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Riding the real estate roller coaster

WHEN the city's real estate market finished 2007 with strong momentum, soaring capital values and high rents in almost all types of properties, few people, even the most experienced industry players, expected the wheels to come off so fast over the following year.

But in 2008, grade-A office rents were slashed by a double-digit rate amid oversupply while the luxury residential market remained subdued as demand from buyers and tenants wilted as the global economic crisis bit down.

For developers, landlords and investors, 2008 was a roller-coaster ride.


Vacancy rates at the city's grade-A office buildings tripled in 2008 amid an oversupply. The overall vacancy rate jumped to 15.4 percent by the end of last year from about 5 percent at the end of 2007, according to Savills Property Services (Shanghai), a major international real estate service provider.

Last year, 837,000 square meters of grade-A office space, including 619,000 square meters in Pudong, came on to the local market, the biggest amount in Shanghai's history. However, only 366,000 square meters were occupied during the period, Savills statistics showed.

"Record supply coupled with sluggish demand will continue to push the vacancy rate above 20 percent in 2009, when another 754,000 square meters of space is scheduled to be available in Shanghai,'' said Albert Lau, managing director of Savills.

Rents began to decline in all office sectors from the third quarter of 2008. Grade-A buildings in Puxi were the only exception. However, rents for Puxi's premium buildings began to join the rest of the market in the last quarter, falling 12 percent, according to Jones Lang LaSalle, another world-leading real estate service provider.

While most landlords are now offering generous renewal packages, including longer rent-free periods, to retain tenants, some have adopted different strategies to lure occupants, such as more use of greenery and outside space.

Insiders expected office rents to continue to fall in 2009. Conservative estimates put the range between 5 and 15 percent. Pessimists called it 20 to 25 percent.


Retail properties remained the highlight of 2008, with rents rising and vacancies standing at low levels.

Retail sales across the world are on the decline, but many global retailers still view China as a significant growth engine over the coming years though many of them are becoming increasingly cautious about expansion plans.

In Shanghai, there were no major signs that retailers were fleeing the market and the overall vacancy stood at a low 6.5 percent by the end of the fourth quarter, Jones Lang LaSalle figures showed.

Average rentals for prime ground-floor space rose 3.1 percent from a quarter earlier as demand for quality space remained robust.

For 2009 when growth in total retail sales is expected to slow, retail rents will encounter some pressure. But the majority of industry insiders believed retail properties would outperform other sectors this year with rents continuing to grow, though at a slower pace.

New supply in prime locations scheduled to complete in 2009 will cause no dramatic decrease in rents. Properties in decentralized areas will face greater downward pressure.


Logistics space for bonded and non-bonded uses had a mixed performance. While slowing demand for Chinese exports caused rents for bonded warehouses to decline, rentals for non-bonded spaces remained stable in the last quarter of 2008 due to a robust need for domestic distribution.

Logistics players are becoming more careful about their expansion plans as the market has been plagued by growing uncertainty. A total of more than 140,000 square meters of logistics space will be put on the Shanghai market this year.

Industry insiders said the business-park sector will likely remain unscathed compared to other properties as rents there would be under less downward pressure due to growing demand from tenants looking for cost-saving options.

Compared to core central business district buildings, business-park rents are already significantly lower, Jones Lang LaSalle said.

Luxury residential

While regulatory changes over the past few months have strengthened the mass market, the high-end sector remained subdued. Capital values of luxury apartments saw moderate corrections since the majority of home owners stayed put.

In the fourth quarter, the average capital value of luxury apartments fell 3.7 percent from a quarter earlier while rents retreated 3.4 percent during the same period, according to latest statistics released by Jones Lang LaSalle.

In the high-end residential leasing market, the negative impact of the global financial turmoil has begun to filter through as multinational companies trim their expat head count and cut housing allowances, while a slowdown in firms' China expansion plans also causes a fall in demand for new luxury rentals.

Between October and December, the average vacancy rate at Shanghai's high-end residential properties rose to 18.7 percent, an increase of 0.8 percentage points from the previous quarter and up 1.1 percentage points from a year earlier, Colliers International said on Monday. However, the increase in the vacancy rate was due partly to seasonal factors, the real estate service provider added.

Average rents fell 3.8 percent during the period, with villas and serviced apartments hit harder by the downturn, dropping 4.1 percent and 5.8 percent, respectively.

In the sales market, some developers and home°?owners are starting to adjust prices southward but transactions are still sluggish.

"In contrast to the mass market, the sales market of high-end residential properties faces greater pressure as many investors are sitting on the fence amid a cautious market outlook,'' said Hingyin Lee, director of Research & Advisory for Colliers International's East China operation.

"Some buyers have diverted to other Asia-Pacific markets such as Hong Kong and Singapore.''

For 2009, expect to see further drops in both rents and capital values of luxury apartments while vacancy (in leasing cases) will rise.


En-block property acquisitions by overseas investors dropped 26 percent to 16.3 billion yuan (US$2.38 billion) in the city in 2008 as a result of central government restrictions on so-called "hot money,'' and an overall lack of liquidity in the global credit market, coupled with a shift to more developed markets.

However, many overseas investors believed 2009 might be a good buying year given the corrections in many property types.

Savills and DTZ also predicted that domestic players, mainly Chinese mainland's large-sized state-owned companies, as well as private investors from Hong Kong, Taiwan and Singapore, may play more important roles in the city's property investment market, as many global institutional investors face tougher credit pressure because of the current financial turmoil.


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