9 July 2013, Shanghai – The Colliers International Shanghai Property Market Review and Forecast 1H2013 press conference was held on 9 July at Colliers Shanghai office. The research shows that average Grade A office rent in CBDs remained unchanged in the second quarter. The retail property leasing market performed well, though rental growth slowed down as new supply increased. However, the office and retail property market remained favorable for foreign investors, withseven en-bloc sales transactions recorded in the first half of the year. In the residential market, both primary and secondary housing prices continued to rise slightly. The supply of new commodity houses increased significantly, reflecting developers’ confidence in Shanghai’s residential market even after the new restrictions announced in the first quarter.
Shanghai’s economy posted better-than-expected growth in 1H13. In 1Q13, the city’s GDP grew by 7.8% y-o-y, outperforming the government target of 7.5%. The Shanghai Statistics Bureau reported that Shanghai’s utilised FDI grew by 11.8% y-o-y during the first five months. Investment in infrastructure, which will benefit the decentralised market, grew by 9.4% y-o-y for the first five months.
Two projects, Garden Square and Jing’an Kerry Center Tower II, were completed in 1H13, adding a total combined office GFA of approximately 95,427 sqm to the Shanghai Grade A office market. The leasing market in 2Q13 was more active, compared to 1Q13, largely due to a seasonal effect rather than a change in economic fundamentals. Net absorption totalled approximately 123,074 sqm in 1H13, up nearly 44% y-o-y. Notable leasing transactions included: Visa’s lease of 2,000 sqm at Mirae Asset Building for relocation; a CITIC Capital affiliate’s lease of 1,600 sqm at SWFC for a new office; and Perkins + Will’s lease of 2,100 sqm at Plaza 66 II for renewal and expansion.
By the end of 2Q13, the average Grade A office rent in CBDs remained largely unchanged from 1Q13, resting at RMB8.8 psm per day. During 1H13, there were five en bloc transactions. For example, in 1Q13, ARA purchased Ocean Tower for a total consideration of RMB1.9 billion. In 2Q13, CLSA bought the Phase II building and part of Phase I of East Ocean Center for an estimated unit price of RMB33,000psm. In addition, Carlyle acquired Central Plaza, a 19-story Grade A office tower above a three-story F&B podium in Huangpu district, from Forterra in April for a total consideration of approximately RMB1.67 billion. Average gross yields compressed by 0.1 percentage point q-o-q to 5.7% as of end-2Q13.
The outlook of the Shanghai CBD office property market is projected to be stable in 2H13. Three projects with a total combined office GFA of approximately 258,838 sqm are expected to complete in the core CBDs in 2H13: Jing’an Kerry Center Tower III in Jing’an, Shanghai Arch in Changning and 100 Bund Square in Huangpu. Rent is expected to stay flat throughout 2013 and vacancy to increase slightly
According to the Shanghai Statistics Bureau, retail sales increased to RMB192 billion as of end-1Q13, up 7.2% y-o-y. However, the growth slowed by 3.4 percentage points compared with 1Q12. The slow-down in economic fundamentals relevant to the retail market caused many developers to become more cautious in trade and brand mixes and project opening strategies, resulting in postponements of several project completion dates during 1H13.
In 1H13, two new mid- to high-end shopping centres, K11 in Huaihai Road catchment and L’Avenue in the Hongqiao catchment, were completed, adding a total combined retail GFA of approximately 83,500 sqm to the retail property market. As of end-2Q13, the total stock of the Shanghai mid- to high-end shopping centre property market was approximately 3.4 millionsqm, up 2.8% y-o-y.
Demand for mid- to high-end shopping centre property mainly came from the luxury, fashion, F&B, entertainment, accessory and education sectors, and was associated with many new leasing and opening activities. For example, Vera Wang opened its first Asia flagship wedding dress store at Xintiandi Style and Breguet opened its largest global flagship at the Langham Hotel in Xintiandi. Jil Sander leased approximately 180 sqm in Citic Square and Innisfree leased approximately 300 sqm in Hongyi International Plaza. As a result, the overall vacancy rate of Shanghai’s mid- to high-end shopping centre property market decreased by 0.4 percentage point h-o-h to 8.5% by the end of 1H13.
The average ground floor fixed rent in Shanghai’s mid- to high-end shopping centres rose by 1.1% h-o-h to RMB40.7 psm per day. There were two main en bloc deals recorded in Shanghai’s retail property investment market in 1H13, one in each quarter. A joint venture between Keppel Land China and Alpha Investment Partners acquired an 80% stake in Lifehub @ Jinqiao for a total consideration of RMB3.3 billion in 1Q13. A subsidiary of New World Department Store China Limited bought Shanghai Hongxin Trendy Plaza for a total consideration of RMB1.25 billion in 2Q13.
The overall outlook of Shanghai’s mid- to high-end shopping centre should be stable. A large amount of new supply will be added, with three new completions scheduled for 2H13, representing a total combined GFA of 503,000 sqm. Two of these projects are located in the prime area. The expected high pre-commitment rate for these projects makes it unlikely that this supply will have a significant impact on the overall vacancy rate. However, the size of Global Harbor, which will add 320,000 sqm of space to the decentralised area in late 2013, should bring about a reasonable increase in the city’s overall vacancy rate. Rental growth should be constrained in the short term.
China’s cabinet rolled out the most stringent yet set of property curbs on the residential property market in March, including a 20% capital gains tax, higher down payments and increased interest rates for second home mortgages. By end-2Q13, the implementation of a 20% capital gains tax on certain second hand homes was not yet being enforced in Shanghai, as evidenced by recent transactions. Both primary and secondary housing prices continued to increase slightly.
The supply of new commodity houses in Shanghai saw a notable increase in March ahead of the implementation of the new property curbs. Despite the new round of property curbs, the supply of new commodity houses soared to 1.34 million sqm (10,670 units) in May, the highest level since 2011.
In terms of sales volume, Shanghai’s new commodity housing sales volume spiked at a 40-month high of 1.5 million sqm (12,683 units) in March, before the implementation of “Five New Measures”. Between April and June, the average monthly sales volume stoodat 907,579 sqm (7,421 units), higher than the 2012 average of 774,000 sqm (6,521 units).
The average sales price of Shanghai’s new commodity houses grew by 2.1% q-o-q to RMB23,736psm in 2Q13. The price rise was primarily due to increased transactions of mid- to high-end products.
During 1H13, several overseas and domestic developers remained optimistic towards the residential property market in Shanghai, evidenced by several headline project investments. For example, in March, a joint venture of Greentown (HK: 03900) and Sunac (HK: 01918) acquired a 724,439 sqm mixed-use development in Huangpu district for a total consideration of RMB9.02 billion. In May, Fantasia acquired the residential Jazz Building in Pudong’sZhuyuan CBD area from China Land Property Holdings for RMB284 million. In June, Keppel Land acquired a residential site in Sheshan, Songjiang District, its ninth project in Shanghai, for RMB1.33 billion.
The outlook of the Shanghai residential property market is expected to be stable. The Shanghai government has announced that it will continue to implement the property curbs announced in 1Q13, as both primary and secondary housing prices continue to rise slightly. The rally in Shanghai’s land market in 1H13 is expected to lead developers to increase their asking prices in the mid-term, as they speculate that rising land prices will translate to rising house prices. The new supply of commodity residential houses is expected to decline in the medium term, given a 16.9% y-o-y decrease in the number of new starts in Shanghai during the first five months of 2013. Overall transaction volume will remain stable in the 2H13. The average sales price of Shanghai’s commodity residential housing is expected to stay relatively stable with some mild increases during 2H13, bolstered by continued demand from first-time home buyers and those seeking home upgrades. In the medium- to long-term, sustained demand, insufficient supply and rising land prices for developers will all support a rise in average prices.