Dry-end fund, Grade A office building, 2017Q1 market situation (focus on Shanghai market)

Highlights

In the first quarter of 2017, the market performance of each first-tier cities was different; the market in most second-tier cities was still at the peak of new supply, the vacancy rate remained high, and the average rent was still in a state of adjustment.

New office supply in Shanghai has been the highest in a single season since 2009; demand in the core business district is stable but it is difficult to prevent vacancy rates from rising and rents in the short term, and rents in non-central business districts continue to rise; large transactions in emerging business districts and traditional core business districts The activity is basically the same.

The main tenants in the Beijing office market are still financial and high-tech enterprises. The weakening demand of foreign-funded enterprises is gradually filled by the needs of domestic-funded financial enterprises; the Shenzhen market is affected by the addition of new high-quality projects, and the vacancy rate has risen. Although the rent has rebounded sharply, in the short term It will continue to be under pressure; Guangzhou will only enter a new project, the overall vacancy rate will fall, rents will enter the rising channel, and the demand side will be dominated by the financial industry.

We believe that the traditional core business district will be affected by the continuous increase in new supply, the vacancy rate will continue to rise, and the rent level will continue to decline in the short term. The mature business districts such as Shanghai Dahongqiao and Beijing Lize Business Circle are affected by factors such as favorable policies, gradual improvement of supporting facilities and convenient transportation. The market is developing rapidly and optimistic about the bright spots in the future.

National overview

In the first quarter of 2017, the office market performance in Shanghai, Beijing, Shenzhen and Guangzhou varied. Taking Shanghai as an example, Pudong’s central business district rents tend to be stable, and Puxi’s central business district rents are affected by non-central business districts (such as projects in some emerging business districts that offer more space and relatively low-cost options). The pressure is obvious. In the non-central business district market, the performance of the inter-segment market is different. The emerging emerging central business districts such as the North Bund and the railway station are in strong demand, and rents continue to rise. In Beijing, due to the increase in supply in the future, the rents in the traditional central business districts have weakened, while rents in emerging central business districts such as Wangjing continue to rise.

In the second-tier cities, a large number of enterprises continued to use the timing of continued downward adjustments in rents during the quarter, and they have realized the demand for upgrading and expansion, especially in science and technology, education, design and trade. However, most of the market is still at the peak of new supply, and the vacancy rate remains high. The average market rent in many cities is still in a state of adjustment.

In the first quarter, the overall rental level of the Grade A office market in the first-tier cities remained basically stable. In addition to a slight drop of 0.3% in Beijing, Shanghai and Shenzhen rose slightly by 0.1%, while Guangzhou rose by 0.4%. Among the 14 second-tier cities, there are 8 cities with a decrease in rents, among which Wuxi, Shenyang and Wuhan have more obvious declines, all of which are more than 1%. (see picture 1)

As always, the demand for office buildings by domestic-funded enterprises far exceeds the demand of foreign-funded enterprises. In terms of industry demand, the demand for office space in the TMT industry (technology, media and communications) in the first quarter of 2017 has been basically the same as that of financial companies, and in 2015 and 2016 only about half of financial companies. In addition, the top industries in demand include professional services, retail and fast-moving, pharmaceuticals, and manufacturing.

On the one hand, it is influenced by policy orientations such as “mass entrepreneurship, innovation”, “Internet +”, “technology leads the new economy”, and on the other hand, due to the upgrading of the needs of the middle class, the call for “tech enterprises to enter the financial services industry” and the original And the capital chasing of high-tech enterprises, etc., have greatly promoted the growth of demand for office space in TMT enterprises, especially the upgrading and expansion of high-quality enterprises in the fields of mobile internet, games, network technology, and financial technology. The demand has been upgraded. At present, the types of new rental demand for TMT enterprises are concentrated in small-sized units of 150-400 square meters, mostly from the upgrade needs of small technology companies. The following table shows the new leases of some TMT companies in the first quarter of the country:

Shanghai market

In the context of the first quarter GDP and tertiary industry data, the overall leasing demand in the Shanghai office market remained stable. The newly built office building project in the Central Business District met the needs of tenants for office upgrades and expansions. The rental momentum of the Central Business District remained strong.

Supply: New supply in core and emerging business districts hit new highs

In the first quarter, according to incomplete statistics, the Grade A office building in Shanghai Central Business District added 293,000 square meters, the largest supply in a single season since 2009. Two projects were completed and delivered, namely Shanghai Center Building in Lujiazui and Changning in Puxi. SOHO Tianshan Square. The influx of new supply in the non-central business district hit a record high, adding 548,000 square meters in a single quarter, mainly for the newly completed projects of the Hongkou North Bund Business District and the Dahongqiao Business District.

Vacancy rate and rent: demand is stable but it is difficult to prevent vacancy rate from rising and rent down in the short term

The Shanghai office leasing market is still active and the demand side continues to grow steadily. In the first quarter, the net absorption of Grade A office buildings in the Central Business District was 120,000 square meters, an increase of 99% from the previous quarter. In terms of subdivisions, Lujiazui achieved a maximum net absorption of 77,000 square meters thanks to the delivery of the Shanghai Tower, which has a high pre-leasing rate. However, the large new supply in the first quarter led to an increase in the overall vacancy rate. The average vacancy rate in the central business district was 12.4%, up 2.2% from the previous month. The average vacancy rate in Pudong and Puxi was 12.8% and 11.9%, up 3.7% and 1.3% respectively.

In the first quarter, the net absorption of non-central business districts exceeded 162,000 square meters. Similarly, due to the centralized entry of new projects, the average vacancy rate in non-central business districts rose to 24.9%, with the vacancy rates in Hongkou District and Minhang District fluctuating the most, at 43.9% and 48.5%, respectively, up 38.4% and 18.3% from the previous quarter. In the non-central business district, the area adjacent to the core area and the subway station is the most attractive to tenants. The more representative lease cases for the quarter included PepsiCo's lease of approximately 7,000 square meters at the Gefei Center and Sino-American Luen Thai Metropolitan Life Insurance leased approximately 3,500 square meters at the Shanghai Xinghui Center.

In terms of rent, the emergence of a large number of rentable office buildings has led the owners to adjust accordingly. The average rent in the city has dropped to 10.4 yuan / square meter / day. Rents in the central business district were under pressure. In the first quarter, the average rent of Grade A office buildings in the Central Business District fell by 0.8%, with Pudong and Puxi dropping by 1.0% and 1.4% respectively. The fluctuations in rents in the non-central business districts showed a divergence. Due to the completion of a large number of high-quality new office buildings, the owners of the old office buildings lowered their rents accordingly to cope with market changes. The average rent of existing office buildings in the first quarter fell by 0.5%. However, the entry of high-quality new projects still pushed the average rent of non-central business districts to rise by 0.4%.

Investment transactions: domestic self-use buyers and investors support the investment market of office buildings

According to Incomplete International Incomplete Statistics, the Shanghai investment market was very active in the first quarter of 2017, with a total of nine major transactions, totaling RMB 16.1 billion. Among them, the largest transaction amount is Jiaxing Shengshi Shenzhou Wenli Investment Partnership Co., Ltd. acquired 50% of the shares of Fosun International's Bund Financial Center Project Company in Huangpu District for 5.33 billion yuan. The buyer, Jiaxing Shengshi Shenzhou Wenli Investment Partnership (Limited Partnership) was jointly initiated by five professional organizations, including Shanghai Fudi Real Estate Development Co., Ltd., a subsidiary of the Fuxing Group, so the transaction was a connected transaction. The Fosun Group's transaction is intended to increase the company's asset liquidity and will continue to participate in the development and operation of the project.

There were 4 other cases with a transaction amount of more than 1 billion yuan. Kland purchased the Jingdi Center of Jing'an from Heishi for RMB 3.92 billion. Heiyan purchased the Putuo's Zhongganghui Building from Shanghai and Hong Kong for RMB 1.36 billion. Xingqiao Tengfei Group purchased Huanglong's Baolong Building from AEW for approximately 1.32 billion yuan; Jiangsu Yancheng Investment Group purchased Block B1 of Poly Green Plaza in Yangpu from Poly Green for RMB 1.13 billion.

In 2016, due to the low return on investment and the impact of exchange rate policies, the scale of foreign investment in Chinese real estate fell once. However, since the first quarter of this year, foreign-funded institutions have begun to be active in the entire transaction of office buildings. Kland, Black Rock and Singapore’s Xinqiao take-off account for 2 to 4 positions in the transaction volume. In addition, in the first six transactions, there have also been insurance funds – Qianhai Life Insurance and state-owned background institutions – Jiangsu Yancheng Investment Group, which is also the enthusiasm of Chinese financial institutions and enterprises for block trades since 2016.

From the location of the project, it fully shows the impact of the emerging business district on the traditional core business district. In the first six transactions of the first quarter of 2017, half of the transactions in the traditional core business district, and half in the emerging business areas, such as Dahongqiao, North Bund and other sectors. In terms of unit price, the emerging business district is gradually catching up with the traditional core business district, and the total transaction volume is also moving closer.

Emerging business districts are gaining favor from investment companies and tenant companies. Due to the scarcity of high-quality buildings available for trading in the core business district, and the large supply of office buildings in the emerging business districts, the choice of properties is diverse and accompanied by the improvement of various urban infrastructures, such as the construction of subway lines. Greatly satisfy the needs of investors or self-use buyers. According to Colliers International's 56 large-scale transaction statistics in 2016, the net rental return of office buildings in Shanghai's core business district is around 3.75~4.25%, and the net rental return of non-core office buildings is around 4.25~4.75%. According to statistics from DTZ, the largest proportion of the block trading market in 2016 is the emerging business district, especially the Dahongqiao business district that has entered the centralized delivery period.

Beijing market

In this quarter, four projects in the Beijing Grade A office market were completed and delivered. The Kuntai Jiarui Center in Wangjing District has a construction area of ​​52,953 square meters and was purchased by the entire Alibaba Group. The remaining three projects are leased office buildings.

New entry into the market and existing high quality projects are still favored by tenants, contributing to the main net absorption of the quarter. However, the absorption of the CBD was negative for three consecutive quarters, and the Grade A office building project with lower quality appeared large-scale vacant. The owners of these projects have responded slowly to the market and failed to reduce rents in a timely manner.

Domestic financial companies are still actively seeking office space, but overall market demand remains weak. In addition, some enterprises have taken advantage of the opportunity of vacant space in the current market to reduce the operating costs and relocate the office. Located in Block A of the Lixingxing Center in Wangjing, with a total construction area of ​​89,000 square meters, it achieved a 70% occupancy rate at the beginning of its opening. A major reason is that the owners are attracting stable large-scale rentals below the average market price. Tenants have long been stationed. The “Commercial Transfer Office” project of Yingke Center was completed and listed, and the occupancy rate of 90% has been achieved in this quarter. The target customers of this project are mainly those who seek joint office space and nearby famous Sanlitun service facilities. The success of the project provides an important reference for other companies interested in transforming office properties or developing new projects.

In the past year, Zhongchuang Space has flourished under the policy dividend, and joint office operators are actively seeking expansion space. In April of this year, US joint office operator WeWork landed in Beijing, indicating that Beijing began to become the target market of international joint office operators. It is expected that the joint office market will usher in further development in 2017, and domestic and foreign operators are expected to provide tenants with high-quality and high-standard diversified office options.

The emerging business districts such as Wangjing, Ya'ao and Yizhuang will further narrow the gap with the core business districts by virtue of their rental advantages and perfect supporting equipment, and become the new darling of the market. The high rents of office buildings in the core business district will catalyze the relocation of rent-sensitive enterprises to non-core business districts. The government's industrial reconciliation policy and the high quality of emerging office buildings will also lead to the selection of high-end manufacturing IT high-tech enterprises in emerging business districts. .

Shenzhen market

According to the statistics of Savills Davis, the newly added supply of Grade A office buildings in Shenzhen in the first quarter was approximately 102,400 square meters, of which the Ping An International Financial Center was completed and delivered. The prime office building is located in the center of Futian Commercial District and became the tallest building in Shenzhen. The demand side was weak in the quarter, and the net absorption of Grade A office buildings was only about 57,000 square meters, down 64.7% from the previous month, resulting in a vacancy rate of 0.56 percentage points to 11.8%.

In the first quarter, the average rent of Grade A office buildings in Shenzhen rose by 1.6% qoq to 226.2 yuan / sq m / month, showing a trend opposite to the downward adjustment last year. However, in 17 and 18 years, Shenzhen office buildings will usher in a blowout. It is estimated that the new supply for two years will reach 1.7 million and 3.5 million square meters respectively. Therefore, the vacancy rate will further increase, and the rent will also be under downward pressure in the short term.

Although the capitalization rate of Shenzhen Grade A office buildings in the first quarter increased by 5 basis points to 4.61% due to the increase in rents, the market supply pattern of oversupply caused by the concentrated supply of office buildings in Shenzhen in the next 2-3 years will lead to rents. Continue to be under pressure, the capitalization rate will continue to decline for 16 years.

Due to the opening of Shenzhen-Hong Kong Stock Connect and the policy dividends in the “13th Five-Year Plan” to promote Shenzhen as an international financial innovation center, coupled with the capital spillover caused by the regulation of residential housing, the demand for Grade A office buildings in Shenzhen will be in the future. Sustained release, it is expected that the traditional financial industry, IT high-tech industry and high-end manufacturing will become the main source of demand.

Guangzhou market

In the first quarter, the Guangzhou Grade A office market only entered the market at the Tianan Life Insurance Center in the Sports Center Business District, bringing new supply of 30,000 square meters to the market. The decrease in new supply caused the city's average vacancy rate to fall by 1.1% to 11.3%, but the vacancy rate of the sports center business district increased by 4.0% to 7.6% due to the impact of the new project at the end of the quarter.

As the new supply of Zhujiang New Town came to an end, the improvement of the vacancy rate made the rents enter the rising channel. The average rent of the city in the first quarter rose by 1.5% to 147 yuan / square meter / month. From the demand point of view, insurance and banks were active in the first quarter, AIA expansion exceeded 5,000 square meters, Taiwan's Yongfeng Bank and China's Macau Bank successively entered Guangzhou.

It is expected that the new office projects in Zhujiang New Town will be completed and delivered in the next two years. In the case of better fundamentals, the absorption will increase steadily, the average vacancy rate will gradually decline, and the rent will usher in further increases.

Analysis of the development trend of Shanghai Grade A office market

The office market in Shanghai's central business district and non-central business district will usher in new supply peaks in 2017. Although the rapid development of the tertiary industry and TMT industry will increase the demand for Grade A office buildings, its destocking rate will be less than that. The growth rate of new supply. According to Colliers International, the high vacancy rate due to high supply will continue to rise to over 15% in the next two to three years, and the average annual rent decline in the next two years may reach 4%.

In the second quarter of 2017, according to CB Richard Ellis, Shanghai's core business district is expected to have about 820,000 square meters of new supply, 80% of which are located in Puxi and other core business districts. In view of this, the overall rent level of the market, especially the rent of office buildings in Puxi, will face further downward pressure. Under this circumstance, the owners of the new projects will provide more incentives for the competitive quality tenants, while also providing more activeness to the market.

The Shanghai government has further simplified the procedures for foreign companies to establish regional headquarters in Shanghai, so the demand for office leasing by foreign companies is expected to rise. Shanghai currently has 580 regional headquarters for foreign investment, 330 investment companies and 411 research centers. At the same time, it is expected that TMT companies will continue to rise in the proportion of office market demand in 2017.

The emerging business districts represented by Dahongqiao, North Bund and Qiantan will have a huge impact on the core business districts represented by Lujiazui, Nanjing West Road and Xujiahui. On the one hand, the leased area of ​​the traditional core business district is close to saturation, and the rent is high, which limits the further expansion and cost control of the enterprise. On the other hand, the emerging business district attracts more domestic and foreign companies with its proximity to the transportation hub (Dahongqiao), the first-line river view (North Bund) and other geographical locations as well as the lower average price of rent. Tenants and domestic and foreign investors.

In addition, with the completion and delivery of each emerging large-scale master plan area, the trend of the expansion and positioning of the Shanghai office market is increasingly obvious. The upsurge in office investment will continue in the future.

Dry view

The dry fund has long tracked the office market in first-tier cities. In the first quarter of 2017, overall supply in the core business district was magnified and rents were under pressure; TMT industry (technology, media and communications) industry upgrades and the financial industry continued to drive demand, but the continued downward trend of rents will not change much, vacancy rate It will also continue to rise. Rents in emerging business districts are on the rise, and the advantages of the office market in terms of capacity, price, area, and quality are increasingly prominent, providing investors and tenants with more choices. In addition, the emergence of convenient transportation, complete facilities and high-quality projects in some emerging business districts will become the highlight of the future, and the rental performance is expected to further narrow the gap with the traditional business district. In addition, the industry clusters, especially the explosive demand for joint ventures in new ventures, and the rational orientation of the “camp reform” policy, have increasingly increased the office market in emerging business districts.

From the perspective of investment M&A, the domestic investment market will still show an active trading situation. China's sustained rapid urbanization process also has huge potential for commercial real estate investment. We believe that a series of regulatory policies including “No. 4 Document” (such as restricting private equity funds from investing in hot-spot urban ordinary residential projects in non-standard manners), and the recent regulations of the China Insurance Regulatory Commission to reduce the shareholding ratio of single shareholders of insurance companies, etc. It is possible to indirectly make high-quality commercial properties with stable returns a new choice in the investment field. From the perspective of segmenting regional markets, the bright spot projects in the emerging business districts will become the embarrassment of office investment transactions.

In the face of the ever-changing market, Gangli Fund has grasped the rising trend of the office market in emerging business districts with its keen market insight and rich experience in investment and mergers and acquisitions in the past few years, and laid out the layout of high-quality office M&A transactions and quickly captured market opportunities.

At the beginning of the 2017 New Year, the Dry Fund entered into an acquisition agreement with Baolong Real Estate for its seven-baby Longcheng T6 office property located in the Dahongqiao section. At the end of the first quarter, the dry-end fund has basically completed the acquisition of the T6 project. In the future, we will introduce an excellent property and asset management team to build a region around the investment operation ideas that we have always adhered to, “hold, transform, upgrade, and voluntarily withdraw”. Excellent office space. Previously, Ganli successfully won the “Top 5 Investment Case for China's Real Estate Industry in 2016”, which also reflected the market's recognition of the highlights of the emerging business district.

Responsible Editor: Real Estate Internship

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