter per day.

Shanghai's commercial property market during Q4 was more active than in the previous quarter, with four new shopping centers officially commencing operations.  Demand for the leasing of properties was strong, with net take-up volume showing a YOY growth of 42.0% to 195,000 square meters. Retail shopping for apparel and home furnishings showed strong performances, while departmental store owners continued to upgrade their properties in order to support retail sales. During the quarter, the average vacancy rate (on a YOY basis) was pushed from 9.4% to 12.4% in part because of new supply. In addition the new project's below-average rent had caused the average fixed rent for ground floor space in mid- to high-end shopping centers in Shanghai to fall by 2.1% (on a YOY basis), or 1.2% over the same period last year, to RMB 38.80 per square meter per day.

Nevertheless demand continues to be strong for commercial space in commercial parks. With two new projects in mid-Zhangjiang Park, the overall vacancy rate fell by 10.9% owing to an increase in the net take-up rate, which was four times the new supply area. This level was also the lowest in the past 10 years. Average rent levels continued to increase, to RMB 3.77 per square meter per day. The en bloc sales market was also very active, with 7 major deals completed during the quarter.

Despite continuing weakness in China's industrial economy, Shanghai's logistic market continued to perform well as a result of retail consumption and e-commerce. During the quarter, 3 high-quality logistics properties with a combined built-up area of 197,000 square meters were completed. Despite significant increases in new supply during the quarter, demand for standard warehouses in Shanghai was more active than in the preceding quarter. Thus the average rent was far more stable than in the previous quarter. It stood at RMB 1.24 per square meter per day. At 14.6%, the vacancy rate was comparable to that in the previous quarter.

The demand in the residential property market in Shanghai remained strong during the quarter, maintaining the trend of Q2 and Q3. A total of 33,925 commercial-residential property units in Shanghai were sold during Q4, amounting to 4.14 million square meters, the highest ever during the same period over the past 5 years. Demand for mid- to high-end residential units was particularly strong.  The average transaction price for new commercial-residential properties in Shanghai rose on a YOY basis by 5.9% to RMB 33,903 per square meter, also a historical high.

The volume of the supply of high-quality office buildings in second-tier cities had declined. Except in the case of Nanjing, where there was no new supply, Hangzhou, Suzhou, Xiamen and Wuhan all had new projects launched during Q4. As a result of launch of new projects, the vacancy rate in Xiamen and Suzhou rose somewhat, while that in Wuhan, Nanjing and Hangzhou showed declines. Among the five cities, rent - at RMB 4.4 per square meter per day - was the highest in Hangzhou and Nanjing, followed by Wuhan (RMB 3.3), Suzhou (RMB 2.7) and Xiamen (RMB 2.3). There were no en bloc sales in any of the 5 tier-two cities. Several new commercial properties were launched in tier-two cities during Q4, with fashion apparels, dining, home furnishing and lifestyle businesses continuing to make up the primary demand for commercial properties in such cities. Nevertheless the vacancy rate in several cities rose because of fresh supply. As at the end of 2015, average vacancy rate in such cities was 7.3%, an increase of 0.6 percentage points during the same period last year. Except in the case of Xiamen, the average rent for ground floor of mid- to high-end shopping centers in several cities declined because of below-average rent for new projects.

Looking ahead, there will be completed in Shanghai's CBD, nearly a million square meters of office space in 2016. Given the net take-up volume over the past few years, such new supply will obviously exceed by far new demand, thus causing the vacancy rate to rise rapidly. At the same time there will also be new supply of significant volume in secondary markets. Therefore, average rent for Grade A office buildings in Shanghai's CBD will remain relatively stable in 2016.  A significant volume of fresh supply of commercial properties is located in non-CBD areas. As such it is expected that average fixed rent for ground-floor units in Shanghai may see a decline during the first half of 2016. In contrast owing to strong demand and improvement in building quality, the average rent for commercial park properties in Shanghai will continue to rise. With respect to industrial property market, strong fresh supply will likely cause average vacancy rate in Shanghai to rise in 2016. This is particularly so for Puxi market, thus exerting downward pressure on rents. With respect to residential properties, demand will continue to be strong in 2016, particular for the high-end and luxury property markets. For office buildings and commercial properties in tier-two cities, in view of significant volume of new supplies, overall vacancy rate will inevitably rise, while rent will decline in tandem.

According to Carlby Xie, Director of China Research, Colliers International, sale of residential properties in Shanghai was a record high in 2015. Given the current stimulant measures and lack of major restrictions, strong buying sentiments look set to continue, at least in Shanghai.


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