January 4, 2017

Global real estate services provider Colliers International today releases the East China Real Estate Market 2016 Review and 2017 Outlook report. Colliers points out in the report that Shanghai CBD Grade A office market witnessed increase in average vacancy rate as a result of widespread withdrawals from peer-to-peer (P2P) lending companies and the highest full-year supply in five years which also combined to constrain the annual rental growth rate. Thirty eight large-scale deals were completed during the year in the office investment market. Shanghai’s retail property market had seven new projects completed in 2016 and the net absorption spiked to 580,100 sqm. In the retail investment market, nine en bloc sales transactions were completed with three of them acquired by domestic companies. Despite government intervention, demand for first-hand residential property in Shanghai was still strong in 2016, resulting in a very high sales volume. The average sales price grew by 19.0% and the average accommodation price spiked by 87% to the record high. Shanghai’s business park real estate market slowed in 2016 and the average vacancy rate increased amidst 13 new completions, while six en bloc sales transactions were announced in the investment market this year. The city’s logistics property market continued to be robust in 2016 with seven high quality logistics developments completed and the average rent rising by 4.4% YoY.

SHANGHAI
CBD Grade A Office: Dynamic year, with influx of new buildings and widespread withdrawals

Shanghai’s CBD Grade A office property market received 11 new office buildings during 2016, and the completion of these and other projects represented the highest full-year supply in five years, and total stock expanded by 7.4% YOY to approximately 6.13 million sq m. As a result of widespread retreats of the P2P lending companies, net absorption totalled just more than 113,000 sq m, significantly lower than the average annual level of 400,000 sq m in the previous five years. These factors led the average vacancy rate in CBD to increase to 10.2% by the end of 2016, up 5.3 percentage points YOY. In May 2016, China’s new VAT tax structure was expanded to the real estate industry. This led some landlords to increase rents as the VAT tax can be deducted from the tenants’ leasing cost in most cases. However, in response to the increasing vacancy rate in buildings, many landlords in Shanghai offered incentives to attract occupiers, which constrained the annual rental growth rate. As of end-2016, the average rent in CBDs grew by 3.1% YOY to RMB10.4 psm per day.

The Shanghai office sector remained the most active investment market in China in 2016. Thirty-eight large-scale transactions totalling more than RMB70.6 billion were completed during the year. Domestic end-users, and domestic and foreign investors were all active in Shanghai. Betty Wong, Executive Director of Colliers’ Capital Markets and Investment Services for East and Southwest China, explains that: “this was driven by various factors, including strong demand for self-use in Shanghai; largely stable asset performance; the need to deploy funds; pressure on currency depreciation; higher transparency relative to many cities in Shanghai; and the relative ease of divesting, given the strong investment appetite for such buildings.” However, investors are becoming increasingly sensitive to the large amount of new supply scheduled for completion in 2017, which should result in stronger leasing competition and limited rental growth in the short to medium term.

Derek Lai, Executive Director of Colliers’ Office Services for East China, comments: “In 2017, 1.1 million sq m office GFA is scheduled to complete in Shanghai’s CBDs with more than half in Pudong, including the skyscraper Shanghai Tower. This massive expansion will outpace the city’s ability to absorb office space, and in turn, lead to a further spike in the average vacancy rate in 2017. Correspondingly, landlords are expected to offer a more flexible incentive scheme, and a rental correction is expected in the short term. ”

Retail: Markets mature, investors buy in
Decentralisation was a major theme in 2016. Six of the seven new projects (90% by GFA) were in non-prime areas such as Qibao and Daning catchment, and these markets accounted for 70% of the city’s total retail stock by the end of 2016. In spite of the large amount of new supply, the city’s vacancy rate increased by just 0.3 percentage points to 12.1% by the end of the year. This was due to strong demand for the new properties, with many achieving occupancy rates of 80% or more at opening. As a result, net absorption spiked to 580,100 sqm in 2016, more than twice the level of 2015. Landlords were able to achieve rental gains during the year, and the average rent (excluding the effect of new supply) increased by 4.2% from 2015. Gains were seen in both the prime market (from RMB56.7 to 57.4 psm per day) and the non-prime market (from RMB 30.0 to 32.1 psm per day). Including new supply, where opening rents were typically below the market average, the citywide average rent declined by 4.0% YOY to RMB 37.3 psm per day. In the investment market, nine en bloc sales transactions were completed, compared to just one in 2015. Notably, three of the acquisitions were made by domestic companies, as they move into the capital markets.

The coming year will be extremely active in the retail property market. More than 1.5 million sq m of new retail property at 17 different projects is scheduled for 2017, including some landmark projects.  Most of the new supply will be in non-prime areas with only two new projects scheduled in prime areas. As a result, the vacancy rate in prime areas will remain low in the coming year, as retailers compete for limited space. In the non-prime areas, the wave of new supply will lead to a rise in the vacancy rate. Rental growth in prime catchments will remain buoyant in 2017, as landlords make trade and brand mix adjustments, and are able to achieve gains,” says Carlby Xie, Senior Director of Research, Colliers China.

Residential – Sales strong despite government intervention, average house price rose by 19.0%
Demand for first-hand residential property was strong in 2016, with sales totalling approximately 13.6 million sq m (106,793 units) by the end of the year. This was the city’s second-highest annual sales figure in the past nine years after record performance in 2015. Notably, the 2016 sales figure was achieved despite a 37% decrease in supply to 7.6 million sq m (65,033 units), as developers slowed the pace of project launches.

The sales volume varied dramatically throughout the year, echoing the implementation of increased government restrictions on buyers. Shanghai’s Bureau of Housing and Urban-Rural Development announced two changes at the end of March, raising the threshold for non-local buyers (who must now show proof of tax payments for the previous five years) and increasing the minimum down payment for second homes from 40% to 50% or 70% (depending on the case). As buyers moved to close sales in anticipation of a further round of purchasing restrictions, sales were robust in the first three months of the year, and peaked at 2.2 million sq m (17,524 units) in March, the highest monthly sales volume since January 2008. The figure fell in April and May, peaked again in August at 1.9 million sq m (13,650 units) and remained strong through the traditional “Golden September, Silver October” sales season. The monthly sales volume declined again in November as developers sharply reduced supply. On November 28, city authorities raised the minimum down payment for a first home from 30% to 35%. In December, developers again reduced supply and the sales volume again. However, the average sales price grew by 19.0% in 2016 to RMB38,300 psm which can be attributed to the substantial increase in sales of high-end and luxury properties.

Developers continued to show a sustained appetite for land acquisition and development in Shanghai and the average accommodation price grew by 87% to RMB32,035 psm. The most notable transaction was Rongxin Group’s purchase of a 30,000 sq m site in Jing’an District in August for RMB11 billion or RMB100,000 psm, a national record for accommodation price.

Looking forward, Carlby Xie, Senior Director of Colliers’ Research for China forecasts that no major policy changes to the government’s purchase restrictions are expected in the near future. The high-end and luxury markets will continue to be active, supported by the confidence of many home buyers that there is still room for upward growth. New supply is expected to be in line with 2016. In the land market, government announcements have suggested that the supply of residential land for development will increase in 2017 after the limited number of sites in 2016.

Business Park – Leasing slowed but rent remained stable
The Shanghai business park real estate market received 13 new completions with a combined effective GFA of 824,000 sq m in 2016. As a result, the total stock increased by 10.6% YOY to approximately 8.6 million sq m. The overall leasing demand was less active in 2016, with net absorption shrinking by 75% YOY to 290,000 sq m and the average vacancy rate rising to 15.3% as of end-2016. Nevertheless, demand was solid in certain submarkets with mature amenities and professional management, such as Caohejing, Zhangjiang and Lujiazui Software Park. Companies from the IT and biomedicine sectors were the main demand drivers. The relative softening of leasing demand had a limited impact on the average rent and the city’s average rent increased by 6.5% YOY to RMB4.03 psm per day as of end-2016, topping the RMB4.0 psm per day mark for the first time since 2006. The business park real estate investment market slowed in 2016, though six en bloc sales transactions were completed. Both institutional investors and end-users actively sought suitable acquisition targets in Zhangjiang, Jinqiao and Caohejing. Notably, foreign funds, domestic institutions and RMB funds were keen on assets either with high occupancy rates and a high-profile tenant mix, or value-add projects with the potential for renovation.

In 2017, approximately one million sq m of new supply is scheduled to complete in Shanghai’s business park real estate market. Nearly 70% of the new supply will be located in mature submarkets such as Zhangjiang, Caohejing and Lujiazui Software Park. Michael Wu, Senior Director of Office Services, Colliers International, East China, comments: “Demand was historically strong in these mature submarkets to which tenants have strong adhesiveness. New supply will stimulate leasing demand to some extent. The average vacancy rate is expected to stay flat or edge up, given the significant volume of new supply in the pipeline. In terms of rent, the new projects will have higher specifications and improved amenities, expecting to support buoyant rental growth in 2017, though rental performance will vary by submarket and project some of which will see short-term decline in rent. Nevertheless, the plentiful available space will provide more choices for tenants and thus put them in a better bargaining position.”

Industrial (Logistics & Manufacturing) – Robust demand, very active investment market
Shanghai’s logistics property market continued to be robust in 2016, underpinned by a positive outlook towards retail sales and other sectors that typically require logistics property. Seven high quality logistics developments were completed in 2016 with a total GFA of 624,800 square metres, the highest annual supply since 2008. All the completions were multi-storey and non-bonded warehouses. Demand for standard logistics property was strong in 2016. Net absorption totalled nearly 640,000 square metres and the overall vacancy rate decreased by 1.6 percentage points YOY to 13.0% by the end of the year. Approximately 60% of net absorption was at the new completions. Strong demand and limited available leasing space resulted in sustained rental growth by 4.4% to RMB1.29 psm per day. The manufacturing property market was stable in 2016. Given the limited industrial land supply, the average rent increased by 3.9% YOY to RMB1.02 psm per day.The investment market remained attractive for logistics property developers and institutional investors in 2016, with a considerable amount of activity.

“Over 700,000 sq m of standard logistics property is scheduled to complete in 2017, with nearly 60% (by GFA) in the Pudong area. Strong demand will drive absorption of this space, and the average rent is expected to remain stable. Though the leasing demand of cross-border e-commerce temporarily slowed, the city’s and nation’s support for cross-border e-commerce is strong, as seen with the establishment of a Shanghai cross-border e-commerce demonstration zone and a pilot zone in early 2016. In November, the government postponed a new and stricter supervision policy on cross-border e-commerce imports until the end of 2017,” says Tammy Tang, Executive Director of Colliers’ Industrial Services for China.

SECOND-TIER CITIES (SUZHOU, HANGZHOU, NANJING, WUHAN and XIAMEN)
Prime Office

Twenty-one projects were completed in these five cities in 2016, or more than one million square metres of office space. In most cities, the majority of new projects are located in mature areas. Wuhan had the highest level of new projects, with six developments or a combined GFA of 427,300 sq m. Demand was roughly in line with previous years with a total net absorption of 684,200 sq m across all five cities. Finance and real estate companies remained the primary sources of demand, though withdrawals by the peer-to-peer lending sector amidst stricter government supervision had an effect in all cities. All cities recorded rental growth in 2016, primarily driven by gains associated with the high quality of the new buildings. The investment sentiment for en bloc sales market in these second-tier cities was active in 2016, with five transactions completed. All of the transactions were for buildings under construction. A total of 28 new developments with a combined office GFA of approximately 2.1 million sq m are scheduled for 2017, nearly twice the level of 2016. This massive expansion will lead to a spike in the vacancy rate in all cities in 2017, and a period of oversupply and rental corrections can be expected in most cities.

Prime Retail
Ten new developments, or 968,000 sq m of retail GFA, were completed in the five cities, about half of 2015’s level. Eight of these new projects were completed in non-prime areas. Wuhan continued to have the largest stock among these cities at 3.1 million sq m, or nearly 30% of the total stock of 10.5 million sq m by the end of 2016. Active demand led the average vacancy rate of these five cities to decrease by 2.1 percentage points YOY to 5.0%. Net absorption totalled 1.3 million sq m. The vacancy rate fell or remained low in all cities but Nanjing. The average rent of all cities except Hangzhou declined, which was explained by the rapid expansion of retail developments outside of the prime catchments. Two major en bloc sales transactions were announced in 2016. The retail markets in all five cities are set to expand dramatically in 2017. Thirty-five new projects (3.7 million sq m of retail GFA) are scheduled. All cities except Suzhou are expected to have moderate declines in the average rental rate, due to the geographic distribution of the new properties and lack of operational and managerial experience from some developers. On a project basis, existing projects in the prime area are expected to achieve moderate rental growth, though existing projects in the non-prime area are expected to main their current levels.

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