SHANGHAI’S real estate market posted a rather quiet first quarter with soft demand for serviced apartments, mixed fortunes for office landlords, a pause in investment activity and moderate retail rental growth, Cao Qian reports.

Serviced residential leasing

The average cost to lease a serviced apartment dipped 0.1 percent quarter on quarter to 219.8 yuan (US$35) per square meter per month between January and March. Flat demand from multinational companies coupled with ample supply in the market continued to place downward pressure on rents. Occupancy rates, meanwhile, climbed 0.8 percentage points from the last quarter of 2013 to an average 87.7 percent, according to Savills data.

“The market is currently digesting the significant supply it has received over the last two years with MNCs remaining on a cost-conscious footing, which means increases in housing budgets and numbers of secondees should be consequently limited,” said James Macdonald, head of research at Savills China. “MNCs in the professional and financial service industries are expected to remain the core of demand in Shanghai while those in the manufacturing and industrial segments are expanding in second-tier cities to benefit from lower costs, which may cause a slight redistribution of demand from first-tier cities like Shanghai.”

On the supply side, one new project, Savills Residence Hongqiao, held its soft opening in the first quarter, adding 78 units to the city’s serviced apartment market. There are now around 14,000 units including landlord operated, international operators, hotel operated as well as strata-titled apartments with services, according to Savills.

For the whole year, Shanghai will likely add about 400 units of serviced apartments from three to five projects, DTZ data showed. That means continuous pressure on rents for operators who have already felt intensified competition from hotels, which are becoming increasingly active in the residential leasing market.

Across the city, Nanjing Road and Xintiandi continued to command the highest serviced apartment rents among major precincts, Savills research showed. Hongqiao registered the lowest rents but maintained healthy occupancy rates.

Grade A office space

Demand for Grade A office premises diverged across the Huangpu River. On the west bank, office rents in Puxi’s central business district fell 0.9 percent from the previous quarter to 9 yuan per square meter per day. On the east bank, rents rose 1.6 percent to 9.60 yuan per square meter in the CBD of the Pudong New Area, according to global property services provider Jones Lang LaSalle.

“In Pudong, robust demand from domestic companies, particularly financial services and energy firms, continued to chase limited available space, pushing vacancy rates down to 3.5 percent — their lowest level since the fourth quarter of 2007,” said Anny Zhang, head of Pudong markets for Jones Lang LaSalle Shanghai. “Steady rental growth is expected to persist throughout the year. Puxi may also benefit if tight supply in Lujiazui forces Pudong demand to spill across the river.”

As a result of the lack of availability in Lujiazui, the trend to relocate there from Puxi is likely to be placed on hold until new supply becomes available near the end of 2014 and into 2015, a separate report by Cushman & Wakefield concluded. Shanghai Tower, for instance, is scheduled for completion in early 2015 with approximately 220,000 square meters of office space. The tallest building in China and second-tallest in the world upon completion will certainly change the landscape of the Lujiazui office market.

In Puxi, most rental activity in the first quarter was related to lease renewals. New leases primarily involved companies seeking larger premises to expand their businesses. Media and retail were the most active tenant segments.

En bloc real estate investment

Major real estate investment activity slowed in Shanghai in the first quarter following a very active fourth quarter of 2013. The volume of transactions fell, due in part to seasonal factors. Concerns about the strength of the property sector in China also started to impinge on investment decisions.

“That aside, most investors remained confident in the fundamentals of tier one markets, Shanghai in particular,” said Joe Zhou, head of research for East China operations at Jones Lang LaSalle. “Given the large amount of capital raised but not yet deployed, we believe that transaction volumes will remain strong this year.”

One major investment in the office market and three in hotels were recorded in the first quarter.

Calxon Global Tower, a newly developed office property in Xuhui District, was sold for 1.74 billion yuan to Cura Fund. In the hotel sector, a domestic developer bought the JC Mandarin Hotel on Nanjing Road W. for 2.1 billion yuan and announced plans to redevelop the site into office space as investors look to acquisitions with the mindset of converting usage in order to achieve targeted investment returns.

Retail

The retail property market recorded moderate growth across the city amid little change in overall market conditions.

Rents for first-floor shopping mall space in prime locations climbed 0.5 percent from the previous quarter to an average 47.4 yuan per square meter per day. Rents in secondary or emerging areas edged up 0.1 percent to an average 18.5 yuan per square meter, Savills data showed.

Vacancy rates at shopping malls in prime areas of the city fell 1 percentage point to 3.1 percent, with malls along Huaihai Road M. and Nanjing Road E. benefiting from the strong emergence of non-fashion retailers.

“Food and beverage and lifestyle retailers made up the majority of large-space leasing as mainstream fashion retailers remained cautious,” said Chester Zhang, associate director of Savills China research. “Rental growth is expected to remain flat to moderate for the remainder of the year, with landlords keen to secure or retain tenants unwilling to raise rents.”

Landlords will be forced to focus on flexible tenant mixes and digital technologies as growth in online shopping continues to detract from traditional retailing.