Residential luxury An in-depth look at the current status of Shanghai high-end property market.

Residential luxury An in-depth look at the current status of Shanghai high-end property market.
by Colliers InternationalAdvertisement

An in-depth look at the current status of Shanghai high-end property market:

Economic Review
The latest statistical data shows that the Shanghai macro economy continues to keep fast and stable growth with its further structural optimisation. 2006 witnessed Gross Domestic Product (GDP) grow by 12%, 0.9 percentage points higher than 2005, and continuous double-digit growth for 15
consecutive years. On the other hand, the Consumer Price Index (CPI) rose by 1.2% YoY in 2006, 0.2 percentage points higher than 2005, which shows a modest inflation level. RMB loan balances of financial institutions in Shanghai rose by 11.5% in 2006 and the growth rate declined slightly over 2005, reflecting the control effect of credit expansion and over-liquidity. The Central Bank raised the one-year benchmark interest rate on loan by 0.27 percentage points, from 6.12% to 6.39% following the similar move in August 2006, which, together with the recent improvement of reserve
margins, are enhancing the effect of constrictive monetary policy and add the capital cost for both suppliers and demanders in residential market.

Under the impact of the enhancing real estate market control, the investment on residential development as well as residential sales are still stuck in a downturn. 2006 saw the total investment in the Shanghai residential market reach RMB83.56 billion, a drop of 9.3% YoY and the first drop for the past eight years. Residential sales reached RMB184.104 billion in 2006, down by 3.4% YoY, but a more modest decline than 2005. We expect the downturn situation will remain for
the short term.

2006 saw the residential price of the Shanghai market have modest stable growth, at 5.1% YoY. At the same time, the growth of per capita income continued to surpass that of residential prices, rising by 10.8% YoY. The per capita income is expected to grow fast and stably in the future, and thus will gradually absorb the effect of market overheating in previous years.

The actual Foreign Direct Investment (FDI) in Shanghai reached US$7.107 billon in 2006, rising by 3.8% YoY and a 0.9 percentage points’ fall in growth over 2005. On the other hand, the actual FDI in the tertiary industries rose by 26.2% YoY, accounting for 62.14% of the total, an 11 percentage
points rise over 2005. Therefore it is expected that the number of expatriates in Shanghai will keep growing, and still be the fundamental source of demand in the high-end luxury residential leasing market.

Market Conditions

Supply, Demand & Vacancy
Q1 2007 witnessed about 492 units launched into the market, all of which are serviced apartments. The most new supply are from two projects, Shama Luxe at Xintiandi in Luwan and The Crescent in Pudong, which opened up recently after being purchased and several months’ renovation by Gateway and Morgan Stanley respectively in 2006. There are no new luxury apartments and luxury villas coming into the market in this quarter. The net absorption in the luxury residential leasing market reached to 260 units and the vacancy rate rose by 0.7 percentage points QoQ and 3.9 percentage points YoY, to 17.97%.

From a sub-sector and district analysis, with the end of Christmas and the Lunar New Year holiday as well as the absorbing of luxury apartments launched last quarter, there are 231 units of luxury
apartments newly taken up, as a result, the vacancy rate dropped by 2.59 percentage points to 16.51%. Jingan saw the highest vacancy rate for luxury apartments at 22.95%, a drop of 7.7 percentage points YoY. However there are still plenty of vacant units from new projects released in Q4 2006. Changning saw the lowest vacancy rate at 8.09%.

The vacancy rate of the serviced apartment sector rose by 7.21 percentage points QoQ, at 23.46% in Q1 since many vacant units from new supply projects will take time to be absorbed. However, some mature markets without new supply, such as Changning and Xuhui just suffered from about one percentage point of vacancy rate change. Pudong had the highest vacancy rate for the serviced apartment sector at 50.33% as a result of newly-released leasable units from The Crescent this quarter. Xuhui saw the lowest vacancy rate at 9.61%.

Although there are no new supply projects in the luxury villa market this quarter, the outflow of some customers drove the vacancy rate to rise by 0.9 percentage points QoQ, at 13.96%. Furthermore, Pudong witnessed the highest at 18.4%, a 5.8 percentage points rise YoY; Minhang witnessed the lowest vacancy rate for villas, at 6.79%.

Rent Analysis
As a result of the slight drop of vacancy rate in the luxury apartment market, the average rent kept stable, just rising by 1.2% QoQ and levelled off with the same time last year, at US$ 17.52 per sq m per month. Additionally, Luwan saw the highest rent of luxury apartments at US$23.68 per sq m per month, while Huangpu saw the lowest at US$13.5 per sq m per month, but had the fastest YoY growth rate at 7.56%. However, Jingan continued to suffer from the sharpest YoY rental drop following last quarter, at 33.65% as a result of low rental units launched last quarter.

Due to some new low rental projects and weak season for short term leasing business, Q1 saw the average rent of the serviced apartment sector drop by 5.1% QoQ, to US$32.24 per sq m per month. However, the long term rental trend of serviced apartments keeps upward, rising by 1.2% YoY. Huangpu had the highest average rent of serviced apartments at US$45.03 per sq m per month, while Hongkou had the lowest at US$20.61 per sq m per month. Xuhui saw the highest YoY
growth rate of 13.12%. However, Changning suffered from the sharpest drop, by 8.77% YoY.

The slight rise of the vacancy rate of the luxury villa market drove the average rent to decline by 3% QoQ, at US$20.74 per sq m per month, but it rose by 1.6% YoY. Changning was listed top in average rent of villas, at US$21.92 per sq m per month, whiles Minhang was listed the lowest at US$18.17 per sq m. Pudong witnessed the highest growth rate at 12.8% YoY, followed by Minhang at 12.7% YoY, Changning saw the sharpest decline at 5.3%YoY.

The average rent of the overall residential leasing market reached US$ 20.89 per sq m per month, levelling off with last quarter and down by 1.65% YoY.

Capital Value & Rental Yield Analysis
The sales research on luxury residential shows that the policies are still affecting the market and the capital value of luxury residential in Q1 fell by 1.95% QoQ and 5.3% YoY, to US$3,831 per sq m. Furthermore, the capital values of luxury apartments, serviced apartments and luxury villas reached US$3,820 per sq m, US$4,447 per sq m and US$3,510 per sq m respectively.

The serviced apartment market has been attracting more attention from overseas investors when
Shanghai’s global business ties gets closer and foreign tourism booms. After several purchase cases by foreign investors last year, Morgan Stanley acquired 219 units from Novel City in Xujiahui CBD for US$67 million this quarter, which will be leased to the market as serviced apartments in 2007.

According to survey data from Colliers, the gross yield of luxury residential rose slightly by 0.1 percent points QoQ, at 6.5%. Furthermore, the gross yield of luxury apartments rose by 0.2 percentage points, at 5.5%, and that of luxury villas fell by 0.31 percent points QoQ to 7.09%, lastly that of serviced apartments reached 8.7%.

Market Outlook
2007 will see a stable Shanghai macro economic growth on the basis of its performance in 2006. FDI growth, however, will continue to slow down, but that of the tertiary industries will keep steady. Under this situation, the number of expatriates in Shanghai will continue to grow stably.

2007 will witness more new supply than 2006, totalling 3,438 units. The new supply of luxury apartments will rise slightly, totalling 1,974 units. But serviced apartments and luxury villas will contribute more new supply than 2006, totalling 989 units and 475 units respectively.

The vacancy rate of luxury apartments is expected to rise in 2007, and it will influence the average rent to drop by 13%-14% YoY. As a result of enhancement relative to the hotel business, both the rent and the vacancy rate of the serviced apartment market will rise. The luxury villa market will have 3-4 percentage points of vacancy rate rise due to more new supply in 2007, but even then the average rent will rise by 2%-3%.

The series of policies in 2006 and early this year suggest that the macro controlling climate will
surround the luxury residential market this year. The capital value will keep on declining by about 6% YoY.