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Market Insight – Rents Down in Some Districts

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As noted in our last newsletter, office rents in the city largely stabilized in the second quarter of this year after a long period of mostly steady increase that began all the way back in mid-2009. Does the current stabilisation represent a peak, meaning that rents will soon start falling, or is it instead a plateau, meaning that the rents will remain largely stationary for a while and possibly even continue rising afterwards? We aren’t certain of the answer, but in the last two months our market data shows that in some areas of the city rents have in fact fallen in some grade A buildings.

These buildings include Wheelock Square in Jing An, where rent for 40th-floor space has dropped from 14.0-15.0 RMB/sqm/day to 13.5- 14.5 RMB/sqm/day. In K. Wah Center on Middle Huai Hai Road, spaces that were renting out at 11.5-12.0 RMB/sqm/day a few months ago have now dropped to 10.5-11.0 RMB/sqm/day. And in central Xujiahui, office spaces at the Grand Gateway towers have gone from 11.0-11.5 RMB/ sqm/day to 10.0-10.5 RMB/sqm/day.

Although rents have fallen in the above three landmark buildings, and in many other grade A buildings as well, rents in other office developments have not changed at all, or have even slightly risen in some cases. Data we’ve collected over the last two months suggests that rents on average have either remained flat or risen ever so slightly in most areas of the city, with the exception of Hongqiao where rents increased more notably. This all suggests to us that the market is undergoing some adjustments on the local district level. At what point we see a new city-wide trend in rental rates, however, remains uncertain.

Hong Kong developer buys ‘last core site’

Regardless of whether office rents in the city will sink or rise in the next five years, many developers seem to be confident that rents will rise in the long run, as evidenced by their recent purchases of city land at historically high prices.

The most recent of these transactions took place last month in a city auction for what commentators have called the city’s ‘last core site’ of undeveloped land, the 99,189 sqm plot in central Xujiahui that is located adjacent to the Grand Gateway complex, between Hongqiao Road and Guangyuan Road. Hong Kong developer Sun Hung Kai won the plot with a bid of RMB 21.77 billion (US$3.6 billion), which works out to RMB 37,264 per sqm of planned gross floor area, a record for the city. The auction starting price for the plot had been RMB 17.5 billion, already the highest ever starting price for a Shanghai land auction, and Sun Hung Kai ended up paying 24% over that.

Sun Hung Kai is the developer of Shanghai International Financial Center in Lujiazui and Shanghai International Commerce Center on Huahai Middle Road. The purchase agreement with city government stipulates that development of the Xujiahui plot must be finished within seven years.

Market Data – Rents & Occupancies Oct. 2013

Rental Rates by CBD Area: RMB / sqm / day

As discussed above, average district rents have either remained unchanged or increased slightly throughout most of the city, with rents in Hongqiaoshowingaslightly steeper rise. The graph below tells the story.

Occupancy in Percentage

Below is the current picture of average occupancy rates in the districts. No major projects are set to open in the next few months, which means these average occupancies should remain largely the same throughout the rest of the year.