The strong demographic and economic growth in Shanghai spurred positive demand in all real estate sectors in 2007, and the optimistic outlook of market fundamental is going to bring another promising year in 2008.
Robust end-user demand and a confident medium term outlook see further rental and capital growth across all key property sectors, albeit at a less rapid pace than in 2007.
More of the new projects coming onto the market will go to the emerging areas. But redevelopment in the traditional areas would continue to inject impetus and development opportunities.
Increasing monetary control and tightening policy is bringing more uncertainties particularly to the investment market. It has yet to see if more heavy handed measures will come out to the extent of significantly dampening market sentiment.
2007: Riding Across Policy Tightening Shanghai’ s property market surfed through another year of remarkable performance in 2007, underpinned by robust economic growth on the back of strong domestic consumption. This is notwithstanding the Government ’ s implementation of several policies to pre-empt overheating of the property market as well as the monetary tightening throughout year 2007. Shanghai’ s GDP growth for 2007 is expected to sustain at a strong double-digit rate of above 13.0%. While expectation of further Renminbi appreciation rendered a boost to acquisition interest, the wealth effect brought by the booming stock market likewise added steam to the property market.
During 2007, the implementation of Land Appreciation Tax and the additional restrictions posed on foreign investment in real estates have exerted some negative impacts on developers. For the homebuyers, the mortgage down payment and interest rate for the second property have been raised further. The government also tightened liquidity, by successively lifting interest rate and reserve ratio requirements. By end-2007, the one-year lending rate stood at 7.5% while the reserve ratio has risen to 14.5%.
Nevertheless, the flourishing economy spurred strong demand among all of the key property sectors in Shanghai, with rental and capital value remained generally on the rise throughout the year, while vacancy rate fell further. There was a slight compression in yield, but which was still considered as relatively attractive.
Office: The buoyant business activity fuelled Grade A office market in 2007, notably with support of expansion demand of tenants from financial and professional services sectors. In particular, in-house expansion and new set up businesses contributed to additional quests for office spaces, bringing an overall net absorption to around 263,000 sq m. Some big tenants eyeing for larger floor plate or better quality chose relocating to another workplace. On the supply side, a total of 227,100 sq m new Grade A office space were completed during the year. With demand surpassing new supply, overall Grade A office vacancy rate fell to a record low of 2.5%, driving the average rent up by 11.3% y-o-y to RMB 9.12 (US$1.14) per sq m per day in Q4 2007. While there was strong demand for quality office space for own use, acquisition interest for investment purpose was also keen, leading to a number of en bloc or bulk area about 560,000 sq m transactions during the year. Notwithstanding some moderation in investment activity in the second half of the year, capital value still increased by 26.6% y-o-y. The outpaced capital growth led to a further yield compression, with the gross yield edging down to around 7.0% at end-2007.
Retail: Strong consumer confidence and escalating purchasing power amidst rising household income bolstered the retail sector in 2007. Demand for retail space continued to grow in both traditional area and emerging area. The vibrant tourism, which brought in affluent consumers from both overseas and other provinces, also contributed. Yet the market saw abundant new supply in 2007 to meet the demand, with completion of 225,730 sq m retail space, most of which are located in downtown. Meanwhile, to upkeep their competitiveness, a number of shopping malls have undergone massive renovations and repositioned their tenant mix. On the leasing front, international luxury brands and high-end fashion retailers kept expanding their portfolio in Shanghai and have been eager to secure large-area retail spaces in prime area especially on ground floor and shopping centers. Keen demand drove the rental values up in most prime retail areas with double-digit growth throughout the year, with average ground floor rent reached RMB 1,024 (US$128) per sq m per month (up 14.8% y-o-y). While there was further decrease in vacancy rate to 3.3%, gross yield in Shanghai retail market remained stable at around 7.9%.
Industrial: Stellar external trade performance and robust manufacturing activity stemmed a strong growth momentum of industrial sector during 2007. The overall optimistic picture translated into an escalating demand for industrial parks, particularly in the Zhangjiang and Songjiang submarkets where nearly zero vacancy rate was recorded by end of this year. In 2007, 699,200 sq m of new supply was completed, providing a temporary relief to the tight occupancy in the industrial market. Meanwhile, average vacancy rate for Shanghai’ s major industrial parks also hit a record low of 2.4%. Strong demand from both foreign and local manufacturers coupled with declining vacancy rate pushed the average rental up by 12.1% y-o-y to RMB 0.87 (US$ 0.11) per sq m per day. The new land policy adopted at the beginning of 2007, which requires all industrial lands to be transacted through bidding and auction, raised significantly the newly transacted land prices and stimulated the capital value of the existing industrial parks to go up. In Q4 2007, average capital value in major industrial parks increased 6.9% y-o-y to RMB 3,777 per sq m, bringing yield slightly below 9%.
Residential: Shanghai’ s residential market demonstrated strength in 2007 with the support of robust economic fundamentals. Buying interest was strong, driven by growing end-user demand and also investment demand. In the high-end segment, supply remained limited in the leasing market, with only 2,060 units completed across Shanghai in 2007. Despite of the attempt of government policy to hold back the over-heated market, activities among the high-end residential properties (including villas, luxury apartments and serviced apartments) stayed active on the back of abundant market liquidity, growing foreign expatriate headcount, as well as rising affluence of residents and also the wealth effect of the stock market.
Average rent of the overall high-end 2 of 11 residential leasing market remained on the rise, by 1.5% y-o-y reaching RMB 171.2 (US$21.4) per sq m per month. Overall vacancy rate however stood at a relatively high level of 17.5%, as some acquisition aimed more at capital gain than rental income. Amidst strong acquisition interest, prices of high-end residential properties went up to RMB 35,800 (US$ 4,475) per sq m (up 6.5% y-o-y). In line with other type of properties, overall yield fell slightly to 5.7% by end-2007.
2008 Outlook: Higher Ground Clouded With Policy Uncertainties The overall outlook for Shanghai’ s property market remains promising in 2008 given the solid market fundamentals, and as the boosting effect from hosting World Expo in 2010 should start to filter through in 2008. However, the year 2008 will also entail more uncertainties on the policy front, given that property prices continued to hit new high despite the series of tightening measures put on board over the past year or so. To rein in surging property prices, it is not impossible that the government would surprise the market by more heavy-handed measures to beat adaptive expectation. The investment market may feel the pinch more, and it is likely that foreign investors will be more vulnerable to these policy changes.
Figure 1 Growth Rate of Shanghai Real GDP, Fixed Assets Investment & Total Retail Sales of Consumer Goods Source: Colliers International Shanghai (CIS) Research Database
Office: In the office market, the increasing demand from the corporate sector brought from both new set up and business expansion would continue to underpin greater need of Grade A office space in 2008. Exemplifying this is the expansion demand from many foreign banks and financial institutions, and also professional firms which are expected to remain as the key demand drivers. While there will be some cross-district relocation and expansion from tenants currently staying in Puxi to the newly completed office buildings in Pudong area, office demand in Puxi would stay strong particularly upon the completion of a few new Grade A office buildings there.
Figure 3 Shanghai Grade A Office Supply, Demand and Vacancy Rate Source: Colliers International Shanghai (CIS) Research Database
Figure 4 Shanghai Grade A Office Rental and Capital Value Source: Colliers International Shanghai (CIS) Research Database
In contrast to 2007, the Shanghai Grade A office market supply will increase notably to 843,300 sq m. The bulk of these new supply will be located in Pudong area (608,900 sq m or 72%) of which the Shanghai World Finance Centre alone contributes some 226,900 sq m, whereas the other are in Jing ’ an (163,400 sq m) and Putuo (75,000 sq m). The more abundant supply will see a small bounce in vacancy rate in 2008 from the historical low in 2007, particularly for that in Pudong, as well as milder extent of overall rental growth, by around 2% in 2008. Yet some new Grade A office buildings in popular districts such as Jing ’ an and Lujiazui could still fetch very good rent in the pre-lease.
In the sales market, investors especially those from overseas funds will continue to look for investment opportunities in Shanghai, with their radar screen extending to the emerging districts such as Putuo area. Yet as many landlords, in anticipation of further asset price appreciation, tend to fore-run the market by offering aggressive asking prices, sale transactions may continue to lock in stalemate for some time. Capital value of Grade A offices will likely register further increase by around 5% in 2008. Overall, the faster rise in capital value than rental will point to further yield compression in 2008 to around 6-7%.
Retail: Despite of the implementation of the macro-tightening measures by the Government over the past year or so, the household sector is basically little affected given their steady income growth. The still mild inflation also has not dampened household’ s propensity to consume. Added to these is the growth in visitors spending brought by the vibrant inbound tourism. It thus suggests that the performance of the retail sector is generally less impacted by policy changes. The remarkable performance of Shanghai’ s retail market is therefore expected to continue into 2008. The strong business growth of foreign market players will continue to be the key driver in the retail leasing market. The landlords of shopping malls will continue to revamp leasing strategy through renovations and tenant re-mix to cater for changing appetite of consumer ’ s demand. The gradually mature office and residential markets in Pudong will spur growing retail demand within that area. Yet along with the successful revamping of shopping areas in traditional districts such as Huangpu and North Bund, more international top-tier retailers will also secure a foothold or extend their footprints in Puxi.
Figure 5 Shanghai Retail Property Market Supply, Demand and Vacancy Rate Source: Colliers International Shanghai (CIS) Research Database
Figure 6 Shanghai Retail Property Market Rental for Ground Floor Source: Colliers International Shanghai (CIS) Research Database
In 2008, the new projects completed are expected to bring altogether supply of 656,008 sq m retail space onto the market. Majority of the new supply (439,000 sq m or 73%) will be located in emerging areas such as Hongkou and Minhang, along with the growing consumer demand there brought by increase in population as transport infrastructure improves. There will also be more high-end shopping malls coming onto the market to meet market aspiration.
The limited new supply in downtown in 2008 will underscore the low vacancy rate for prime retail centers there at 4.3%. In contrast, as it takes time for the ample new supply in emerging areas to be fully absorbed in the market, vacancy rate in the latter will hover at a high level, thereby pushing the overall vacancy rate slightly up to 5.6%. Yet rental in prime areas is expected to stay firm, supported by the low vacancy and also high profitability of business there. The ground floor rental surges will spill over to higher floors as well, as more luxury brands or international retailers occupy almost the bulk of ground floor plate, leaving little room for second-tier retailers. Keener competition among the latter for quality retail space in turn would jerk up rental in higher floors. However, given that some retailer’ s faster pace of expansion may thin out the turnover and hence profitability of each branch if consumer demand could not catch up in tandem, rental affordability of some tenants may fall. In addition, shopping centers in emerging area will also face greater rental pressure. In overall terms, we expect that the shopping centre ground floor rental will increase further by 12% in 2008. As capital value of retail premises is expected move largely in line with rental, gross yield is expected to hold steady in 2008.
Industrial: Entering into 2008, Shanghai’ s external trade prospect is expected to be optimistic on the back of a continuously robust China economy and ongoing export growth. Demand for industrial premises with built-to-suit and built-and-lease-back strategies become increasingly popular in the industrial market with the support of exporters, manufacturers and other MNCs. Going forward, development of YangshanDeepwaterPort and Pudong Airport Phase 2 will likely introduce more export-processing relating activities and thus raise additional warehouses and factories demand within the Shanghai industrial market.
Figure 7 Shanghai Major Industrial Parks Average Rent & Growth Rate Source: CIS Research Database
Figure 8 Shanghai Major Industrial Parks Average Capital Value & Gross Yield Source: CIS Research Database
On the supply of industrial properties, an annual quota release system recently adopted by the Land Administration Bureau in 2007 contributes to our belief to see more constraints on industrial land supply in 2008. Owing to the relatively lower tax revenue applied to logistics sector, more industrial zones become reluctant to designate land supply for logistics development. As for the market of business parks, there are going to be 260,480 sq m new supply in 2008, in which 77% of these new spaces are located in Caohejing Hi-Tech Park. We expect the overall vacancy rate to become lower in 2008 for industrial properties amid the stronger market demand. However, the appreciating Renminbi, as well as rising labor costs and production costs may lower Chinaexports ’ competitiveness and curb the expansion demand or investment initiative of some foreign investors. Some cost cautious logistic operators may opt to consider investing into other second tier cities and that may risk higher vacancy rate in the long run.
In light of the sustained strong leasing demand and low vacancy rate coupled with limited new supply coming into the market, we expect the rental value for industrial properties to maintain steady growth in 2008, similar to the trend in 2007.
On the sales front, we expect to see further rise in average land price in 2008 following the land policy being adopted in January 2007, which stated that all industrial land should be granted only by bidding, auction and listing. As land price uses to be a key factor in driving industrial capital value, stronger capital value growth is expected, particularly in areas where demand for high-quality space is robust. That said, we expect that the higher capital value would be supported by rising rental, thereby keeping the gross yield at a still attractive level of 8-10%.
Residential: The overall residential property market is expected to hold firm in 2008. Local residents’sustained income growth and upgrading demand will continue to render support. Housing demand in emerging districts will also be supported by improved transport infrastructure. This notwithstanding the higher interest rates which may have some negative impacts on affordability of homebuyers. The market may start to see a lag impact on overall mass residential market with smaller supply in 2008 owning to the less investment in previous years. As to the high-end segment of the market, abundant liquidity, continuous inflow of expatriates, rising number of professionals and entrepreneurs as well as upbeat economic outlook are expected to keep the underlying of high-end residential market on the positive wavelength.
Future supply in the high-end residential leasing market will increase to a total of 3659 units in 2008. Supply of high-end apartments and serviced apartments will be more abundant, reaching 1381 and 2006 units respectively in 2008, while supply of villas remains limited, at 272 units. The more abundant supply would see an increase in vacancy rate for high-end apartments, and thus some downward pressure on their rentals. In contrast, as expatriates will continue to look for good-quality serviced apartments, vacancy rate for this type of property is expected to edge down, with rental firming up. We also expect some upsides on the rental for villas, underpinned by the steady demand.
On the capital front, we expect to see increasing price divergence between older properties and the newly built high-end residential properties, given the better quality and facilities of the latter. The capital value of high-end residential properties is expected to remain on the rise, though likely with a relatively milder growth in 2008 on the back of a high base and also due to the government ’ s control policy and continuously climbing interest rate. In overall terms, as capital value is expected to register a faster growth than rental, gross yield is expected to compress slightly further to below 6% in 2008.
Figure 9 Shanghai High-end Residential Supply, Demand and Vacancy Rate Source: CIS Research Database
Figure 10Shanghai High-end Residential Rental and Capital Value Source: CIS Research Database
Investment Market: The real estate investment market is expected to hold steady in 2008, though policy risk would remain the greatest downside. As a result of the promulgation of Document No.171 in 2006 and the subsequent release of Document No.50 in 2007 to reinforce the earlier regulations, foreign property players become more vulnerable to policy changes. Judging from the central government ’ s recent policy stance on foreign investment in real estate market, as well as from the broad direction of next year ’ s economic adjustment, the government will continue to uphold stipulations under Document No.171. Moreover, since 2007, the administrative procedures in land tender process for foreign investors have lengthened. This will impact those investors who have weaker financial position and less knowledge of local market, due to higher threshold and cost of investment. Meanwhile, for those investors who have accumulated considerable knowledge and experience in the Shanghai market, the design of appropriate tax and legal structure as well as investment strategies are of utmost importance. Some players would probably switch to second tier cities to avoid the tough competition in first tier cities such as Shanghai.
From a sub-sector perspective, Grade A offices and serviced apartments will still be the hot spots of foreign investment and continue to suck in foreign capital. However, as the limited supply situation of these properties in CBDs will sustain, market attention may turn to some emerging areas, such as North Bund, Zhuyuan, Wujiaochang and ChangfengPark. As for the shopping centre market, along with the change in spatial distribution of population, projects in certain emerging areas that are adjacent to the outer ring with large population catchment will become more attractive. Logistics projects will still be hot in the industrial property market, with the focus more on large-scale customized development and purchases with leasing terms. In the hotel market, while further mergers & acquisitions of budget hotels will continue, international hotel brands will also accelerate their expansions in Shanghai.
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 http://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.
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