Real estate investment flying high. Asia Pacific Property Digest Q3 2015

Transcription

1 Real estate investment flying high Asia Pacific Property Digest Q3 215

2 Dear Reader, Asia Pacific investment volumes are at $88 billion year-to-date and are on track for a record level in 215. Increased space requirements from corporates have been reflected in a 33% surge in leasing activity over the same period. You can view this report online at We hope you enjoy our new-look report and as always, welcome your feedback. Best regards, Dr Jane Murray Head of Research Asia Pacific Feature Articles 4 Asia Pacific Economy and Property Market The impact of online retailing on Australian industrial demand Women are critical to Japan s economic success Navigating the patent-cliff : the role of corporate real estate in the life science industry Net absorption in Shanghai s Grade A office market to hit record high in 215 Office 13 Hong Kong 14 Beijing 15 Shanghai 16 Chengdu 17 Taipei 18 Tokyo 19 Osaka 2 Seoul 21 Singapore 22 Bangkok 23 Jakarta 24 Kuala Lumpur 25 Manila 26 Ho Chi Minh City 27 Delhi 28 Mumbai 29 Bangalore 3 Sydney 31 Melbourne 32 Brisbane 33 Auckland 34

3 Hong Kong 36 Beijing 37 Shanghai 38 Chengdu 39 Tokyo 4 Singapore 41 Bangkok 42 Jakarta 43 Delhi 44 Mumbai 45 Sydney 46 Melbourne 47 Hong Kong 58 Beijing 59 Shanghai 6 Tokyo 61 Singapore 62 Sydney 63 Melbourne 64 Retail 35 Industrial 57 Hong Kong 5 Beijing 51 Shanghai 52 Singapore 53 Bangkok 54 Manila 55 Hong Kong 66 Beijing 67 Shanghai 68 Tokyo 69 Singapore 7 Bangkok 71 Jakarta 72 Sydney 73 Residential Hotels 49 65

4 4 FEATURES ASIA PACIFIC ECONOMY A rather sluggish economic environment... By regional standards, economic growth was rather sluggish in the third quarter, prompting a number of governments to implement further supportive measures. China continues its economic transformation, moving to a greater focus on services and domestic consumption a profound structural change that is reverberating throughout the rest of Asia Pacific, particularly China s major trading partners. Japan, the region s second biggest economy, fell into recession in the third quarter, with the government s huge stimulus measures yet to be reflected in a meaningful uplift in consumption or corporate capex. Meanwhile, India s economy has held up relatively well and growth is projected to overtake that of China this year. Despite various challenges, the Asia Pacific economy is still expanding at a decent pace indeed more than twice as fast as the rest of the world. Retail sales performance remains mixed Encouragingly, retail sales in China have been trending higher since April (+11% y-o-y in October), supported by solid wages growth and providing a cushion against weakness in other parts of the economy. However, the performance of retail sales in other areas of Asia Pacific has been less robust. In Hong Kong, a slowdown in Mainland Chinese visitor arrivals has impacted sales which fell almost 5% y-o-y in 3Q. Retail sales growth in Japan remains weak as households hold back on spending, while in Singapore, retail sales have improved but remain subdued. In Australia, a buoyant housing sector has supported retail sales over the last year. Ongoing weakness in regional trade Weaker global demand for Chinese goods saw exports from China decline in each month of 3Q. However, devaluation of the Chinese Yuan may provide a boost going forward. Economic restructuring in China is impacting trade throughout the region with exports remaining weak in most AP markets. Further rate cuts while deflation emerges in some markets During the quarter, various governments continued to cut interest rates to shore up growth in their economies. India and New Zealand cut rates by 5 bps, China by 25 bps, while Taiwan lowered the policy rate for the first time in six years by 12.5 bps. Low prices for oil and other commodities are flowing through to falling inflation. Singapore and Thailand have seen declining consumer prices, while producer prices have been falling for at least six months in major markets including China, India and Japan. Stable growth expected for this year and next Oxford Economics expects 215 regional growth of 5.3% and a similar outcome next year, with a gradual recovery in global demand to underpin growth. Most major economies in the region are forecast to see modest improvements with the exception of China as it continues to transition to new growth drivers. Although stable performance is anticipated for AP, there are downside risks to the outlook including ongoing uncertainties related to the impact of China s slowdown and the timing of US interest rate hikes.

5 Figure 1: Outlook for Major Economies Real GDP Growth (%) Country 215F 216F China Japan India Outlook Slower growth as government continues with structural reforms. Services sector an area of strength in part due to robust consumption. Modest recovery supported by gradual improvement in domestic demand. More stimulus may be on the way. Domestic demand and fixed investment to underpin growth. Improved growth trajectory to depend on progress on reforms. 5 FEATURES South Korea Gradual improvement in trade and consumption amid loose fiscal and monetary policy. Australia Growth supported by residential sector and lower AUD which will improve export competitiveness. Mining investment a drag. Indonesia Modest pick-up in growth underpinned by infrastructure investment and private consumption. Singapore Rise in government spending and investment, but export performance to remain patchy. Hong Kong Subdued growth as sluggish Mainland demand impacts exports and inbound tourism spending. Asia Pacific Gradual recovery in global demand and ongoing policy support to aid solid performance. World Pick-up in global growth expected to be driven by improvements in advanced economies including the US (from 2.4% in 215 to 2.7% in 216) and the Eurozone (from 1.5% to 1.8%). Note: India revised its GDP methodology (including historical growth rates) in January 215. Source: Oxford Economics, November 215 ASIA PACIFIC PROPERTY MARKET while leasing and investment maintain good momentum In 3Q15, occupier demand surged for a second successive quarter and we are optimistic that regional leasing volumes for the full year will finish up at least 2% higher than the 214 level. On the commercial real estate investment front, investor interest remains strong with ample liquidity and low borrowing costs supporting demand for assets. 215 investment volumes are expected to reach the record level achieved in 214. Office leasing demand continues to strengthen, but still not consistent Overall leasing activity continued to improve in 3Q, with gross leasing volumes rising by a strong 27% y-o-y, following 4% growth in 2Q. However, the improvement was not consistent: activity was strongest in India and China, but still subdued in some other markets including Singapore. The most active occupier types across the region were domestic financial institutions and technology-related firms. The Indian markets of Delhi, Mumbai and Bangalore contributed half of total regional leasing volumes in 3Q, underpinned by both domestic expansion and offshoring by MNCs. China s shift to a service based economy is being seen through the growth in office leasing in its Tier 1 markets. Shanghai is on track to achieve its strongest ever year of take-up. Consistent with this, occupier demand in Hong Kong is being bolstered by Mainland Chinese firms. In Australia, Sydney is leading the leasing recovery while the cities more dependent on the resources sector remain weak. Healthy office supply additions. Occupancy levels up slightly Asia Pacific stock additions were up 38% y-o-y to 1.2 million sqm in 3Q, with more than one-third of the total in India. In spite of the large volume of new supply, vacancy declined in many markets including Beijing, Hong Kong and Seoul, with Hong Kong Central falling to 1.2%, the lowest vacancy in over seven years. Vacancy rates held stable in Shanghai, Tokyo and Sydney but rose in most Southeast Asian markets.

6 6 FEATURES Office rental growth slows in most markets Net effective rents declined in about one-third of major Asia Pacific markets in 3Q. On average, rents grew.5% q-o-q, slowing from.8% in 2Q. The strongest quarterly growth was in Sydney (3.9%) and Hong Kong (3.5%). Despite the recent financial market ructions in China, rents increased in Shanghai and Beijing on the back of sustained demand from financials and IT firms. fell furthest in Singapore ( 5.2% q-o-q) as landlords continued to take pre-emptive steps to retain and attract occupiers ahead of a large wave of supply due to be completed in 216. Declines were also seen in Kuala Lumpur, Ho Chi Minh City and some Australian cities. Over the 12 months ending 3Q15, average rents in aggregate were up 2.1%. Already with the highest rents in the region, Hong Kong was the market leader with 11.1% y-o-y growth, followed by Shanghai and Sydney which both recorded growth of 8.2%. Bangalore, Bangkok and Tokyo also recorded strong growth. At the opposite end of the spectrum, Singapore and most Australian cities have seen rents fall over the past year. Mid-tier brands are the most active retailers During the quarter, retailer demand in China continued to be supported by fast fashion retailers and F&B. However, new supply and ongoing caution by the luxury segment have created a more challenging operating environment. Market conditions in Hong Kong have continued to weaken and some retailers have reduced their store footprint and/or secured rental reductions. Retailer demand in Singapore continued to be subdued as consumer caution prevailed, while the economic backdrop in Australia remained largely supportive of trend growth in retail spending. During 3Q, there was limited rental growth in most markets and average growth edged down. Over the short term, we see limited scope for significant rental gains in most markets, while in Hong Kong, high street rents are likely to fall further. Generally healthy leasing activity for logistics facilities Across the region, 3PL and e-commerce firms continued to underpin leasing activity. were generally flat, with the highest quarterly growth seen in Hong Kong (1.4%) amid a tight vacancy environment. However, leasing demand in Hong Kong was impacted by falling exports and airfreight cargo. Strong tenant expansion demand continued to be evident in Tokyo, supporting a modest rise in rents. Strong residential sales momentum in China while some markets see lacklustre sales Policy restrictions remained in place in various markets across Asia. In China, high-end sales activity strengthened on the back of a more accommodative policy stance, including a cut in interest rates. However the high-end markets in Hong Kong and Singapore remained sluggish. Leasing activity in these two cities was stronger the third quarter being the traditional peak season in Hong Kong, while Singapore leasing volumes were supported by tenants moving to newly completed units. Most markets across the region saw stable or small increases in rents and prices, a trend that is expected to continue over the short term. Buoyant commercial real estate investment market Investment volumes for 3Q15 came in at USD 32 billion, relatively stable y-o-y but with growth partly impacted by a stronger USD, the reporting currency. Year-to-date, investment volumes total USD 88 billion, up 1% on the same period last year. During the quarter, cross-border Asian investors and global funds were active. There were also more portfolio and platform transactions, as investors sought to acquire assets that are difficult to acquire directly. Japan (+11% y-o-y), Australia (+13%) and China (+81%) performed strongly in 3Q as investors continued to focus on large and liquid markets. Japan remained the largest market in AP with investment volumes totalling USD 8.9 billion. Other markets saw a mixed performance with Hong Kong up 25% y-o-y, buoyed by a major hotel deal, while volumes in South Korea were down 24%, in part due to a lack of tradeable assets. Capital value growth slows Capital value growth moderated across all sectors and most markets in the region. In the office sector, average capital value growth slowed to 1.5% q-o-q but continued to outpace rental growth. Quarterly growth was strongest in Osaka (+6.4%) and Sydney (+6.3%), with Melbourne, Brisbane and Auckland all recording growth of between 3 5%. Capital values in Jakarta and Singapore declined. Figure 2: Office Rental & Capital Value Changes Yearly % Changes, 3Q15 2 Figure 3: Direct Commercial Real Estate Investment 27 3Q YTD 215 $88.1bill 1% y-o-y y-o-y % 5 USD Billion Hong Kong Sydney Shanghai Bangkok Tokyo Manila Beijing Melbourne Seoul Jakarta Mumbai Singapore YTD 215 Japan China Australia Singapore Rental Values Capital Values Hong Kong South Korea Other Figures relate to the major submarket in each city (Real Estate Intelligence Service), 3Q15 Figures refer to transactions over USD 5 million in office, retail, hotels and industrial (Real Estate Intelligence Service), 3Q15

7 Figure 4: Rental Property Clocks, 3Q15 Grade A Office Guangzhou Jakarta, Singapore Prime Retail Kuala Lumpur Guangzhou Jakarta Hong Kong^ Singapore 7 FEATURES Kuala Lumpur Beijing Shanghai Taipei, Bangkok Manila Growth Slowing Falling Bangkok Tokyo Growth Slowing Falling Hong Kong Tokyo, Beijing Auckland, Bangalore Delhi Rising Chennai, Sydney Wellington Shanghai, Melbourne Osaka Canberra Decline Slowing Brisbane Hanoi Seoul, Ho Chi Minh City Mumbai, Adelaide Perth Manila Rising Mumbai Delhi Auckland, Bangalore Chennai Sydney*, Melbourne*, Brisbane* Decline Slowing Wellington *Regional ^High Street Shops Prime Residential Industrial Guangzhou, Kuala Lumpur Singapore (Logistics), Shanghai Singapore (Business Park) Bangkok Manila Shanghai Growth Slowing Rising Falling Decline Slowing Hong Kong Tokyo Growth Slowing Rising Falling Decline Slowing Jakarta Auckland, Manila Wellington Beijing Hong Kong Singapore* Beijing Sydney Melbourne Brisbane *For Luxurious Residential Properties *Logistics space (Hong Kong, Shanghai, Beijing, Greater Tokyo) (Real Estate Intelligence Service), 3Q15 Note: Clock positions for the office sector relate to the main submarket in each city. Continued optimism on leasing and investment activity Office leasing volumes should continue to improve in 4Q15 and into 216, with India and Tier I cities in China (particularly Shanghai) expected to see the strongest activity. Moderate rental growth is generally expected over the next year, with Sydney, Tokyo and Bangalore leading the way in the office sector. Singapore, Jakarta and Brisbane may see further declines due to lacklustre tenant demand and/or upcoming supply. Meanwhile, 216 should be another strong year for investment activity. At this stage, volumes are expected to be similar to this year s estimate of USD 13 billion, on par with the record in 214. ABOUT THE AUTHOR Dr Jane Murray joined JLL in 1998 and in 25 was appointed as Head of Research Asia Pacific. In this role, Jane leads a team of 14 professional researchers in the region, which forms part of a network of over 4 researchers in 65 countries around the globe.

8 8 FEATURES The impact of online retailing on Australian industrial demand Online retailing has grown rapidly over the last decade. Traditional retail operators are being challenged by technological advances, however many have adapted and now offer a multichannel sales approach. Here, we look at how online retailing is impacting the Australian industrial sector. According to National Australia Bank s latest online retail sales index, Australian online retail spending increased to AUD 17.5 billion in the year to August 215, a year-on-year increase of 7%. Online retailing now represents around 7.1% of traditional retail spending excluding cafes, restaurants and takeaway food, up from 4.9% in 211. Over the past two years, there has been a strong correlation (.7) between online retail turnover growth and gross take-up of industrial space by the retail and wholesale trade sectors. This supports the need for industrial expansion from retailers moving to or expanding their online presence. Traditionally, warehouse space utilised by the retail trade sector was stocked with products for sale at store-based retailers. However, with the ongoing advances in technology and the increasing number of retailers with an online presence, there is a growing trend to deliver goods direct from warehouses to the consumer. As the retail market becomes more competitive, especially given the recent weakening of the Australian dollar, domestic retailers incorporating online platforms are likely to require more flexible industrial property solutions that incorporate non-traditional stock picking (selection of stock as per orders) and delivery methods. These may include higher staff ratios, smaller delivery vehicle access, returns areas and direct customer access. Online retailers need to locate in areas that will provide an efficient movement of goods to their consumers, as well as close proximity to major postal centres. In Sydney, the Outer West (OW) precincts centred on major transport routes (M2, M4, M5 and M7) have proven to be key areas for retail occupiers. The OW precincts have accounted for 76% of total retail and wholesale trade gross take-up annually between 21 and 214. These precincts are highly sought after due to the relative simplicity of receiving and distributing stock. Between 26 and 21, retail and wholesale trade accounted for 26% of gross industrial take-up nationally. Since then (211 to YTD 215), the retail and wholesale trade sectors recorded an additional 75, sqm of activity, and represented 32% of total take-up. Logistics has also benefitted from the increase in online retailing and retailer demand as distribution operations get outsourced to third-party logistics (3PL) providers. The transport and storage sector s percentage of total gross take-up increased from 25% to 34% over the same period. Online retail turnover growth vs retail and wholesale trade gross take-up 5.% 4.% 3.% 2.% 1.%.% 1.% 2.% 3.% Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 35, 3, 25, 2, 15, 1, 5, Gross take-up (sqm): Retail & Wholesale Trade Online retail turnover growth Multi-channel online retail trade Pure-play online retail trade Source: ABS, JLL Research Despite the rapid growth in online retailing in Australia, it still comprises a small percentage of total retail sales (the majority of which is through domestic retailers), indicating that there is further room for expansion. It is likely that more traditional retailers will expand into and increase their exposure to the online retailing market and subsequently increase their requirements directly or indirectly through 3PLs for distribution space that can accommodate the special needs of online retailers. ABOUT THE AUTHOR Alison Spiteri is a Senior Analyst in the JLL Research team in Australia. She specialises in industrial research for the Sydney and Melbourne markets and office research for the Sydney Metro markets.

9 9 FEATURES Women are critical to Japan s economic success Japan has regained some of its lost momentum under Abenomics, a three-pronged set of policies aimed at rejuvenating and reforming the Japanese economy. While consumer sentiment has remained fragile over the past few years, corporate profits have continued to rise and the unemployment rate has declined to 3.4%, the lowest level in 18 years. Should private consumption recover along with rising real wages, the stagnation that has characterised Japan s economy since the Lost Decade might at last be giving way. There is a blip on this bright horizon, however. Japan s declining birth rate and rapidly ageing population threatens the working capacity of its labour force, and therefore the long-term viability of the nation s growth. Fertility rates are below replacement level, and over one-fourth of Japan s current population is over the age of 65. Current demographic predictions by Japan s Health Ministry put the Japanese labour force at 55 million by 25, down 1 million from this year. Without a consistent supply of labour, Abenomics cannot succeed, and so to forestall this damaging shortfall, Abe has turned to a chronically underutilised demographic Japan s women. Japanese women are among the most highly educated in the world, but female participation in the Japanese workforce ranks among the lowest in OECD countries, especially in the late 2s to early 3s age bracket, when most women have their first child. The reason for this lies in the entrenched corporate mind-set, which penalises maternity leave, prioritises long hours and ultimately clashes with sociocultural expectations for Japanese motherhood. In addition, Female labour force participation rates, top 25 countries 214 (%) Iceland Sweden Switzerland Norway Denmark Canada New Zealand Netherlands Finland Germany UK Lithuania Latvia Estonia Austria Australia Portugal Spain Israel Russian Fed. France Slovenia US Japan OECD aveage: 62.8 Source: OECD Employment Outlook 215 Japan female labour force participation rates Source: OECD Employment Outlook Japan 59.6% 61.9% 66.% Czech Rep. restrictive Japanese labour laws, low numbers of women in managerial positions, a lack of childcare facilities, and the spousal tax deduction, which incentivises a sole-breadwinner household, all stand in the way of women s participation in the labour force. The Abenomics structural reform strategy aims to encourage a radical change in this paradigm and establish woman-positive corporate environments and policies. The most recent results are encouraging; already female employment has increased by 93, workers since Abe took office in 212. Given Japan s tradition of lifetime employment, which limits re-entry of workers into well-paid, permanent positions, much of the new female workforce has been relegated to low-benefit, low-wage, temporary positions with little to no chance of advancement. Furthermore, there is still a wealth of untapped potential; according to a 213 survey by the Ministry of Internal Affairs, as many as 3.15 million currently unemployed women could return to work if given the opportunity. The economic effect of such a change is nothing to sneeze at; closing the workforce gender gap could boost Japan s GDP by as much as 12.5%, according to a report by Goldman Sachs. For Japan to truly see returns from an influx of women in the workforce, it s critical that initiatives are put in place to incentivise women to return to work and furthermore, remain employed throughout their childbearing years. Revising antiquated legislation, building day care facilities, and promoting a culture that promotes, rather than demeans, women s empowerment, will be instrumental in deciding the future of both the gender gap and the country as a whole. The extraordinary growth potential of Japanese women is already there it is just a question of providing the right environment for them to flourish. This is also an important driver of demand within Japan s real estate markets which should reap the benefits of a revitalised labour force along with other structural reforms. ABOUT THE AUTHOR Takeshi Akagi is the Head of Research in Japan. His responsibilities include primary real estate research, economic and investment analysis, and forecasting. He regularly contributes to JLL s publications as well as provides commentary on issues related to Japan. Emma Saraff was an intern for JLL s research team in Tokyo.

10 1 FEATURES Navigating the patent-cliff : the role of corporate real estate in the life science industry The life science industry is standing on the edge of a patent cliff. In 215, the world s biggest pharmaceutical firms stand to lose up to USD 47.5 billion in revenues from the expiry of the patents of some of their biggest blockbuster drugs. For example, Celebrex an arthritis drug which contributed almost USD 3 billion to Pfizer s revenues in 214 is set to see its patent expire later this year, opening it up to competition from generic alternatives which are often sold at much cheaper prices. This has triggered a wave of consolidation activity within the industry as firms look to replace best-selling drugs whose patents are expiring with newer drugs that have the potential to grow revenues. According to the Thomson Reuters Full Year Mergers & Acquisitions Review, the life science industry saw more than USD 39 billion in transactions in 214, and transactions are expected to remain at similarly high levels throughout 215. With revenue streams becoming more uncertain, many firms are also focusing on reining in costs to maintain overall profitability. While these cost pressures impact all aspects of a firm s operations, they are being felt more keenly in corporate real estate (CRE). In the 215 Global Corporate Real Estate Survey conducted by JLL, 92% of CRE executives from the life science industry felt that the demand from their senior leadership for them to reduce operating expenses had increased. This represents a marked increase from the already substantial 85% of executives from the industry who felt the same way in the last survey conducted in 213. At the same time, a substantial proportion of CRE executives also reported rising demand from their senior leadership for them to deliver across the following areas that could help to further manage costs: Increasing portfolio flexibility (71%) Challenging the business about presumed space needs (71%) Reducing portfolio size (71%) Correspondingly, CRE teams in the life science industry now say that they feel more empowered within their organisations, with 88% of life science industry respondents reporting that they have stronger or much stronger mandates now compared to three years ago. Life science firms are also making plans to aggressively outsource the delivery of many CRE services over the coming years. According to the survey, significant outsourcing activity is expected to take place from now to 218 (see figure). In particular, CRE services like lease administration, facilities and property management, and transaction management, which are more transactional in nature, are expected to be outsourced at the quickest pace. How would you best describe the current delivery of the following CRE services? Lease Administration Facilities and Property Management Transaction Management Transaction Execution Energy Management Supply Chain Management Project and Construction Management Technology Worlplace Strategy Occupancy Planning Capital Budget Planning & Management *Percentages represent proportion of respondents who selected 4 or 5, on a scale where 1=fully in-house and 5=fully outsourced Notably, the increased demands being placed on CRE teams in the industry appears to have significantly stretched their current capabilities: three out of four CRE executives indicated that they were not confident of meeting all the demands that were being placed on them. To learn more, click here to download the Global Corporate Real Estate Trends 215, and also look out for upcoming industry specific content! ABOUT THE AUTHOR PMO Portfolio Strategy Change Management 15% 14% 2% Clarence Goh is a Senior Manager of APAC Corporate Research for JLL in Singapore. He is involved in global and regional research projects for JLL s Corporate Solutions business. % Now 15% 39% 43% 41% 42% 45% 4% 43% 35% 27% 32% 27% 23% 14% 23% 23% 23% 22% 18% 31% 3 Years Time 5% 57% 55% 65%

11 11 FEATURES Net absorption in Shanghai s Grade A office market to hit record high in 215 Over the past few months, one of the most common questions we hear in China from clients has been what effect the gyrations in China s stock market might have on the performance of the office market in Shanghai. Some investors have assumed perhaps drawing a connection between Shanghai s status as a financial centre and the stock market crash s disproportionate impact on financial services that the stock market s post-june slump will negatively impact the office leasing market. The numbers do not bear this out, however: net absorption for the year through 3Q15 has already exceeded 1 million sqm, and we believe Shanghai s Grade A take-up is on track to reach a record high in 215. Three factors are driving the record high absorption. First, domestic financial service firms have increased leasing activity in both the CBD and decentralised markets. Encouraged by ongoing financial reform and liberalising policies in the Shanghai Free Trade Zone, both traditional domestic finance firms (like retail banks and insurers) along with non-traditional internet finance companies have been active in setting up new offices and expanding their office space in Shanghai. Leasing deals by domestic financial services companies in Shanghai s Grade A office market Category in Finance Services Traditional Finance Services Non-traditional Internet Finance Services Subsector Tenant Submarket Insurance Company E-commerce, Third-party payment Shanghai Life Insurance Wanda Finance Group (Real Estate Intelligence Service), CREIS Size (sqm) Pudong CBD 3, Decentralised Pudong 11,5 A second key driver is MNC tenants, who have demonstrated particularly strong leasing demand in decentralised areas. Recognising that China s middle class population is expanding the country s consumer potential, MNCs in the retailing and media sectors are actively expanding their business, and many have found they require more office space in Shanghai. The large volume of new supply in the decentralised market has tapped into pent-up demand from MNCs that seek large contiguous spaces for consolidation and expansion. In addition, many MNC professional services firms such as consulting companies have retained a positive outlook toward their China business, and have shown strong interest in office expansion. Leasing deals by MNCs in Shanghai s Grade A office market Industry Subsector Tenant Submarket Retailer Professional Services Luxury brand retailer Consulting and Auditing (Real Estate Intelligence Service), CREIS Size (sqm) Richemont Puxi CBD 5,6 Owner-occupation in Shanghai s Grade A office market PwC Puxi CBD 16,72 The third main driver of take-up this year has been firms self-using space that they build or acquire. In the decentralised market, several companies notably domestic financial institutions have acquired or developed buildings, and have reserved large shares of space for their own use. Industry Self-occupier Property Submarket Financial Services Food Ping an Group Ting Hsin International Greenland Center Phase 2 W Square Tower A&B (Real Estate Intelligence Service), CREIS ABOUT THE AUTHOR Grace Lv is a Senior Manager in JLL s research team in Shanghai, specialising in the office sector in Shanghai and major Yangtze River markets. She regularly contributes to quarterly publications and is also involved in market consultancy studies. Decentralised Puxi Decentralised Puxi Aside from the three main demand types discussed above, other tenant types have also contributed to this year s robust demand, including domestic retailers and professional services firms. Size sqm 78,3 53,7 We expect leasing momentum to remain strong through the remainder of the year. As a result, Shanghai s overall net take-up is expected to reach a record high of above 1.4 million sqm in 215. The Shanghai stock index may have taken a dive, but the take-up in the city s Grade A office market is heading skyward.

12 Need Asia Pacific rents and capital values on the move? Download JLL s DataTouch today and access Office, Retail, Residential, Hotels and Industrial market data from your smartphone or tablet. Wherever you are. Jones Lang LaSalle 215 Jones Lang LaSalle IP, Inc. All rights reserved.

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14 HONG KONG Demand recovery pushes monthly rents in Central back up to HKD 1 per sq ft for the first time since 4Q11. Denis Ma, Head of Research, Hong Kong 14 OFFICE Rental Value Capital Value base: 4Q11 =1 Financial Indicators are for Central. 11.1% SQ FT PER MONTH, NET EFFECTIVE ON NLA HKD 1. STOCK MARKET ROUT HAS LIMITED IMPACT ON PRC DEMAND The recent volatility in the local and Mainland Chinese stock markets had a limited impact on PRC demand, with a number of PRC securities trading firms and mid-tier banks actively securing office space in 3Q15. PRC demand accounted for about 6% of all new lettings (in terms of floor area leased), up from 25% in 2Q15. A tight vacancy environment entering the quarter saw headline net absorption moderating in most of the city s five major office submarkets. Leasing demand, nonetheless, remained intact with a handful of shadow space being backfilled, including AIA s lease on three floors at 633 King s Road in North Point. TOWER 535 IN CAUSEWAY BAY RECEIVES OCCUPATION PERMIT Rising Phoenix Property Investors office/retail development, Tower 535, in Causeway Bay was issued its Occupation Permit in 3Q15, adding 128,3 sq ft to the market. About 2% of the building has already been leased to a fitness centre and a club house operator F Take-Up (net) 16F Vacancy Rate For 211 to 214, take-up, completions and vacancy rates are year-end annual. For 215, take-up, completions and vacancy rates are YTD, while future supply is for 4Q15. are for the Overall market Percent In Central, robust leasing demand drove the vacancy rate down to 1.2% its lowest level since March 28 just prior to the Global Financial Crisis. CENTRAL S BACK AT HKD 1 PER SQ FT PER MONTH in Central grew by 3.5% q-o-q in 3Q15 to reach HKD 1 per sq ft per month for the first time since the Eurozone Crisis in 4Q11, as the vacancy rate further tightened. All of the city s major office submarkets recorded rental growth. With rents in Central experiencing a broad-based recovery, investors showed renewed interest in the submarket despite strong pricing levels, as evidenced by several non-grade A en bloc office buildings changing hands in 3Q15. The interest in office properties prompted more developers and owners to consider selling properties in their portfolio. OUTLOOK: CENTRAL RECOVERY HAS YET TO RUN ITS COURSE Despite an uncertain economic outlook, leasing activity should remain intact with most companies still looking to increase headcount over the near term. Strong policy support from China should translate into ongoing demand from PRC firms. Central rentals are likely to continue to edge higher, supported by an ultra-tight vacancy environment. Steady rental growth should enhance the investment appeal of office properties over the near term, enabling pricing across the market to hold firm. However, capital values are likely to face increasing downside risks amid a moderating rental market and rising interest rates. Note: Hong Kong Office refers to Hong Kong s Overall Grade A office market.

15 Despite slow economic growth and volatility in the stock market, finance firms remain highly active. Steven McCord, Head of Research, North China BEIJING 2.6% SQM PER MONTH, NET EFFECTIVE ON GFA RMB DOMESTIC FINANCE AND IT FIRMS CONTINUE TO DRIVE DEMAND Rising Due to the supply-constrained market, net absorption in the first nine months of 215 reached just 14,5 sqm, down 34% y-o-y. IT remained one of the most active sectors in Zhongguancun and Wangjing, accounting for more than 3% of the overall net absorption in 3Q15. A handful of projects in Finance Street achieved 1% occupancy in the quarter due to strong demand from domestic finance companies such as state-owned banks, and private equity and securities firms. Expansion plans from existing tenants in the CBD and Finance Street were put on hold due to limited availability of space in these areas OFFICE MARKET VACANCY DECLINES TO 3.8% DUE TO STEADY LEASING PROGRESS Raycom Infotech Park Tower B obtained a 6% commitment rate at end-3q15 a quarter after opening; most new tenants came from IT or IT-related sectors. Dreamsfounts 35th, another new completion in Finance Street from 2Q15, achieved a 7% commitment rate in the quarter, with state-owned banks and private investment companies making up a large presence at the project. RENTS RISE ACROSS MOST SUBMARKETS AMID LOW VACANCY Landlords at buildings with very low vacancy were able to focus more on tenant profile and exert greater power during rental negotiations. Landlords at recently completed projects charged higher rents as occupancy stabilised. 8 Rental Value Capital Value base: 4Q11 =1 Financial Indicators are for the CBD Singaporean-listed GuocoLand sold its Dongzhimen mixed-use project for RMB 1.5 billion to China Cinda Asset Management Co. after the property was kept vacant for years. Slated for completion by end-215 in Wangjing, Kuntai Garry Center, owned by Beijing developer Kuntai, sold to Alibaba for 2.84 billion RMB Percent OUTLOOK: FUTURE SUPPLY PROJECTED TO RELIEVE PENT-UP MARKET DEMAND Net take-up is expected to climb as Grade A office space becomes available in the CBD and Finance Street, where absorption and company expansion have been muted due to a lack of leasable space. are likely to rise as tenants compete for space at quality buildings. Investors remain interested in Beijing, but there continues to be a disconnect with sellers on pricing. Wangjing s popularity is climbing; one property sold here in the quarter, making it the third of five Beijing office buildings to be transacted in the submarket this year. Due to strong government support, Tongzhou is set to become a hot spot for investment opportunity F 16F Take-Up (net) Vacancy Rate For 211 to 214, take-up, completions and vacancy rates are year-end annual. For 215, take-up, completions and vacancy rates are YTD, while future supply is for 4Q15. are for the Overall market. Note: Beijing Office refers to Beijing s Overall Grade A office market.

16 SHANGHAI Net take-up to hit record high in 215. Daniel Yao, Local Director - Research, Shanghai 16 OFFICE Rental Value Capital Value base: 4Q11 =1 Financial Indicators are for the CBD. 7.3% SQM PER DAY, NET EFFECTIVE ON GFA RMB 1.1 NEW SET-UP DEMAND FROM DOMESTIC FINANCIAL SERVICES ON THE RISE Domestic retail banks and wealth management companies were active in setting up branch offices in Pudong in 3Q15. Changchun Rural Commercial Bank set up its Shanghai branch office in Jin Mao Tower (5 sqm), while a domestic wealth management firm set up a new branch office in Hong Jia Tower (1,8 sqm). Domestic financial services companies were seeking space in Puxi as well. Meanwhile, multi-national companies (MNC) in retailing and professional services were also active in Puxi. LETTABLE SPACE REMAINS TIGHT IN PUDONG Rising For the fourth consecutive quarter, no new supply was delivered in the Pudong CBD. In the Puxi CBD, Soho Bund (87,248 sqm) in Huangpu District was the only project reaching completion in the quarter. In the Decentralised market, three Grade A projects with a total GFA of 151,22 sqm were completed, including Oriental One Tower 3 (3,831 sqm) in Pudong, as well as Hongqiao Vanke Center Phase 1 (58,385 sqm) and Soho Hongkou Plaza (62,4 sqm) in Puxi F Take-Up (net) 16F Vacancy Rate For 211 to 214, take-up, completions and vacancy rates are year-end annual. For 215, take-up, completions and vacancy rates are YTD, while future supply is for 4Q15. are for the CBD Percent SEVERAL MAJOR INVESTMENT DEALS CLOSE; RENTS RISE Underpinned by strong leasing momentum, Pudong Grade A rents increased by 2.2% q-o-q to RMB 11. per sqm per day, and Puxi Grade A rents rose by 2.3% q-o-q to RMB 9.4 per sqm per day. Positive sentiment about rental growth prospects in the CBD market led domestic and foreign institutional investors to become increasingly active in seeking en bloc investment opportunities. Notable investment deals closed in the quarter included Corporate Avenue 1 & 2 (RMB 6.6 Billion), Hongjia Tower (RMB 2.6 Billion) and GC Tower (RMB 2.2 Billion). OUTLOOK: STRONG LEASING DEMAND EXPECTED TO CONTINUE THROUGH 216 It is expected that financial and professional services enterprises particularly domestic firms should remain active in the CBD market. Meanwhile, many MNC manufacturers are likely to continue to show interest in relocating operations to decentralised areas. The strong demand and rental outlook should further boost institutional investors confidence. We expect more core investors, who tend to have longer investment horizons, to become active in the market. Note: Shanghai Office refers to Shanghai s Overall Grade A office market consisting of Pudong, Puxi and the decentralised areas.

17 Robust leasing activity as landlords employ various measures to boost occupancy. Frank Ma, Head of Research, West China CHENGDU SQM PER MONTH, NET EFFECTIVE ON GFA 4.7% RMB 94.7 LARGE LEASING DEALS PUSH UP QUARTERLY NET TAKE-UP Net absorption significantly improved q-o-q in 3Q15, underpinned by several large lease deals. The most notable transaction was Tianfu International Funds Business Park committing to about 14, sqm in Taifeng International Plaza in the City Centre submarket. The tenant was introduced to the landlord by the district government. Leasing activity was concentrated in the City Centre and New South Area submarkets. The City Centre mainly appeals to MNCs and financial services/ professional services companies due to the maturity of its business environment and quality office buildings. New South Area is attractive to small- to medium-sized local tenants because of its lower rents. ONE PROJECT RECEIVES OCCUPANCY PERMIT Falling International Financial Square (Tower 3, IFS) in the City Centre was the only Grade A completion in 3Q15. After being fully fitted out, the office portion of this mixed-used development was subleased to MFG, a serviced office operator, by developer Wharf Group. MFG had 2% of the space committed by end-3q15. In 3Q15, overall vacancy edged down by 1.8 percentage points to 38.5%. However, vacancy marginally increased in the South Renmin Road submarket as tenants of older buildings relocated out of the submarket Rental Value Capital Value base: 4Q11 = OFFICE HIGH VACANCY PROMPTS LANDLORDS TO LOWER RENTS A high vacancy environment led many landlords to lower rents in a bid to improve occupancy and as such, net effective rents declined 1.4% q-o-q to RMB 94.7 per sqm per month. Chinese Estates Center was acquired by Evergrande Real Estate Group when it purchased all of Chinese Estates Group s projects (two residential, one mixed-use) in Chengdu for a total consideration of HKD 6.5 billion (CNY 5.3 billion). OUTLOOK: NEW LEASING STRATEGIES EXPECTED TO SPUR ACTIVITY In addition to lowering rents, various measures are being undertaken by landlords to spur leasing activity, including offering higher commissions to leasing agents and co-operating with government agencies to encourage more company setups. As vacancy is forecast to remain high in the near term, more landlords are expected to adopt the aforementioned methods to fill vacant space. A low interest rate environment and business diversification strategies are expected to see more domestic real estate funds/companies explore the purchase of quality commercial property assets in core locations F Take-Up (net) 16F Vacancy Rate For 211 to 214, take-up, completions and vacancy rates are year end annual. For 215, take-up, completions and vacancy rate are YTD, while future supply is for 4Q Percent Note: Chengdu Office refers to Chengdu s Overall Grade A office market.

18 TAIPEI Record third quarter net take-up but largely due to pre-commitments to new completions. Jamie Chang, Head of Research, Taiwan 18 OFFICE % PING PER MONTH, NET ON GFA NTD 3,39 ACTIVITY STRONGEST AMONG MID-TO-LARGE SIZED UNITS Growth Slowing In the past three years, net take-up in 3Q averaged around 3, ping (9,915 sqm). However, net take-up in 3Q15 reached 1,8 ping, a notable improvement and largely driven by strong pre-commitments to supply completed in the quarter Rental Value Capital Value base: 4Q11 =1 Financial Indicators are for Xinyi. Demand mainly came from firms in the technology, IT and financial services industries. TWO BUILDINGS COMPLETE Cathay Landmark Square and Hung Shen International Financial Centre reached completion in the quarter and added 31,575 ping to stock. As result of the new supply, the vacancy rate increased by 2.8 percentage points q-o-q to 1.6%. Cathay Landmark Square (27,333 ping) is located in the Xinyi submarket and features direct access to public transport, a shopping arcade and premium building characteristics. Hung Shen International Financial Centre which is located in the Non-core submarket, added 4,242 ping to market stock and has direct access to the Metro system Percent S GENERALLY STABLE DESPITE STRONG TAKE-UP In spite of healthy demand, overall rents edged down slightly by.2% q-o-q to NTD 2,582 per ping per month. It was observed that many leasing deals signed in the quarter had lengthy negotiation periods and in some circumstances, with rentals agreed upon in prior quarters as early as 4Q14. Overall market yields remained flat at 3.3% due to sluggish investment activity and slow rental growth. Investment volumes for all real estate asset classes totalled NTD 9.7 billion in 3Q, a decrease of 9.% q-o-q or 71% y-o-y F Take-Up (net) 16F Vacancy Rate For 211 to 214, take-up, completions and vacancy rates are year-end annual. For 215, take-up, completions and vacancy rates are YTD, while future supply is for 4Q15. are for the Overall market. OUTLOOK: MODERATE GROWTH EXPECTED Taiwanese businesses have reduced their intentions to increase staffing levels and as a result, office demand may be impacted. Finance, professional services and transport & utility sectors are expected to be the primary drivers of demand. A further 32, ping of new Grade A office space is planned to be completed by year end, with around 85% planned for owner occupancy. As such, vacancy is likely to increase moderately in 4Q15. Note: Taipei Office refers to Taipei s Overall Grade A office market.

19 Rent growth moderates despite low vacancy, as corporates are cautious about a global economic slowdown. Takeshi Akagi, Head of Research, Japan TOKYO IT AND MANUFACTURING FIRMS MAIN DRIVERS OF DEMAND According to the Financial Statements Statistics of Corporations by Industry, corporate profits reached a record high in the April-June period (+21.6% y-o-y). However, global economic uncertainty weighed on corporate sentiment. Net absorption tipped slightly into negative territory in 3Q15. In 3Q15, demand was largely driven by tenants in the information & communication and manufacturing industries. A notable leasing deal announced in the quarter was mobile app developer Line s expansion to JR Shinjuku Miraina in January 216. VACANCY REMAINS STABLE TSUBO PER MONTH, GROSS ON NLA 4.3% JPY 34,688 Rising The vacancy rate at end-3q15 was 3.3%, remaining stable q-o-q but down 6 bps from a year earlier. Vacancy in mature buildings continued to be below the market average, while commitment rates for recently completed buildings was only around 6%. By submarket, Shibuya saw a decrease in vacant space while Toranomon recorded an increase Rental Value Capital Value base: 4Q11 =1 19 OFFICE The Tokiwabashi District Redevelopment Project was announced in 3Q15. Located on a 3.1 hectare site adjacent to Tokyo Station, the complex will comprise four buildings offering a total floor area of 68, sqm (GFA). Office space will be offered in Building A (14, sqm, GFA) which is due for completion in 221 and Building B (49, sqm, GFA) which is scheduled to be finished in 227. RENT AND CAPITAL VALUE GROWTH SLOWS at end-3q15 averaged JPY 34,688 per tsubo per month, increasing.7% q-o-q. have grown for 14 consecutive quarters, although the rate of increase moderated in 3Q15. Growth was driven by Otemachi/Marunouchi, Akasaka/Roppongi and Hibiya submarkets. Capital value growth slowed to.2% q-o-q (15.2% y-o-y), in part reflecting weaker rental growth. However, the investment market remained active. Mori Hills Reit acquired a stake (1.4%) in Roppongi Hills Mori Tower for JPY 12 billion (NOI cap rate of 3.8%). OUTLOOK: MODEST RISE IN RENTS AND CAPITAL VALUES EXPECTED The Japanese economy is expected to see a modest recovery in 216, with Oxford Economics forecasting real GDP growth of 1.5%. However, increased uncertainty surrounding the global economy is a downside risk. Vacancy is expected to remain stable amid steady demand and healthy take up of new supply. The low vacancy environment should support moderate growth of rents. Persisting investor interest is expected to see cap rates compress further, and this, in combination with rent growth, should support a rise in capital values. Note: Tokyo Office refers to Tokyo s 5 Kus Grade A office market F 16F Take-Up (net) Vacancy Rate For 211 to 214, take-up, completions and vacancy rates are year-end annual. For 215, take-up, completions and vacancy rates are YTD, while future supply is for 4Q Percent

20 OSAKA continue to edge up as vacancy declines and corporate sentiment improves. Takeshi Akagi, Head of Research, Japan 2 OFFICE Rental Value Capital Value base: 4Q11 =1 3.2% TSUBO PER MONTH, GROSS ON NLA JPY 16,125 DEMAND STEADY AMID RECOVERING ECONOMY According to September s Greater Osaka Tankan Survey, business conditions for large manufacturers and non-manufacturers continued to improve. Leasing demand in 3Q15 was driven by sectors such as professional services, finance and insurance. Net absorption slowed q-o-q to 7,5 sqm; however, total net take-up for the first nine months of the year recorded a strong increase from the same period last year. Notable tenant movements in the quarter included Asatsu-DK and Daicel s relocation to Grand Front Osaka Tower B. VACANCY CONTINUES TO DECLINE AND REACHES 5.5% Rising There were no completions in the quarter and the Shin Daibiru Building which completed in 1Q is expected to be the only addition to market stock in 215. With no new supply entering the market and steady demand, vacancy in the overall market declined by 4 bps q-o-q (31 bps y-o-y) to 5.5%. This was the fourth consecutive quarter of decline. By submarket, decreases were recorded in Umeda and Midosuji. Grand Front Osaka continued to see an improvement in occupancy, reaching 8% in the quarter F Take-Up (net) 16F Vacancy Rate For 211 to 214, take-up, completions and vacancy rates are year-end annual. For 215, take-up, completions and vacancy rates are YTD, while future supply is for 4Q Percent RENT GROWTH PICKS UP SLIGHTLY at end-3q15 averaged JPY 16,125 per tsubo per month, increasing.6% q-o-q. The rate of growth accelerated slightly and rents maintained an uptrend for the fifth consecutive quarter. Growth was driven by Dojima and Midosuji submarkets. Capital values in 3Q15 increased 6.4% q-o-q (25.4% y-o-y) and this marked the eighth straight quarter of growth. Strong growth was sustained as yields continued to compress, reflecting strong investor interest in regional office assets. Mori Trust Reit sold Osaka Marubeni Building for JPY 11 billion. OUTLOOK: RENT GROWTH AND YIELD COMPRESSION PUSH UP CAPITAL VALUES Japan s economy is expected to continue a slow recovery, but the slowdown in the global economy and volatility in financial markets is a concern. According to the latest Greater Osaka Tankan Survey, business conditions are expected to improve for large manufacturers, while those for large nonmanufacturers are likely to soften in 4Q15. Leasing demand is expected to remain resilient and this coupled with no new supply over the next 12 months should place continued downward pressure on vacancy and support moderate rent growth. In the investment market, capital values are expected to grow while cap rates compress. Note: Osaka Office refers to Osaka s 2 Kus Grade A office market.