SHANGHAI’S real estate market remained generally subdued in the first half of this year, with split performances for office buildings on the two sides of the Huangpu River.

There was a notable cool-off in residential as well as land sales, greatly eased sentiment among overseas institutional investors and sustained demand from fashion and food and beverage retailers, market data suggested.

Grade A office

The vacancy rate in Grade A offices in Pudong’s central business district area fell to its lowest level in six years by the end of the first half, the result of increasingly active demand from domestic financial services tenants and a continuously tight supply. The average stood at 1.2 percent as of June, while in Puxi the Grade A average edged up to 11.4 percent, according to global real estate services provider Colliers International.

“Corporate clients from the finance and professional services sectors, as well as retail and trading companies, were primary demand generators in the first half of 2014,” said Carlby Xie, director of research, China, for Colliers International. “Domestic firms, particularly banks, funds and investment companies, played a larger role than multinational corporations in generating demand for expansions and new setups.”

Mainly boosted by the robust increase in Pudong, the city’s overall rental growth for Grade A office buildings in CBD areas accelerated mildly during the first half, up 2.8 percent from the second half of 2013 to 9.1 yuan (US$1.47) per square meter per day. In Pudong, where supply remained limited, average rent rose 6.1 percent to 9.6 yuan per square meter per day while on the other side of the river, it climbed 0.4 percent to 8.8 yuan.

The decentralized market, meanwhile, remained dynamic during the same period on the back of a continuing trend of decentralization, as well as improvements in both infrastructure and project quality. The average rent of offices in decentralized areas rose 5.5 percent from the second half of 2013 to 5.6 yuan per square meter per day as of June, Colliers data showed.

Residential and land sales

Shanghai’s residential property market witnessed a major slide in the first half of this year despite abundant supply as high housing prices and tightened credit put more home searchers on the sidelines.

The purchases of new homes, excluding government-subsidized affordable housing, totaled 4.06 million square meters during the January-June period, a plunge of 40 percent from the second half of 2013 and a year-on-year drop of 33 percent, according to data released by Shanghai Deovolente Realty Co.

In comparison, 5.26 million square meters of new residential properties were released to the local market, pushing up the city’s overall new home inventory to a record of about 11 million square meters at the end of June.

“Rapid price increases since last year caused many home seekers to hold back while the unexpectedly tightened credit at commercial banks in the first half also damped sentiment among home seekers, particularly those budget-conscious first-time buyers,” said Sun Kouhua, vice general manager of operation at Deovolente. “Whether developers will offer attractive discounts could be critical for market performance in the second half.”

By price, the average cost of new homes rose to a record 26,400 yuan per square meter, partly due to a structural change, Deovolente data showed.

In the land market, meanwhile, cautious sentiment seemed to hang over real estate developers amid sluggish property sales. Sales of land parcels, excluding those designated for public use, totaled 57.7 billion yuan between January and June, a plunge of 58 percent from the second half of 2013 and a drop of 13.3 percent from same period a year earlier.

By price, land plots were sold for an average 11,300 yuan per square meter, a dip of 0.6 percent from the previous six-month period and a rise of 11.3 percent year on year.

En bloc investment

Shanghai’s real estate investment market suffered a double-digit setback in the first half, and such slack sentiment will probably extend for another six months, global property services provider DTZ said.

The transaction value of major real estate investment deals, or property acquisitions worth more than US$10 million each, totaled US$15.7 billion between January and June, a 14 percent decrease from US$18.3 billion registered during the same period a year ago, DTZ data showed.

“Though the drop seemed rather insignificant in the first half, we do expect entire en-bloc investment value to fall as much as 50 percent this year from 2013, when it reached an all-time high of US$57.1 billion,” said Jim Yip, managing director of investment and advisory services at DTZ China. “A decelerating national economy, tightened credit at commercial banks, slower growth in office rentals, as well as an abundant supply of commercial real estate in the local market jointly contributed to the decline in the first half.”

Notably, overseas investment dropped to a historic low, accounting for only 9 percent of the total value registered in the first six months. That stood in stark contrast to the 43 percent share in the same period a year earlier and a 24 percent stake in the second half of 2013.

By property type, offices remained the most favored option among investors, with 57 percent of transactions sealed in the first half being office buildings.

Retail

Despite a slowdown in retail sales, Shanghai’s retail property market continued to see sustained demand from domestic and international brands in the first half of 2014, underpinned by the fashion, food and beverage, luxury, cosmetics, electronics and personal care sectors.

For instance, H&M opened its largest flagship store in Shanghai on Nanjing Road E., occupying 3,500 square meters across four stories in Mosaic, previously known as Plaza 353. C&A, after leaving downtown Huaihai Road M., opened a new 3,000-square-meter store on Sichuan Road N. in Hongkou District. New Look, a British fast fashion brand, made its China debut at Cloud Nine Shopping Center in February, followed by another two outlets in Xujiahui and Daning areas in March.

“The slowdown in retail sales had rather limited impact on retailers’ confidence in Shanghai, which is a critical gateway city for them to raise the awareness of their brand,” said Xie from Colliers.

“In the F&B sector in particular, several landlords adjusted the trade and brand mixes to increase the proportion of the sector due to extremely strong demand from tenants.”

By the end of June, the average ground floor fixed rent in Shanghai’s mid- to high-end shopping centers dipped 0.3 percent from the previous six-month period to 40.9 yuan per square meter per day, mainly due to a rental decrease at one project in a decentralized area. In the decentralized area, the average retail rent fell 1.8 percent to 29.5 yuan per square meter per day by the end of the first half, while in the prime retail area, sustained demand coupled with annual rental adjustments in several high-end projects contributed to a 0.5 percent rental increase to 56.4 yuan per square meter, Colliers data showed.