The New Bund. Plans and Possibilities for Qiantan

The New Bund Plans and Possibilities for Qiantan

Contents 1. Introduction 2. Office 2.1 The Plan 2.2 The Current Situation 2.3 What Do Tenants Think? 2.4 Conclusion 3. Retail 3.1 The Plan 3.2 The Current Situation 3.3 What Do Tenants Think? 3.4 Conclusion 4. Residential 4.1 Qiantan s Residential Market 4.2 Shanghai s High-End Residential Market 4.3 Land Sites 4.4 Conclusion 04 10 11 13 17 19 20 21 22 27 30 31 32 33 34 35 Colliers International March 2016 The New Bund 3

Section ONE Introduction Shanghai is currently constructing and promoting a new business district in Pudong along the bank of the Huangpu River, known as the Qiantan International Business District, or The New Bund, as official translations refer to it. Plans for the district, south of the former World Expo site, are centred on the development of office space but also call for a substantial amount of retail space, as well as residential housing, in order to develop Qiantan into a business community. The district is currently in the early stages of development. Land has been cleared and sold to developers, and several projects have already broken ground. Much of the transportation infrastructure has already been completed. Government plans expect Qiantan to be largely completed by 2020, with 3.5 million sq m of commercial and residential real estate. Qiantan is shaped like a boot, with the laces facing to the left. The area is centred on the Oriental Sports Centre, which was completed in 2010, and is connected to three Metro lines. The riverside the face of the boot is a long greenbelt, while

1. Introduction the interior and perimeter areas will become an office district. A significant amount of retail space will also be developed, along with amenities such as international schools and hospitals, as well as high-end apartments. These amenities are part of the master plan to develop the area into an international community, which will attract multinational companies. To date, the highest-profile developers to enter Qiantan are Tishman Speyer, who will construct a mixed-use building, and Swire Properties, who plan a commercial complex, both in the core area next to the Oriental Sports Centre metro station. Developer Hongkong Land also plans a mixed-use complex. The Lujiazui Group, which led the development of the Lujiazui area, is in charge of the area s overall development, and has created joint ventures with all three of these developers. Transportation will be a major benefit to Qiantan. In addition to the abovementioned metro lines, the area will be served by the Middle Ring Road (which forms the area s southern boundary) and Jiyang Road (which forms the eastern boundary and directly connects to the North-South Elevated Road). Construction on the South Longshui Road Tunnel, which will connect Qiantan directly to Puxi, is expected to begin in 2016. In this paper, Colliers has analysed public government plans, land sales contracts, and promotional material from developers active in this area, as well as undertaken surveys of local consumers and an analysis of the area s current retail options to ascertain the area s current situation. Colliers has drawn on its own database of the Pudong office market and consulted with its commercial real estate experts in order to analyse demand in this district, in addition to fundamental macroeconomic research specific to Pudong. The residential component analysed completed land sales, public remarks by a Lujiazui senior executive, Shanghai s past residential market performance and the Lujiazui Group s master plan. Finally, Colliers Research has undertaken a survey of a number of retailers and office tenants from across 20 industries to create a picture of the current impression of Qiantan among prospective tenants.

WENSHUI ROAD A 20 MIDDLE RING ROAD Shanghai Railway Station Lujiazui People s Square Hongqiao Transportation Hub WEST YAN AN ROAD Xujiahui INNER RING ROAD INNER RIN Shanghai South Railway Station QIANTAN A 20 6 The New Bund March 2016 Colliers International

INNER RING ROAD 1. Introduction MIDDLE RING ROAD Figure 1: Accessibility of Qiantan (Metro Line 11, Oriental Sports Center Station to Major Destinations) 75 min 40 min Pudong International Airport 31.7 km 20 Metro Stops G ROAD Huamu 41 min 40 min Hongqiao Transportation Hub 13.6 km 15 Metro Stops MIDDLE RING ROAD Pudong International Airport 15km 25 min 26 min Shanghai Railway Station 11.0 km 12 Metro Stops 26 min 16 min Shanghai South Railway Station 4.9 km 8 Metro Stops 2 km Colliers International March 2016 The New Bund 7

Qiantan is part of the Greater Lujiazui area. It is a 2.8 sq km area south of the former Expo grounds, but was designated as Qiantan in 2012 as part of the master plan to spur development in the area. YAOLONG ROAD CHUANYANG CREEK JIYANG ROAD a b c d e Swire Properties (New Bund Centre) Hongkong Land (Asia Pacific Centre) Tishman Speyer (Crystal Plaza) Sanxiang Corporation Gree Real Estate b c a d e c MIDDLE RING ROAD Commercial Residential Others Figure 2: Qiantan Total Supply (2020) Commercial 57% Residential 24% Others 19% Office 43% Retail 14% 1,540,000 sq m 485,000 sq m HUANGPU RIVER 877,000 sq m 695,000 sq m 8 The New Bund March 2016 Colliers International

1. Introduction The following timeline is based on the Lujiazui Group s master plan 2011 Oriental Sports Center metro station opens 2012 Qiantan officially established 2013 TISHMAN SPEYER Tishman Speyer announces joint venture with Lujiazui Group Wellington College opens 2014 2015 SWIRE PROPERTIES HONGKONG LAND Swire Properties and Hong kong Land announce joint ventures with Lujiazui Group First office building (Corporate Office Area) scheduled to complete 2017 2017 First retail component (Tishman Speyer s Crystal Plaza) scheduled to complete Sixty percent of residential properties to complete 2018 2019 Swire s New Bund Centre to complete Hongkong Land s Asia Pacific Centre to complete 2020 Colliers International March 2016 The New Bund 9

Section TWO Office

2. Office 2.1 The Plan Commercial real estate will anchor the Qiantan area. Dozens of office developments totalling approximately one and a half million sq m are planned in Qiantan. The first building broke ground in 2013, and the first wave of office supply, a total of more than 240,000 sq m office GFA, is scheduled to complete in 2017. The Lujiazui Group will be involved in 85% of the area s development, either through direct development or joint ventures. Qiantan s office buildings will be divided into five separate zones, and launched in phases, according to government plans: Media City (by 2020); corporate offices (by 2022); professional services (by 2022); a high-end business area (by 2021); and a general mixed-use zone that will also include the CBD s major retail projects (by 2020). No further details about these zones have been made public, and it is unclear how the names will translate into specific positioning or regulation, with the exception of Media City, which will target media and cultural enterprises. The government s master plan calls for office demand in Qiantan to be supported by the area s environment and mixeduse development. A large green belt borders the CBD to west, along the Huangpu River s bank, several retail developments are planned and a residential component will be built. These and other amenities are aimed at creating a business community. The office development in Qiantan is being led by the Shanghai Lujiazui Group, which has developed 14 commercial projects in Pudong (with six more under construction), and is backed by the Shanghai Municipal Government. They will be involved in both direct development and in joint ventures with developers, as in the agreements with Swire and Tishman Speyer. The group s experience in planning and leading development in Lujiazui will be an asset in developing Qiantan into a business hub, and helping it to create a professional image, in line with the retail and residential components. This will, in theory, help to attract the finance sector and major multinational and domestic corporations. Figure 3: New Supply Pipeline in Qiantan by GFA (2017F-2022F) sq m 450,000 400,000 350,000 406,000 366,000 300,000 250,000 200,000 150,000 241,000 224,000 184,000 123,000 100,000 50,000 0 2017F 2018F 2019F 2020F 2021F 2022F Colliers International March 2016 The New Bund 11

Figure 4: Qiantan s Zoning Plan by GFA sq m 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 383,000 311,000 325,000 304,000 198,000 13% 21% 21% 25% 20% Media City Area Corporate Offices Area Professional Services Area High-end Business Area Mixed-use Area Figure 5: Qiantan s Zoning CHUANYANG CREEK Media City Area JIYANG ROAD Corporate Offices Area Professional Services Area High-end Business Area Mixed-use Area MIDDLE RING ROAD 12 The New Bund March 2016 Colliers International

2. Office 2.2 The Current Situation The Completion of Lujiazui When the Shanghai Tower is completed in 2016, it will represent the completion of Pudong s Little Lujiazui area after decades of development. With just a few minor exceptions, no new office buildings will be built in this area. For tenants seeking office space, the stock is already extremely limited, with a vacancy rate of just 4.8% in Pudong s CBD areas in 2015. A measure of demand has spilled over into the Huamu area (a decentralised area), though stock here is rapidly being absorbed as well. In short, desirable office space in Pudong is being quickly absorbed and tenant demand (especially from financial firms) is strong....desirable office space in Pudong is being quickly absorbed... The Finance Industry Drives New Demand The finance industry is the primary source of new demand for office space in Pudong, and this sector is growing quickly in Shanghai. Demand for office space is closely correlated with tertiary industry, and official statistics show that Lujiazui s finance industry accounted for approximately 27% of the total value of Pudong s tertiary industry in 2014. Finance is the single largest business sector in Pudong in terms of value, and it continues to grow. At least 30 new financial institutions have been established in Pudong every year since 2010, bringing the total to 728 in 2014, the most recent year for which data is available. The expansion of Shanghai s Free Trade Zone in 2014, and government support for the finance industry in China s 13th Five-Year Plan (2016-2020), will drive further growth. Figure 6: Pudong s CBD Grade A Office New Supply and Vacancy Rate (2008-2020F) 000 sq m 500 25% 450 400 20% 350 300 15% 250 200 10% 150 100 5% 50 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F New Supply Vacancy Rate Colliers International March 2016 The New Bund 13

Demand From Other Industries Existing demand in Pudong comes from a number of industries including: manufacturing, services such as law firms and business consultancies, real estate developers and related companies, the pharmaceutical industry and trading companies. However, demand from these industries is nearly flat in terms of generating new demand for office property in Pudong; leasing activity is typically related to relocations or renewals of existing offices. Demand for new leases or expansion is primarily driven by the finance sector. Demand for new leases or expansion is primarily driven by the finance sector. Figure 7: The Finance Sector in Pudong 2010 2011 2012 2013 2014 Number of Financial Institutions by Year-End 592 630 662 698 728 Number of Newly Established Financial Institutions by Year-End 39 38 32 36 30 Value of Finance Sector in Lujiazui (RMB Billion) 68.8 84.5 89.6 104.5 128.8 Value of Finance Sector in Pudong (RMB Billion) 82.6 99.2 106.9 125.4 150.3 Value of Tertiary Industry in Pudong (RMB Billion) 263.9 314.4 357.6 415.5 476.1 Proportion of Finance Sector of Lujiazui in Pudong 83.3% 85.2% 83.8% 83.4% 85.7% Proportion of Finance Sector in Tertiary Industry in Pudong 31.3% 31.5% 29.9% 30.2% 31.6% Source: Statistical Yearbook of Shanghai Pudong New Area, Colliers International Shanghai Research, 2016 14 The New Bund March 2016 Colliers International

2. Office Pudong s Office Markets It is important to recognise that Pudong s office real estate market is separated into three markets: the Grade A office market in the Lujiazui and Zhuyuan central business districts; the decentralised market in Huamu; and the business park market in areas such as Zhangjiang and Jinqiao. There is a degree of overlap in the industries that are attracted to these three markets, with the tenant profile shifting in response to the real estate market and economic performance. Grade A Office Market Lujiazui continues to attract well-known financial firms, bank headquarters, and law firms who contribute to and benefit from the area s prestigious image. Zhuyuan was previously positioned to provide support functions to companies in Lujiazui such as the back office functions for banks. However, this area has since become attractive to investment companies, private funds, and wealth management companies for both cost and availability reasons. As demand for this area has grown, its stock has been quickly absorbed. In the first three quarters of 2015, the average vacancy rate in Zhuyuan was below 1%. Decentralised Office Market Demand from Lujiazui has now spilled over into the decentralised Huamu market. Tenants here include domestic finance companies, back office functions for banks as well as multinationals who have relocated from traditional CBD areas for cost savings. Citibank and Morgan Stanley both have back office functions in this area, for example. Business Park Market Shanghai has the country s most developed business park office market, in terms of both scale and the quality of buildings. Since 2005, the total stock of business park premises has increased from approximately 800,000 sq m to more than eight million sq m in 2015. Pudong accounts for 45% of the market, or 3.53 million sq m. Investors have been particularly active in this market, with multiple investment transactions reported in most quarters. The cost savings, large available spaces, policy incentives and new transportation connections have attracted domestic and multinational companies to set up headquarters, R&D centres and back offices in business parks. Internet-related companies are a growing source of new demand, given their large space requirements and the low cost of business parks relative to other areas. Amazon, Agoda, Groupon, Ebay, Paypal, JD.com, Dianping, Gewara and 58.com have all signed new leases in Shanghai s business parks in the last two to three years. Rent The average rent in Pudong s Grade A office market surpassed the average rent in Puxi in the third quarter of 2013 and has continued to grow. Limited stock and high demand have fuelled this growth. Figure 8: Rental Trends in Pudong and Puxi RMB psm per day 12 RMB11.2 psm per day 11 10 9 8 7 RMB9.4 psm per day 6 5 Q 1 08 Q2 08 Q3 08 Q4 08 Q 1 09 Q2 09 Q3 09 Q4 09 Q 1 1 0 Q2 1 0 Q3 1 0 Q4 1 0 Q 1 1 1 Q2 1 1 Q3 1 1 Q4 1 1 Q 1 12 Q2 12 Q3 12 Q4 12 Q 1 13 Q2 13 Q3 13 Q4 13 Q 1 14 Q2 14 Q3 14 Q4 14 Q 1 15 Q2 15 Q3 15 Q4 15 ce: Source: Colliers Colliers International International Research, Shanghai Shanghai, Research, 2016 2016 Puxi Rent Pudong Rent Colliers International March 2016 The New Bund 15

Why not cross the river? When choosing to expand or relocate, what factors stop a company from leaving Pudong altogether, and crossing the river to Puxi, and one of its central business districts? Two main reasons are the clustering effect and the benefits of the Free Trade Zone. Lujiazui is the financial centre of China, and city planners regularly announce plans for it to become an international financial capital. The clustering effect, where companies in the same or related industries choose to locate their business in the same area, is particularly strong among the finance industry in Pudong, and especially in Lujiazui. Banks that have chosen Lujiazui for their headquarters are unlikely to move for a number of reasons, including company registration and taxation issues, as well as the close proximity to government regulators such as the China Banking Regulatory Commission and the State Administration of Foreign Exchange, and their back offices, which are commonly located in Huamu or Zhangjiang. This effect is not as pronounced for industries such as manufacturing and pharmaceuticals. While it may be convenient for these companies to be located close to Shanghai s ports or their suppliers, their primary criteria for selecting office space are cost and the availability of large contiguous spaces. If these needs are met, they may be willing to relocate from their current location to other areas in Pudong or Puxi. Shanghai unified its previous free trade zones into one entity in 2013, known as the China (Shanghai) Pilot Free Trade Zone. This zone initially covered the airport and seaports, but was expanded in December 2014 to three areas in Pudong: Greater Lujiazui (including Qiantan), Jinqiao and Zhangjiang. The inclusion of these areas is intended to boost business activity, as registering a company in the free trade zones offers numerous benefits, such as the ability to operate in previously restricted industries, relaxed currency controls and tax exemptions. A third reason companies choose Pudong is image. Many tenants have an impression of Puxi, the historical centre of Shanghai, as being old and crowded. In contrast, Pudong, which has been largely developed in the past two decades, is seen as modern, spacious and clearly positioned by subarea. This factor is more important for companies in the finance sector, though it partially affects the decision of many companies when choosing an office location. The former World Expo area is located directly north of the Qiantan area. Government plans call for this site to become the headquarters for state-owned enterprises, and several massive buildings are currently under construction. Companies who serve these state-owned enterprises and want to be close to their clients may become another source of demand for office space in Qiantan. Figure 9: Office Availability in Lujiazui (LJZ) and Zhuyuan (ZY) 2010-2015 000 sq m 250 20% 200 15% 150 10% 100 5% 50 0% 0 2010 2011 2012 2013 2014 2015-5% Vacant Office GFA in LJZ Vacancy Rate in LJZ Vacant Office GFA in ZY Vacancy Rate in ZY 16 The New Bund March 2016 Colliers International

2. Office 2.3 What Do Tenants Think? Colliers surveyed a number of companies from a diverse range of industries in Shanghai to understand their criteria for selecting an office location, and what implications that may have for Qiantan. The companies represented industries that are typically strong sources of demand for Grade A and decentralised office real estate in Shanghai, including finance, professional services, e-commerce and FMCG, among others. The Huangpu River Continues To Be a Barrier The survey found that 54% of the respondents in Puxi showed very limited interest in crossing the river to Pudong. Manufacturers with factories in Jiading District, Minhang District or Caohejing High-tech Park, all in western Shanghai, preferred to keep their offices in close proximity, and so prefer Puxi. Retailers prefer Puxi as well, where they typically have denser store networks than in Pudong. Q Would you relocate from Puxi to Pudong? 54% 31% 15% Unlikely Likely Less Likely Awareness of Qiantan is Limited Though nearly all of the respondents were familiar with the name Qiantan, the majority were unfamiliar with basic details, such as its exact location, the transportation connections (such as the Metro station) and a general plan for the area s development. Q How familiar are you with Qiantan? 93% 7% Limited Understanding Unfamiliar Colliers International March 2016 The New Bund 17

Proximity To Clients and/or Business Associates Is Important Most tenants choose locations that are close to clients and/ or business associates or have efficient transportation networks, according to the survey. This is most evident among service industries and certain vendors, and is seen in and around the Zhangjiang, Caohejing and Wujiaochang areas, where numerous industries cluster. Companies who have strong business connections to these areas are unlikely to relocate to other districts. Qiantan Will Not Replace Little Lujiazui Qiantan will not replace Little Lujiazui. All respondents in the financial industry with offices in Little Lujiazui said they were unwilling to relocate. The primary reason for this is the proximity to regulators. The Shanghai branch of the State Administration of Foreign Exchange is located in Little Lujiazui, and the China Banking Regulatory Commission is less than five kilometres away. Financial institutions have frequent interactions with these offices, making proximity a major factor. By comparison, Qiantan s location is 10km south of Little Lujiazui, farther from the regulators. This is a major barrier for major financial institutions in Little Lujiazui to consider relocation to Qiantan. Secondary factors include the clustering effect, image and business ambiance. State Administration of Foreign Exchange China Banking Regulatory Commission China Securities Regulatory Commission Tenants Have Varied Concerns Sixty percent of respondents said they would consider relocating to Qiantan, though they have various concerns. The most common concerns after cost are public transportation and amenities. Industry-specific concerns include the number of car park spaces, load-bearing, image of the area, industry clustering and/or proximity to clients and manufacturing facilities. Q Would you consider relocating to Qiantan? 60% 40% Yes No 18 The New Bund March 2016 Colliers International

2. Office 2.4 Conclusion Qiantan has the potential to benefit from Pudong s continuing development and the city s healthy service sector. The area has a number of advantages over other office clusters that may develop in Shanghai, including infrastructure, scale, the reputation and experience of developers and the Lujiazui Group, government support, and its inclusion in the Free Trade Zone. While companies from the finance sector are expected to continue to be the major source of new demand in Pudong, Qiantan may also benefit from Pudong s limited stock and the ongoing decentralisation for tenants from traditional sectors such as manufacturing. In addition, Qiantan may benefit from tenants whose business will be tied to the state-owned enterprises that will open headquarters in the former World Expo area. Qiantan may have a cost advantage relative to most CBD areas. However, it will also face strong challenges from massive supply scheduled in other decentralised areas where, in some cases, amenities and transportation networks are more established. Consequently, the positioning of the area by its planners and developers and their success in establishing its reputation as a convenient, high-quality area for doing business will be critical to its success. Colliers International March 2016 The New Bund 19

Section THREE Retail

3. Retail 3.1 The Plan Qiantan will have approximately 600,000 sq m of aboveground retail real estate, including shopping centres, pedestrian streets and retail podiums by 2022, according to the Lujiazui Group s master plan. This influx of retail space is expected to serve as amenities for the office and residential buildings, and potentially become a draw for consumers from across Pudong. International developers Swire Properties, Tishman Speyer and Hongkong Land will all develop retail or mixed-use properties with a retail component. All three developers have previously developed properties in mainland China. Future Development Qiantan has a planned population of approximately 25,000 residents. These residents are expected to have above-average spending power. This assumption is based on the forecast residential real estate prices and the government s stated goal to position Qiantan as a high-end area. This positioning has been reflected in the opening of Wellington College, an international school, in 2014, and the laying of a foundation stone for a 40,000 sq m, international-standard hospital by Singaporean medical service provider Raffles in November 2015. While students of this school and patients of the hospital may not live in Qiantan, the reputation of Wellington College and Raffles will help to position Qiantan as a high-end area. The Next Five Years Approximately 968,000 sq m of new retail supply is expected to complete in Pudong between 2016 and 2020. According to current plans, approximately 485,000 sq m or 50% of Pudong s total supply over this period, will be located in Qiantan. Of this 485,000 sq m, approximately 274,000 sq m will be in the shopping centre format, and an additional 211,000 sq m will be in other formats such as retail podiums, pedestrian streets and convenience stores. Figure 10: Future Retail Supply sq m 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2016F 2017F 2018F 2019F 2020F Pudong Shopping Centre Qiantan Shopping Centre Qiantan Other Retail Colliers International March 2016 The New Bund 21

3.2 The Current Situation Pudong s Retail Market Lujiazui is one of the most established retail catchments in Shanghai and is currently the core of Pudong s retail real estate market. This area accounts for 53% of Pudong s total retail stock by GFA, and has at least three of Shanghai s highest revenuegenerating shopping centres, including International Financial Centre, Super Brand Mall and New Yaohan. In the Little Lujiazui area (bounded by South Pudong Road and Dongchang Road), the retail podiums of the International Financial Centre, developed by Sun Hung Kai, and the Shanghai World Financial Center, developed by the Mori Building Company, are positioned at the high end of the market, with a number of luxury brands. Next to the Pearl Tower, Super Brand Mall, developed by CP Group, has made continuous upgrades to its trade and brand mixes, and targets mass market shoppers with brands such as H&M, Muji, Uniqlo and Zara. Several other major shopping centres are located on nearby South Pudong Road. Other retail hubs in Pudong include Jinqiao, Huamu and Lianyang. Pudong s Shoppers Pudong s retail fundamentals are strong. Retail sales in this district have grown at a double-digit pace for the last five years, higher than the city s average. In 2014, Pudong accounted for 20% of Shanghai s total retail sales. Consumers spent more as well. Pudong s retail sales growth has consistently outpaced the city average. In 2014, for example, retail sales growth in Pudong was 15.6%, compared to the city average of 8.3%. This is underpinned by the large population (one of every five Shanghai residents lives in Pudong) and growing disposable income for Pudong residents, which increased from RMB32,330 in 2010 to RMB49,629 in 2014, a CAGR of 11%. Figure 11: The Lujiazui Area in Pudong Super Brand Mall International Financial Centre Dongchang Road New Yaohan South Pudong Road 2 km 22 The New Bund March 2016 Colliers International

3. Retail Figure 12: Growth of Retail Sales in Pudong and Shanghai (YOY) 25% 20% 15% 10% 5% 0% 2010 2011 2012 2013 2014 Pudong Shanghai Source: Pudong Statistics Bureau, Shanghai Statistics Bureau, Colliers International Shanghai Research, 2016 Figure 13: Population of Pudong Figure 14: Expenditure and Disposable Income Per Capita of Pudong s Urban Residents million 5.45 5.41 2014 2013 RMB 60,000 50,000 40,000 5.26 5.18 2012 2011 30,000 20,000 10,000 5.04 2010 0 2010 2011 2012 2013 2014 Consumption Expenditure Disposable Income Source: Pudong Statistics Bureau, Shanghai Statistics Bureau, Colliers International Shanghai Research, 2016 Source: Source: Pudong Pudong Statistics Statistics Bureau, Bureau, Shanghai Shanghai Statistics Statistics Bureau, Bureau, Colliers International Shanghai Research, 2016 Colliers International March 2016 The New Bund 23

Brand Presence Colliers selected four fast fashion brands that are tenants in many of Shanghai s prime shopping centres and popular with young, middle-class and white collar consumers. Their nearest location was charted to determine their current presence and accessibility for consumers in the areas around Qiantan. Though this information is qualitative and the first residential building in the Qiantan CBD is not scheduled to complete until 2017 (potentially bringing new consumers and demand), it appears to show that the neighbourhoods in the Qiantan area lack several popular retailers who have large networks in Shanghai. At the same time, Pudong s retail sales have grown faster than the city average, and the district s per capita disposable income was nearly RMB50,000 in 2014....the neighbourhoods in the Qiantan area lack several popular retailers who have large networks in Shanghai... The Consumer s View Colliers conducted a survey of female consumers in the Qiantan area (aged 35 and below, approximately), who are expected to constitute a major consumer segment, and interviewed several small-scale real estate agents who specialise in this neighbourhood to assess the current shopping landscape. This survey clearly showed that The River Mall and J-mall are the most popular retail projects for such consumers in this area, given the proximity to their communities and the positioning. The River Mall is a 330,000 sq m shopping centre in the Expo area, four stops away from Qiantan s metro station (Oriental Sports Centre Station). Major tenants include Muji and Uniqlo. J-mall, an 87,000 sq m shopping centre in Sanlin Town, is closer to Qiantan than The River Mall. It is one stop away from Qiantan on Metro Line 11. Major tenants include Uniqlo, Watsons and Tesco. 24 The New Bund March 2016 Colliers International

3. Retail Figure 15: Proximity to Selected Brands Nearest Gap 12.8 km 10 stops away (Kerry Parkside) 30 min Line 8 Oriental Sports Center Line 7 Yaohua Road Huamu Road 180 m Nearest H&M 12.8 km 10 stops away (Kerry Parkside) 30 min Line 8 Oriental Sports Center Line 7 Yaohua Road Huamu Road 180 m Nearest Zara 16.5 km 13 50 min stops (Super Brand Mall) Line 6 Oriental Sports Center Line 2 Century Avenue Lujiazui 610 m Nearest Muji 5.8 4 km stops (The River Mall) 30 min Line 8 Oriental Sports Center China Art Museum 1,200 m Colliers International March 2016 The New Bund 25

The View On The Ground No commercial facilities have opened in the Qiantan area to date, though several high-profile developers have announced their entry to this market and have formed joint ventures with the Lujiazui Group, including Swire Properties, Tishman Speyer and Hongkong Land. Tishman Speyer was the first of these developers to break ground, in 2014. Their project, named Crystal Plaza, is a 160,000 sq m development with office and residential components, in addition to 48,000 sq m of retail space across a podium and underground shops. It is expected to complete in phases, beginning in 2017. Hong Kong-based developer Swire Properties signed a framework agreement with Lujiazui Group in June 2015 to develop the New Bund Centre. This project is on an 80,000 sq m land site west of Dongyu Road, and will be developed into a 312,100 sq m commercial complex including a 100,000 sq m shopping centre. The first of two phases is scheduled to complete in September 2017. Swire s tenants at other properties in China, such as Taikoo Hui (Guangzhou) and Taikoo Li (Beijing) are high profile and popular retailers from the luxury, fast fashion, and electronics sectors, among others. No specific information about the positioning for Swire s Qiantan project has been made public. In September 2015, Hongkong Land announced its cooperation with Lujiazui Group to develop a commercial complex known as Qiantan Asia-Pacific Centre. The mixed-use project, on the east side of Dongyu Road, will have a GFA of approximately 360,000 sq m, including 126,000 sq m of retail space. It is scheduled to break ground in 2016 and complete in 2020. Figure 16: Existing Mixed-use Projects in Mainland China by Swire Properties, Tishman Speyer and Hongkong Land Swire Properties Project Name Date of Opening Estimated GFA (sq m) Location Taikoo Li Sanlitun 2008 136,000 Beijing Indigo 2011 176,000 Beijing Taikoo Hui 2011 357,000 Guangzhou Sino-Ocean Taikoo Li 2014 266,000 Chengdu HKRI Taikoo Hui 2016 (first phase) 321,000 Shanghai Tishman Speyer The Springs 2014 900,230 Shanghai The Atrium 2012 123,170 Chengdu Hongkong Land WE City 2014 1,300,000 Chengdu Landmark Riverside 2012 1,500,000 Chongqing WF Central 2016 (first phase) 150,000 Beijing 26 The New Bund March 2016 Colliers International

3. Retail 3.3 What Do Tenants Think? Colliers undertook a large-scale survey of retailers to assess their current attitudes and understanding towards Qiantan, their current expansion plans and their anticipated rental thresholds. The retailers represented industries that are typically strong sources of demand for retail real estate in Shanghai, including F&B, fashion, children s care and entertainment. Current Attitudes Retailers Show Interest but Many Still Vague on Details In response to the question How familiar are you with Qiantan?, 48% of retailers considered themselves to have a basic understanding of the Qiantan area (including location, transportation infrastructure, existing facilities and nearby retail projects) and expressed interest in opening a store in Qiantan. Certain retailers from the F&B and entertainment industries said they have already conducted their own market research on the Qiantan area. Thirty-five percent of the respondents considered themselves to have limited knowledge of Qiantan, and therefore did not have future expansion plans involving the area. Seventeen percent of respondents were not familiar with Qiantan. Q How familiar are you with Qiantan? 48% 35% 17% Basic Understanding Limited Understanding Unfamiliar Demographic Fundamentals are There but Retailers Are Project-Driven Official census data shows that the neighbourhoods within a 4-km radius of Qiantan had a total population of 700,000 by the end of 2014. (This figure includes only neighbourhoods in Pudong district, east of the Huangpu River.) The survey found Qiantan meets the population benchmarks for many industries to consider opening a store, though retailers are more concerned with the quality of the retail development itself, and 52% of respondents said that their population benchmark for a new store depended on the specific development. Q What is your population benchmark for opening a new store (within a 3-km radius)? 52% 9% 18% 4% 4% 13% Depends on the project 10,000-30,000 40,000-60,000 150,000-200,000 200,000-300,000 Above 300,000 Colliers International March 2016 The New Bund 27

Retailers responded similarly when asked to forecast sales for a store in Qiantan, with 83% emphasising that it would depend on the quality and management of the retail project itself, as well as the surrounding projects. Seventeen percent of respondents believed that their sales would be equal to or less than their existing stores. Q How would you forecast sales for a project in Qiantan in the first three years? Depends on the project 83% 13% 4% Less than existing store Same as existing store Expansion Retailers Currently Prefer Puxi Retailers typically prefer Puxi, with the surveyed companies having three stores in Puxi for every one store in Pudong. They attributed this distribution to the larger number of established retail catchments in Puxi. However, when asked if they would maintain this ratio in the future, they said that the decision would include a number of variables, such as the positioning of the potential retail project, sales forecasts and demographic factors. Eight-three percent of respondents said they planned to expand in Shanghai in the next five years. The remaining 17% said it would depend on the project and the retail catchment. In particular, retailers from the lifestyle and supermarket sectors said they would seek expansion opportunities in Pudong given the district s improving infrastructure, the nature of its future supply and lower average rent than Puxi. Q Do you plan to expand in Shanghai in the next five years? 83% 17% Yes Depends on project and catchment Q What is the distribution of your store network? Q Do you prefer to expand in Pudong or Puxi in the next five years? Puxi Pudong 24% 76% OPEN 21% 23% 56% In Pudong In Puxi Depends on project and catchment 28 The New Bund March 2016 Colliers International

3. Retail Rent Rent Collection Models and Anticipated Rent Retailers in Shanghai pay rent in a number of ways, including fixed rent, turnover rent (a percentage of sales) or a combination of the two. The specific model often depends on the brand s negotiating power and the reputation or location of the retail project. Colliers survey found that the largest proportion of retailers (40%) would prefer a rent based on turnover for stores in Qiantan. This reflects a degree of caution on the part of retailers towards the sales prospects of the Qiantan area, and shows their expectation that landlords will help to nurture the development of their business in the area. This cautious business sentiment was also seen in response to the question What rental level would be acceptable for a new store in Qiantan?. While approximately 60% of respondents said it would depend on the project, 35% of respondents said that they consider a rental of no more than 70% of the area s average rent to be acceptable, i.e., a rental discount of at least 30%. Q Q What is your current rental model? 40% 35% 25% Combination Turnover Rent Fixed Rent What model would you prefer for a store in Qiantan? As of 2015, the average rent for ground floor retail space in Pudong s shopping centres was RMB36.7 psm per day. At current levels, an acceptable rent for that 35% of respondents would translate to no more than RMB25.7 psm per day. They considered this to be a fair figure given the distance between Qiantan and Pudong s established retail catchments such as Lujiazui and the unproven track record of the Qiantan area in general. 20% 40% 25% 15% Fixed Rent Turnover Rent Combination Undecide Q What rental level would be acceptable for a new store in Qiantan? 61% Depends on the project 35% No more than 70% of average rent 4% 71%-90% of average rent Colliers International March 2016 The New Bund 29

3.4 Conclusion The retail component of Qiantan is secondary to the office development in terms of total stock. However, it will be an important way for the area to distinguish itself as a sophisticated catchment for both companies and brands. The Lujiazui Group s partnership with well-known developers Swire Properties, Tishman Speyer and Hongkong Land is an encouraging sign that the area will be able to attract retailers and develop a new retail catchment in what is now a relatively undeveloped part of Shanghai, in terms of retail stock. As Colliers survey has shown, the majority of brands place considerable importance on the specific project (including its design, the reputation of the developer and its potential to draw customers) when deciding where to expand. At the moment, most retailers are cautious towards the Qiantan area, as public information is fragmented and often vague. At the same time, Qiantan will be a new development and much of its success will depend on execution, management and positioning. For many brands, it is still too early to assess their prospects for the area, though demographic and economic indicators for Pudong are encouraging. 30 The New Bund March 2016 Colliers International 30

Section FOUR Residential

4.1 Qiantan s Residential Market Qiantan will have a residential component in addition to its commercial development, primarily aimed at affluent buyers and investors in Shanghai s luxury residential market. In 2014, the former general manager of the Lujiazui Group, Yang Xiaoming, was quoted in Eastday newspaper as saying that the area will become an international community of 25,000 residents, with foreign nationals accounting for more than 60% of the total population. The article has since been re-posted on an official Shanghai government website, though no further public statements about the demographic mix or how it will be achieved have been publicly made. Residents Detailed information about the residential component of Qiantan is scarce. Colliers expects the housing here to be targeted at high net worth individuals and investors, based on a review of completed land sales contracts, Lujiazui Group s master plan and a comparison with similar residential developments in other areas of Shanghai. Yang Xiaoming, the former general manager of the Lujiazui Group, has said that a portion of the residential development will only be available for lease, in order to attract foreign nationals (presumably employees and managers of companies who lease office space in Qiantan), who are likely to prefer leasing to purchasing. Indeed, contracts for two completed land sales stipulate that units will be available for lease only. However, given the large volume of planned housing, it is expected that the majority of residential units will be offered for sale. No further details have been made public thus far. Plans for the area show that a total of 8,300 residential units (877,000 sq m) will be built in Qiantan by 2022. Construction began on three sites in 2014 and the first wave of supply (1,531 units, or 146,000 sq m) is scheduled to complete in 2017, followed by an additional 4,100 units (434,000 sq m) in 2018. Qiantan as a High-End Residential Community A review of the completed sales contracts for four residential land sites shows that the average accommodation value for these plots is more than RMB63,100 psm. Based on Colliers valuation model, this suggests that units at these developments will sell for approximately RMB110,000-130,000 psm. This strategy would be consistent with other residential developments alongside the Huangpu River. In 2014 and 2015, areas along the Huangpu River (North Bund, Lujiazui Binjiang, Huangpu Riverside and Xuhui Binjiang) accounted for 52% and 29% of the sales volume of houses above RMB80,000 psm respectively, in terms of total transacted area. In 2015, the sales volume of this segment in these locations nearly doubled compared with 2014 s level, demonstrating the strong demand for luxury riverside housing in Shanghai. Figure 17: Sales Volume and Units of High-end Housing (2013-2015) 000 sq m 700 600 500 400 300 200 100 0 2013 2014 2015 unit 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Transacted Area Units Source: Uwin, Colliers International Shanghai Research, 2016 32 The New Bund March 2016 Colliers International 32

4. Residential 4.2 Shanghai s High-End Residential Market Shanghai s high-end residential market has become increasingly active in the past three years, with the transacted area of this segment increasing by more than 260% between 2013 and 2015. During the same period, the proportion of this segment of the market to total sales of all houses has doubled. This has happened against the backdrop of housing purchase restrictions, and government fine-tuning to those restrictions, such as changes to the minimum down-payment guidelines and the amount buyers can borrow from the housing provident fund. Figure 18: Residential Area in Qiantan CHUANYANG RIVER JIYANG ROAD ORIENTAL SPORT CENTER STATION B A C D E F MIDDLE RING ROAD Figure 19: Transacted Residential Land Sites Land Sites Transaction Date Developer Land Area (sq m) Land Price (RMB psm) Units Residential GFA (sq m) Restrictions on sale of properties A 2014-12-24 Gree Real Estate 12,258 65,832 136 24,516 / B 2014-12-24 Sanxiang Corporation 13,965 66,629 155 27,930 / C 2014-12-24 Gree Real Estate 11,695 53,905 179 26,899 / D 2014-12-24 Lujiazui Group 11,746 31,858 199 35,238 Lease only E 2014-12-24 Lujiazui Group 13,372 66,010 226 40,116 / F 2015-02-16 Lujiazui Group 9,456 29,422 394 23,640 Lease only Source: Shanghai Municipal Bureau of Land and Resources, Colliers International Shanghai Research, 2016 Colliers International March 2016 The New Bund 33

4.3 Land Sites The Developers Six land sites in Qiantan have been sold to date. Gree Real Estate and the Sanxiang Corporation have been the only outside developers to acquire purely residential land in the Qiantan area. The remaining transacted sites will be developed by the Lujiazui Group, either directly or with capital from outside investment companies. Gree Real Estate was initially a subsidiary of the Gree Group, a publicly listed manufacturer and retailer of white goods. In 2015, Gree Real Estate was spun off and is now wholly owned by the Zhuhai State-owned Assets Supervision and Administration Commission. Gree s purchase in Qiantan marked its entry into the Shanghai market, after developing properties in Chongqing and Xi an. The developer purchased two sites in Qiantan in 2014, covering a total 23,954 sq m, to develop a total of 315 units. The land contract does not place any conditions on the sale of residential property built on this site. Sanxiang Corporation entered the Shanghai residential real estate market in 2014 and has developed three high-end projects in Yangpu and Minhang Districts. The developer purchased a 13,965 sq m site on the same day as Gree Real Estate. The contract allows a total of 155 units to be developed on this site. No conditions have been placed on the sale of the units, according to the land sales contract. The remaining three land sites were acquired by subsidiaries of the Lujiazui Group. Two sites will be jointly developed by the Lujiazui Group with capital from outside investment companies. One will be developed solely by the Lujiazui Group. Property on two of those three sites, representing a total of 593 units (58,878 sq m of residential GFA), may not be sold for commercial gain, according to the land sales contracts. Colliers believes these units will be for lease only, in line with the Lujiazui Group s public statement, though no details of how the leasing process will be operated have been made public. The Lujiazui Group will independently develop an additional five land sites, or nearly 1,500 units, according to the Group s land usage plan. Housing at Mixed-use Projects In addition, two other land sites will be developed into mixed-use projects that include a residential component. HNA Group will develop 482 units (residential GFA of 57,800 sq m) as part of a 79,700 sq m complex. Tishman Speyer s mixed-use project will include an additional 434 units. No details of the conditions on the sale of these units have been released. Figure 20: Qiantan Residential Supply Forecast by GFA 000 sq m 500 450 400 350 300 250 200 150 100 50 0 2017F 2018F 2019F 2020F 2021F 2022F 34 The New Bund March 2016 Colliers International 34

4. Residential 4.4 Conclusion Qiantan will bring a significant number of new apartments to the residential market as it is developed. These units will be aimed at the high-end of the market, according to Colliers analysis of the accommodation value for the land sites. Despite the official statement that at least a portion of the new housing will be reserved for lease only, to accommodate business executives and their families, this new development is likely to draw strong interest from Chinese home owners and/or investors seeking high-end residential property with riverside views. Sales transactions for such apartments in Shanghai have shown fast growth in recent years, and barring any major economic downturn or abrupt policy change, demand for such units is expected to be strong. Colliers International March 2016 The New Bund 35

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