Economic Review
Shanghai’s macro economy continued the strong momentum during the first three quarters in 2007. The secondary industries grew rapidly, by 11.9% YoY. Industrial investment maintained brisk growth and port trade expanded notably. The above strong growth momentum underpinned a favourable climate for Shanghai industrial property market.
Fixed asset investment in industry rose 11.2% YoY during January to September. Total profits of industrial enterprises surged 32.5%, reflecting the robust trend and potential for faster future growth in the industrial market. At the same time, the demand on industrial land and warehouse facilities has been fuelled by the booming port trade, which reached a growth of 20.9%, and increasing port throughput, which expanded by 4.4% to 419.57 million tons.
The foreign direct investment (FDI) in Shanghai went up 10.9% YoY from January to September. Although FDI in the secondary industries declined by 3% YoY, it still reached US$2.177 billion and the decline has narrowed by 6.5 percentage points as compared with H1. Moreover, FDI in the secondary industries still accounted for 34.27% of total FDI in Shanghai. This suggests that secondary industries are still the destination of foreign investment.
On the policy front, the regulation on land acquisition released by the Ministry of Land Resources recently stipulated that developers are required to pay off all land transaction fee before they can get construction approval from government. This suggests that land use right certificate issued by instalments is now prohibited. The measure would exert pressure on developers’ funding, particularly on large-scale projects, and so increase their costs in land acquisition.
On the other hand, the Central Bank lifted interest rates successively for five times over the past three quarters, of which the one-year loan benchmark rate increased by a total of 1.17 percentage points, from 6.12% to 7.29%. In addition, the Central Bank lifted the reserve ratio from 9% in the beginning of 2007 to 13.5% in November, the latest was the ninth adjustment in the year. These tightening measures put some stress on the developers’ financial position.
Supply Demand, Vacancy
There are 339,000 sq m of industrial facilities newly released from June to October, a slight decline of new supply as compared with that from January to May. Among which, Qingpu, Baoshan and Xinzhuang industrial parks witnessed more abundant new supply, accounting for 59%, 15% and 15% of the total respectively. The major industrial facilities completed in our report period included: 80,000 sq m facilities in Anting Auto City, 180,000 sq m factories in Lingang Industrial Zone, 23,000 sq m warehouses in Baoshan Industrial Zone, 13,800 sq m factory of Shanghai Usui Engine Parts in Xinzhuang Industrial Park, as well as Siemens’ 27,000 sq m factory in Qingpu Industrial Park.
Since the Shanghai Government positions logistics as a priority industry in its future planning, coupled with Shanghai’s improving soft and hard facilities as a regional trade and shipping hub, many industrial property developers strengthen their strategic investment in the logistical market. For example, Goodman, a global industrial real estate giant, now has two properties in Shanghai - a distribution center in Fengxian and a logistics center built for DHL-Exel in Kangqiao. Three more deals, also logistics and distribution centers in suburban areas of the city, will be finalized in the next few months. The investment value of the five projects totaled US$200 million. ProLogis plans to add between 1 million and 1.5 million sq m of service space a year on average in the next few years to expand its China portfolio. Meanwhile, its annual investment in the China market will reach US$300 million to US$500 million. In Shanghai, ProLogis now operates three logistics parks in Putuo, Minhang and Nanhui. It expects to strengthen further its business in Shanghai in 2008.
The bullish economic outlook together with the growth in China’s consumption market have been driving foreign manufacturers to set up new factories and logistical centers in Shanghai, which underpin the strong demand in the industrial property market. The major transactions include Nivea’s purchase of a 50,000 sq m land and Invista’s purchase of a 20,000 sq m land lot in Qingpu Industrial Park; as well as Culp’s renting of a 10,000 sq m factory in Qingpu Export Processing Zone. The logistics property market also showed a flourishing trend. The electronic giant, Best Buy rented a 6,200 sq m warehouse in Minhang Logistics Park.
According to Colliers’ survey on vacancy rate, the average vacancy rate of leading industrial parks declined by 0.75 percentage point compared to May, to 2.37%. Zhangjiang and Songjiang witnessed lowest vacancy rates at 0.3% and 0.46% respectively. Since there is less room for favourable policies to attract tenants, the industrial parks will compete more on amenities, transportation facilities and operational efficiency.
Rent Analysis
In October 2007, the strong demand for industrial properties from both international and domestic manufacturers drove the average rental up, which reached RMB0.87 per sq m per day, rising 6.8% compared with May and 12.1% YoY. Analysed by district, Zhangjiang industrial park registered the highest rent in single floor factory or warehouse, at RMB 1.4 per sq m per day. Comparatively, Qingpu Industrial park witnessed lowest rental in Multi-floor factory or warehouse, at RMB 0.6 per sq m per day.
Capital Values & Yields
Since the implementation of the new land policy by the central government in January 2007, which requires industrial land to be transacted through biding and auctions, average land prices (achieved at auction biddings) have soared by 45%-60% in Shanghai. For example, land in Waigaoqiao Free Trade Zone (FTZ) was previously selling for RMB700,000 per mu, however, in the recent land auction in the zone, prices of around RMB 1 million per mu were achieved.
Stimulated by the growing land prices and strong demand, industrial facilities witnessed an upbeat trend on both capital values and rentals. The average capital value in leading parks reached RMB 3,777 per sq m, going up by 4.3% compared with May and 6.9% YoY. Analyzed by district, the capital values in Zhangjiang and Jinqiao industrial parks ranked top 2, at RMB 6,000 and 5,600 per sq m respectively. Yet gross yield continued to rise to 8.41% in October, up 0.15 percentage point from May. The rising yield is on one hand driven by strong rental demand; on the other hand, the higher investment threshold for industrial properties suggests that competition among developers on asking rents may be less fierce compared with other real estate sub-sectors.
Business Parks Market Update
As the average rental of Grade A office facilities in CBD continues to surge, a lot of cost-sensitive tenants turn to the alternatives in outlying areas. Traditional industrial hubs have been committing to develop into office space to meet the relocating demand. According to the market survey, the average rental in business parks rose by 17.5% YoY in October to RMB 3.76 per sq m per day. The Knowledge Innovation Community continued to hold the top 1 position in rental, at RMB 4.48 per sq m per day, followed by International Business Park and Caohejing, both at RMB 4.32 per sq m per day.
Looking ahead, it is undoubted that China economy will maintain a steady uptrend, which is evidenced by the key leading industrial indicator. Meanwhile, Shanghai is going to hold the edge in absorbing foreign direct investment. Moreover, with the development of logistics, Shanghai will become a more influential regional logistics and business hub. Therefore the demand for standard factories will be enhanced, while outlook for logistical facilities will be even brighter. We project the vacancy rate of warehouses to decline further; and both capital value and rental will go up about 7% in tandem due to limited new supply in the coming 12 months.
The land price is expected to continue to rise, by over 10% in the next 12 months due to fiercer competition. On business parks front, the demand from relocations and new establishments will remain robust. Yet new supply is expected to be also ample. As a result, rental growth will slowdown somewhat.
This report has been prepared by Colliers International Property Consultants (Shanghai) Co Ltd for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This report and other research materials may be found on our website at www.colliers.com/china. Colliers Macaulay Nicolls Inc. and its country subsidiaries are member firms of Colliers International Property Consultants, an affiliation of independent companies with 267 offices throughout 57 countries worldwide.
Last update : Thursday, 29 November 2007
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