2 In Q1 2018, the average Grade-A offce rentdropped to RMB9.6 per sqm per day (seeTable 1). Due to weak leasing demand and thehuge amount of new supply, the overallGrade-A offce vacancy rate increased1.8 percentage points to 6.1% quarter onquarter (Q-o-Q) (see Table 1).With the departure of some major tenants,the average rent in Core CBDs decreasedto RMB11.6 per sqm per day, a Q-o-Q dropof 3.3%. In Q1, the net absorption in Shanghai’sGrade-A offce market was approximately129,326 sqm (see Figure 2), of which only19,000 sqm was recorded in Core CBDs.The vacancy rates in Pudong and Puxiincreased 2.3 and 1.5 percentage points to5.9% and 6.3% respectively. In the second quarter (Q2) of 2018, Grade-Aoffce rents are expected to drop further.Except some industries with high rentalaffordability, for instance, co-workingand high-end fnancial services, mostcompanies are expected to relocate toother business districts offering lower rentsfor cost saving. With the government’s effort on improvingmarket openness, the local investmentenvironment has become more favourableto foreign companies. Restrictions on someindustries previously dominated by state- owned enterprises, for example, generalmanufacturing, telecom, pharmaceuticaland insurance, have now been loosened forforeign investments. In the coming years, foreign investmentwill play an important role in China’seconomic development. Grade-A offceleasing demand from foreign companies isexpected to post a solid rebound.SHANGHAI CORE-CBDGRADE-A OFFICE RENTSDROP IN Q1 2018 New Grade-A offce supply in the frst quarter (Q1) of2018 was 464,041 sqm, a decrease of 6% quarter-on- quarter (Q-o-Q) (see Table 1).TABLE 1 Shanghai Grade-A offce market indicators IndicatorQ1 2018 fgureQ-o-Q changeOutlook(Q2 2018) New supply464,041 sqm↓6%↗ RentRMB9.6 / sqm / day↓1.0%↘ Vacancy rate6.1%↗1.8 percentage points↗ PriceRMB64,365 / sqm↑2.3% Source: Knight Frank Research 3 RESEARCHSHANGHAI OFFICE MARKET REPORT Q1 2018 TABLE 2 Major Grade-A offce market indicators, Q1 2018 SubmarketRent(RMB / sqm / day)Rent % change (Q-o-Q)Vacancy rate Vacancy ratepercentage pointchange (Q-o-Q) Little Lujiazui12.7↓2.3%5.9%↑1.4 Nanjing WestRoad10.7↓1.8%6.7%↑2.3 HuaihaiMiddle Road10.9↓1.8%2.8% Xujiahui7.512.2% ZhongshanPark7.05.8% Source: Knight Frank Research Weak leasing demand and the hugeamount of new supply in Q1 imposedhuge pressure on rental growth in theGrade-A offce market. In Q1, the averagerent dropped one percentage pointcompared with the previous quarter. Rentsin Core CBDs decreased to RMB11.6 persqm per day with a Q-o-Q drop of 3.3%.Many landlords fexibly adjusted theirasking rents to absorb the vacant space,given the departure of some large tenants. In Little Lujiazui, the additional vacantspace in many Grade-A and PremiumGrade-A offce buildings resulted in arental drop in Q1. However, thanks tosustained demand from co-workingcompanies, some vacant space wasabsorbed. This avoided signifcant fallsin offce rents. Local co-working operatorMixpace, for example, rented 5,700 sqmof offce space in Taiping Finance Tower. InQ1, offce rents in Little Lujiazui averagedRMB12.7 per sqm per day, down 2.3%Q-o-Q (see Table 2).Puxi Nanjing West Road’s offce rentsdecreased 1.8% Q-o-Q to RMB10.7 persqm per day in Q1 (see Table 2). Thelow asking rents made offces alongNanjing West Road appealing to mediaand fnancial companies who opt to setup relatively small offces in Core CBDs.Cenic Media, for example, rented 800 sqmof offce space in Jing’an Kerry CentrePhase Three, while the newly set-up HaifuFund rented 1,000 sqm in the high zone ofPlaza 66. RENTS ANDPRICES Source: Knight Frank Research TABLE 3 Major Grade-A offce leasing transactions, Q1 2018 DistrictBuildingZoneArea (sqm) HongkouSinar Mas PlaceLow2,400 Jing’anPlaza 66 Tower TwoHigh1,200 Source: Knight Frank Research Note: all transactions are subject to confrmation TABLE 4 Major Grade-A offce strata-title sales transactions, Q1 2018 DistrictBuildingFloor / unitArea (sqm)Price (RMB / sqm) Minhang Macrolink International Centre4th foor unit 58462,373 XuhuiMagnolia Plaza18th foor unit23859,446 XuhuiGreenland Centre Phase Two18th foor unit 49370,422 Source: Shanghai Real Estate Trading Centre / Knight Frank Research Note: all transactions are subject to confrmation FIGURE 1 Grade-A offce rental and price indices4 In Q1, several Grade-A office buildingswere completed in Hongqiao CBD andLittle Lujiazui, adding approximately220,000 sqm of office space to themarket, accounting for 47% of the totalnew supply. LIHPAO Plaza Phase Twoand Hongqiao Gate Phase One locatedin Hongqiao CBD were handed over inQ1, providing nearly 51,000 sqm and72,000 sqm office space to the marketrespectively, pushing up the office stockin Hongqiao CBD to approximately900,000 sqm. In Little Lujiazui, LujiazuiFuhui Plaza and Shimao Tower werecompleted, adding approximately 68,000sqm and 36,000 sqm of office space tothe market respectively. One MuseumPlace developed by Hines and locatedin Puxi’s Jing’an District, with an officespace of nearly 125,000 sqm, wasalso completed in Q1. In Q2, anotherapproximately 500,000-sqm new supplywill be added to the market, of which270,000 sqm is expected to be launchedalong Pudong Century Avenue.The vacancy rates increased in the twoCore CBDs, Nanjing West Road andLittle Lujiazui, by 2.3 and 1.4 percentagepoints respectively. The relocationof some major tenants and the hugeamount of new supply were the mainreasons.The vacancy rate in emerging businessdistricts increased 4.7 percentagepoints to 9.8% due to the launch ofnew office projects in the quarter.Stable performance was registered inHongkou North Bund in Q1. As one ofthe beneficiary districts of the ShanghaiFree Trade Zone, North Bund offers taxand policy supports to enterprises andoffers relatively low rents comparedwith other CBDs, appealing to differentindustries settling down. Office servicesoperator Atlas and financial companyGalaxy Future rented 4,000 sqm and2,750 sqm of offices in Sinar Mas Placerespectively. In Q1, due to the tightening of bankcredit controls, the conclusion of majortransactions slowed down. In the officeinvestment market, two en-bloc dealswere closed: Warburg Pincus purchasedBuilding 23 in Shanghai Business ParkPhase Three located in Caohejing,covering a total gross floor area (GFA) of33,505 sqm, while state-owned ShanghaiGuosheng Group purchased GatewayPlaza in Xuhui District, covering a totalGFA of 49,346 sqm. SUPPLY, TAKE-UP AND VACANCY INVESTMENTMARKET FIGURE 2 Grade-A Offce Stock, Take-up and Vacancy Rate Source: Knight Frank Research Although the overall office rentaldemand was weak in Q1, relativelystrong demand was witnessed from theInternet and medical companies withthe promotion of technical innovationand the healthcare concept in China.Demand for precision servicesassociated with big data analysishas increased significantly. Relatedindustries such as e-commerce,Internet search engines and healthcareconsulting services have grown rapidly,boosting demand for office space.British luxury e-commerce companyNet a porter, for example, rented 1,200sqm of office space in Plaza 66 TowerTwo in Nanjing West Road. The 360Company, meanwhile, rented 2,400sqm in Sinar Mas Place in North Bund.Bio-rad and Sumitomo Pharma rented4,000 and 2,000 sqm of office spacein Anlian Tower in Yangpu Dalian Roadand CN Overseas International Centrein Huangpu District respectively. Inthe future, technology and medicalconsulting services companies, who relyon big data and block-chain applicationsto provide efficient services, will likelybecome the new drivers for office rentalgrowth. 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 20052006200720082009201020112012201320142015201620172018Q1 '000 sqmGrade-A office supply (Left)Grade-A office net absorption (Left)Vacancy rate (Right) 。。。。。。