Dec 15, 2016

Shanghai has entered the era of upgrade and transformation, and the model for urban renewal based on "transforming old buildings to increase stock” has caught the attention of multiple entities, such as government, developers, operators, and service providers.

How to renew the increasingly scarce market for office buildings in core areas and reestablish new values has become another challenge for the industry. Recently, Colliers has teamed up with experts from various industries to conduct a full assessment of the market opportunities for transforming and upgrading office buildings and the development trends of urban renewal.

Panel Guests (from left to right)
Zhang Wei, Deputy Director, East China Property and Asset Management Services, Colliers International
Ye Yan, Vice President of Investment, Yicheng Investment
Hao Jie, serves in the municipal department in charge of commerce
Huang Qiong, General Manager of East Ocean Centre, Sino-Ocean
Pang Chengliang, serves in the municipal department in charge of housing and urban and rural construction
Yu Ying, President of Asset Management, Real Estate Fund Department, Gopher Asset
Lai Jinxiong, Executive Director, East China Office Building Services, Colliers International

Influence of Urban Renewal and Industry Trends

Recently, the "Shanghai Master Plan for 2016-2040 (draft for review)" has been approved by the Shanghai People's Congress Standing Committee, and submitted by the Shanghai Municipal People's Government to the State Council for approval. The new Master Plan has set an urban development goal of "building an outstanding international city by 2040". Shanghai shall strive to become an "international economic, financial, trade, shipping, technological innovation and cultural center". The Master Plan has also set the target of negative growth of land for construction. In February this year, four departments including the Shanghai Municipal Administration of Planning and Land Resources jointly announced the "Implementation Opinions on the Optimization of the Land and Residence Supply Structure", which provides regulatory opinions, such as "increasing the proportion of self-ownership for developers of new commercial and office buildings, and support organic renewal of commercial and office buildings".

How should the core purpose of this series of policies be determined in the age of urban renewal? Mr. Pang Chengliang, who serves in the municipal department in charge of housing and urban and rural construction, provided a macro analysis of the office building renewal market from the four aspects of "land supply, capital investment, industrial development, and business models". He also provided outlooks for "land supply structure adjustment and decreasing development bonuses", "layered land sales and construction and operations of underground corridor complexes", "establishment of large-scale information management platforms", "establishment and industrial development of the five centers of Shanghai", "transition from the traditional development model (development-construction-sales) to a new business model (information management platform-commercial operations-asset securitization and withdrawal)".

From a macro perspective, urban renewal is subject to constant upgrades. From a micro level, the transformation of office buildings comes at the right time. Ms. Hao Jie, who serves in the municipal department in charge of commerce, provided the following perspectives: In the future, the city shall strictly protect the four baselines of land, population, security, and environment and the supply of new commercial and office buildings is expected to be tight. However, there are still relatively few high-quality office buildings in the city at the current stage. Therefore the renewal and transformation of office buildings will be an important channel for increasing the supply of high quality office buildings. At the same time, on the subject of full lifecycle management of land, the renewal and transformation of office buildings meets the development ideals of innovation, harmony, green, open, and sharing. With respect to specific operations, the government welcomes capable investors, developers and operators to actively participate in the renewal and transformation of office buildings to increase the overall quality of and investment in office buildings and make renewed office buildings more consistent with the city's industrial development and regional development plans.

The real estate market has entered the late-stage era of advancing "from quantity to quality". Cities in the past could use "increased spatial adjustment and "remote land swaps for new buildings" to achieve urban renewal. However, the contemporary focus on the instant upgrade model of "focusing on existing stock and implementing organic renewal" has made the upgrade and transformation of office buildings a common goal for the government, market, and society.

Rules of Investment in the Transformation of Office Buildings

As a vessel for the modern service and advanced manufacturing industries, office buildings bear enormous economic value. With the coming of the age of upgrade and transformation, the application of professional property management ideals and advanced financial tools for transforming and increasing the value of office building properties has become a critical property development model.

When asked about the standards and factors in real estate investment funds' selection of office building transformation projects, Ms. Yu Ying, President of Asset Management in the Real Estate Fund Department, Gopher Asset, shared her experience: "When Gopher Asset focused on core value-added properties in tier-1 and tier-1.5 cities, we discovered that there are large quantities of undervalued properties across the national market. Preliminary statistics have shown that there are 430 million square meters of undervalued properties across the country. Some may have old hardware or limited operating capabilities but they provide excellent investment opportunities for investors. This year, Gopher headquarters also established the Gopher Renewal Value-Added Fund, which will integrate strengths and resources from various sources and turn them into important development plans."

In April this year, Sino-Ocean successfully acquired East Ocean Centre, which had been acquired by a fund in its early stages. A quality project does not only satisfy the traditional procedures of development and leasing, but also requires constant upgrades to soft power, such as commercial facilities and property services, to win the approval of tenants. Ms. Huang Qiong, General Manager of East Ocean Centre, Sino-Ocean stated: "The old benchmarking office buildings and properties now face competition from numerous new projects. The renewal of old projects will satisfy the demand of users and improve quality. Based on advanced human-oriented health concepts, Sino-Ocean will expand its brand into different segments and form comprehensive links with economic benefits, user demands, and social development, in order to truly turn office buildings into assets for operations."

Based on years of experience and dedication in urban renewal and investment/operations, Yicheng Investment has accrued significant experience in successful property renewal in Shanghai. Ms. Ye Yan, Vice President of Investment of Yicheng Investment introduced Aviation Technology Tower, with total construction area of 15,000 square meters: "The project is in the Xujiahui commercial district, but the location is not ideal. After six months of renovation and product enhancement by Yicheng Investment, the rent has increased from RMB4-5 to RMB8, in later stages, which matches Grand Gateway Shanghai, the benchmark property of the same commercial district."

Strong Support in the "Rejuvenation" of Office Buildings

The most critical issue in the renewal process of traditional office buildings is the focus on a tenant experience that values users. In the "rejuvenation" process of office buildings, LWK & Partners and Colliers International have witnessed and participated in many upgrade and renewal projects for high quality office buildings as professional service providers for property renewals.

At the event, Mr. Lu Qianfeng, Director of East China Office Building Services at Colliers International shared the results of surveys of 50 office building tenants conducted by Colliers International. The survey aimed to understand the three hardware factors that tenants value most and their degree of reliance on the property management company. It also provided recommendations for renewal in accordance with the level of difficulty in renewing office buildings.

Mr. Lu Qianfeng, Director, East China Office Building Services, Colliers International

"Many office building properties occupy prime real estate in urban commercial districts, but their outdated software/hardware facilities fall short of modern requirements leading to low lease rates. The unit area rent is relatively low compared to nearby newly constructed office buildings, energy consumption is an issue and management and operations costs remain high." Mr. He Xiao, Director at LWK & Partners (HK), used successful case studies of office building renewals completed recently in Shanghai in his analysis: "The renewal projects saw not only adjustment and refurbishment to the hardware, such as elevators, lobby, parking lot, and interior decorations, but also to the software elements that require actual experience, such as management services, building appearance, and building culture. Finally, overall quality has been improved to reflect commercial value and the properties have become favored capital investment targets.

Mr. He Xiao, Director at LWK & Partners (HK)

Zhang Wei, Deputy Director of East China Property and Asset Management Services at Colliers International, stated: "Renewal and upgrade of buildings can indeed increase rent and the quality of building property management, but tenant satisfaction remains a critical issue. In the renewal process, property management companies must have clear understanding of the construction process and promptly and actively handle the inconveniences caused to tenants by construction in order to complete the renewal process smoothly. At the same time, enrichment of buildings’ green environmental protection functions also needs to be considered."

As cities progress, office building markets will reflect the methods and changes of urban renewal through building renewal and upgrade, and will drive urban growth and prosperity. The renewal and upgrade of office buildings requires not only "rejuvenation" but also the "sincerity" of all participants.

In the future, Colliers International hopes to team up with industry players for the advancement of renewal and development in the office building market and the enrichment of the city.

Video review (Mandarin only):

Speech 1:Please click here.

Speech 2:Please click here.

Panel:Please click here.

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