Timothy Chen Director Research East China

thousand sq m Timothy Chen Director Research East China timothy.chen@colliers.com Building a global science and innovation centre is an important strategic mission for Shanghai. Colliers' analysis of business parks in Shanghai finds that domestic enterprises are the main new tenants and investors. Internet and IT enterprises account for the majority of the leases, and Zhangjiang and Jinqiao are the most active submarkets for leasing and investment. In the coming five years, new supply should slow. We expect the vacancy rate will remain low and fall steadily. Meanwhile, rent for business parks in Shanghai should rise by 4.9% p.a. on average over 217-221. We expect domestic buyers to continue to dominate investment in business parks, though foreign investors should also find the sector attractive. Executive Summary Building a global science and innovation centre is an important strategic mission for Shanghai. For China to become a truly developed economy, it must realise advances in technology and innovation. Business parks are a key foundation for this growth. Cambridge Science Park in the UK provides an excellent example of how business parks can drive economic growth through innovation, and we include a case study in this report. Our in-depth analysis of business parks in Shanghai finds that domestic enterprises are the main new tenants and investors. Internet and IT enterprises account for the majority of the leases, and Zhangjiang and Jinqiao are the most active submarkets for leasing and investment. In the coming five years, new supply should slow. We expect the vacancy rate will remain low and decrease gradually in the coming years. Concurrently, rent for business parks in Shanghai should rise by 4.9% p.a. on average over 217-221 due to robust demand for office space in the parks. Technology enterprises, particularly internet and IT companies, should be some of the key sources of this robust demand for office space. Manufacturers should also be active, establishing or expanding R&D centres, while finance companies should continue to move back office functions out of CBD properties and into business parks. In the investment market, we expect domestic buyers to continue to dominate the market, although certain foreign investors should also be attracted by the sector s positive outlook. Figure 1: New Supply, Net Absorption and Vacancy Rate Forecast of Business Parks in Shanghai 1,2 3 1, 3% 8 6 4 2 2% 1 1% 2 % 221F 22F 219F 218F 217F 216 215 214 213 212 211 21 29 28 27 26 New Supply Net Absorption Vacancy Rate

Contents Executive Summary... 2 Strategic Mission to Build a Global Science and Innovation Centre in Shanghai...4 Development History and Supply of Shanghai Business Parks... 4 Impact of Macro Economy on Demand of Business Parks... 5 Analysis of Leasing Demand.....5 Analysis of En-Bloc Investment Transactions for Business Parks... 7 Future Outlook for Business Parks in Shanghai... 8 Case Study of International Science & Innovation Parks... 1 Conclusion... 11 3 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

RMB psm per day thousand sq m Strategic Mission to Build a Global Science and Innovation Centre in Shanghai In May 217, the Shanghai Municipal Government mentioned the establishment of a Global Science & Innovation Centre several times in a report about the city s future development. The goal is to build the framework and core functions of a Global Science & Innovation Centre by 22 and 23 respectively. This was followed by the State Council s Asset Supervision and Administration Commission s signing of a strategic cooperation agreement for state-owned enterprises to become part of this goal, in June 217. The involvement of the national State Council underscored the importance of this planned development, and the government s commitment to realising it. Colliers International has conducted an in-depth analysis of international science and business parks and key business parks in Shanghai, including the impact of the macro economy on business park performance, a leasing demand analysis and a review of institutional investment in the sector. Based on this analysis, we forecast future trends for this sector, which can act as a reference for occupiers, developers and institutional investors. Development History and Supply of Shanghai Business Parks In order to compare international and domestic business parks, we must first look at Shanghai s business park property market. For this analysis, we first look at key submarkets in Pudong (Zhangjiang, Jinqiao, Waigaoqiao, Figure 2: Location Map of Business Parks in Shanghai Lujiazui Software Park, Caohejing Pujiang) and in Puxi (Caohejing, Linkong, Zhabei and Zizhu), and analyse the market dynamics. We then focus on leasing demand and the investment market. Shanghai s business park market has grown quickly since 29, peaking in 215 with 89, sq m (9.6 million sq ft) of new stock. The total stock was 8.6 million sq m (86.73 million sq ft) in 216. Despite this massive expansion, the vacancy rate has remained in the 1-1 range since 212. Figure 3: New Supply, Net Absorption, Vacancy for Business Parks in Shanghai(26-216) 1,2 1, 8 6 4 2 Since 212, rental growth has been approximately per year. In Q2 217, the average rent increased 7% YOY to RMB4.13 (USD.61) per sq m per day. This growth has been underpinned by certain projects with stable leases and high occupancy. Figure 4: Average Rental and Growth for Business Parks in Shanghai(26-216) 4.5 4. 3.5 3. 2.5 2. 1.5 1..5. % 26 27 28 29 21 211 212 213 214 215 216 New Supply Net Absorption Vacancy Rate 26 27 28 29 21 211 212 213 214 215 216 Average Rent Growth Rate YOY 2 2% 1 1% % - -1% -1 3 3% 2 2% 1 1% 4 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

Number of Companies Impact of Macro Economy on Demand of Business Parks Shanghai s GDP growth has slowed in recent years, settling at 6.8% annual growth in Q1 217. Nonetheless, the business park market is more closely correlated with the services sector, which is growing rapidly. In 216, the added value of the services sector grew by 9. YOY, driving robust demand for office space in business parks in Shanghai. Figure 5: GDP Growth in Shanghai(28-217Q1) Figure 7: Growth of Key Industries of Tertiary Industry in Shanghai(217Q1) Accomodation, F&B Wholesaling & Retailing Transportation, Warehousing, Post Finance Telecommunication, Software, IT 3.2% 5.% 9.1% 11.3% 14.4% % 1% 1 3, 25, 2, 15, 2% 1 1% Source: Shanghai Statistics Bureau, Colliers International Research Figure 8: New MNCs' Regional HQ & R&D Centres in Shanghai(25-216) 1, 5, 7 6 Cumulative Totals 58 28 29 21 211 212 213 214 215 216 217Q1 Shanghai GDP Growth (%) % 5 4 3 411 33 Source: Shanghai Statistics Bureau, Colliers International Research Figure 6: Added Value of Tertiary Industry and Growth in Shanghai(28-217Q1) 2 1 25 26 27 28 29 21 211 212 213 214 215 216 Regional Headquarter Investment-type Company R&D Centre 2, 2% Source: Shanghai Statistics Bureau, Colliers International Research 15, 1, 5, 28 29 21 211 212 213 214 215 216 217Q1 Added Value of Tertiary Industry Growth (%) Source: Shanghai Statistics Bureau, Colliers International Research Within the services sector, the fastest growing sectors are telecommunications, software, IT services (14.4% YOY growth) and finance (11.3% YOY growth). Both of these industries have strong demand for business park property. In addition, MNCs continue to be drawn to China, and Shanghai in particular, and they established 78 new entities in 216, bringing the total to 1,321. These entities include regional headquarters, R&D centres and investment companies. 1 1% % Analysis of Leasing Demand We have analysed our proprietary data from the past year to produce a leasing demand analysis. According to this analysis, the biggest proportion of leases (by number of enterprises) came from the Internet and IT industry, accounting for 3 of all leases in 216. Tenants included Intel Big Data Group, China Soft International, Tian Tai Network, and 36. This was followed by manufacturers such as Nissan and Guang Mao Da Robots, accounting for 22% of all leases, the finance industry (Ping An Group, We Bank), real estate developers (Xinmei Development), and energy enterprises. The analysis shows that 79% of companies which signed new leases for business parks in 216 were based in China. Only 21% of these companies were MNCs. 5 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

Figure 9: Tenant Industries Figure 11: Submarket of Leasing Transactions Trading Real Estate Biopharm 4% 9% 4% Culture 4% Energy 9% Manufacturing Internet & IT 3 Caohejing Pujiang 12% Zizhu Caohejing 4% 8% Waigaoqia o 8% Zhangjiang 32% 22% Finance 9% Retailing 4% Jinqiao 24% Linkong 12% Figure 1: Domestic or Overseas Tenants Figure12: Floor Area of Leasing Transactions (sq m) Overseas Enterprise 21% >1 17% < 2 16% Demestic Enterprise 79% 5,- 1, 4% 3,-5 17% 2-3 46% By submarket, 32% of the deals in 216 were in Zhangjiang, including leases by Shanda Creative Box, Innov Star, and Shine International, reflecting this submarket s positioning towards science and innovation. This was followed by Jinqiao (24% of leases), where Shanghai International Trade Centre, Vanke Jinqiao Project, and KEB all signed new leases. In Linkong (12%), Ben-Q Plaza and Jiantao Commercial Plaza moved in this year, while at Caohejing Pujiang, Pujiang Technology Plaza had leasing transactions during 216. From these leasing deals, we found that 46% of deals were for spaces in the 2,-3, sq m (21,52-32,28 sq ft) range. The 3,-5, sq m range and the above 1, sq m categories each represented 17% of transactions. By this calculation 63% of all transactions were for space between 2,-5, sq m (21,52-53,8 sq ft). Our analysis found that the most important factors for prospective tenants are rent/sale price, accessibility, facilities. After these factors were satisfied, building quality and specifications, the absence or presence of an industry cluster, location, and business services (including incubation, legal, and finance services) were also important. Figure13: Important Factors for Prospective Tenants Rent/Sale Price Accessibility Facilities Quality of Office Space Cluster of Relevant Industry Location Business Services PM Standard Business Environment 3 6 9 12 15 6 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

In terms of quality and specification of business parks, the occupiers believed that professional property management, security system, and facade were the most important factors. In addition, the efficiency rate, sufficient car parks, and an impressive lobby were factors in tenants leasing decisions. In terms of supporting facilities in business parks, the most important facilities are banks, restaurants, and convenience stores. Cafeterias, cafés, and hotels are also important. Most transactions (44%) were in Zhangjiang. This was followed by Jinqiao (28%) and Linkong (17%). A few other transactions were concluded in Zhabei and Yangpu. The analysis found that 89% of the buyers were domestic, such as Hony Capital, a subsidiary of Lenovo Group, Bank of China Group Investment (BCGI), and China Vanke. Overseas investors in the Shanghai business parks market include Mapletree (Singapore, real estate) and Honeywell (US, automation). Figure14: Tenants Preference for Quality and Specification 15 12 Figure 16: Submarket of Investment Transaction Yangpu Linkong 17% Zhabei 6% Zhangjiang 44% 9 6 3 Jinqiao 28% Figure 17: Domestic / Overseas Investors Overseas Investor 11% Figure15: Tenants' Preference for Facilities 15 12 9 6 3 Domestic Investor In terms of deal structure, half of the transactions were structured as asset transfers. Onshore transfers accounted for a third of all transactions. Offshore transfers accounted for 17% of deals. In terms of the purpose of the acquisition, investment accounted for 61% of deals; only 39% were for self-use. 89% Analysis of En-Bloc Investment Transactions for Business Parks The en-bloc investment market for Shanghai business parks has been very active. We have reviewed the past two years of transactions for the following analysis. 7 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

thousand sq m Figure 18: Deal Structure of Investment Transaction Figure 21: Unit Price of Investment Transaction (RMB/sq m) Asset Transfer 5% Onshore Share Transfer 33% Offshore 25,- 3, 19% >3, 6% <1, 6% 1,- 15, 19% Share Transfer 17% 15,- 2, 2 2,- 25, 2 Figure 19: Purpose of Acquisitions Self-use 39% Investment 61% Future Outlook for Business Parks in Shanghai We forecast that in the next five years, new supply of business parks will taper off after a period of rapid growth. In total, approximately 2.5 million sq m (26.9 million sq ft) is planned to enter the market between 217 and 221, bringing the total stock to over 1.6 million sq m (117.3 million sq ft) by 221. However, the new projects will have improved building quality and specifications, and more professional operations. Our analysis found that most deals (44%) were for properties of 2,-5, sq m, followed by properties smaller than 2, sq m (28%) and properties of 5, to 1, sq m (17%). In terms of transaction price, half of the deals were in the RMB15,-25, (USD2,25-3,675) per sq m range, followed by the RMB25,-3, (USD3,675-4,41) per sq m range and the RMB1,-15, (USD1,47-2,25) range, which each accounted for 19%. Figure 22: New Supply, Net Absorption and Vacancy Rate Forecast of Business Parks in Shanghai 1,2 1, 8 6 4 2 3 3% 2 2% 1 1% Figure 2: GFA of Investment Transaction (sq m) 26 27 22F 219F 218F 217F 216 215 214 213 212 211 21 29 28 New Supply Net Absorption Vacancy Rate 221F % <2, 28% 2,- 5, 44% >1, 11% 5,- 1, 17% The majority of new supply (37%) will be in Zhangjiang, followed by Caohejing (17%). In terms of the land title, commercial land will account for 4 of the available land supply from 217 to 221. R&D-titled land will account for 34%. This is notable, since in the case of land that is R&D-titled it is permitted to sell 5% of any development by GFA, making this land attractive to developers who seek to recoup their investment quickly. 8 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

RMB psm per day Figure 23: Future Supply by Submarket 217 218 219 22 221 2 4 6 8 1 12 Figure 24: Future Supply by Land Use (% by GFA) 21% 4 34% R&D Commercial Industrial Caohejing CHJ Pujiang Jinqiao Linkong Thousand sq m We forecast that demand will remain strong or even increase in the coming years. Several factors lie behind our view. One of the major reasons is the government's call to develop Shanghai into a hub of research and development, as well as finance, both sectors that are active in the business park office market. Government support can be seen in the city s latest Master Plan (216-24), which calls for clusters of high technology companies and an improvement in the ability to innovate. Under this plan, investment in R&D will account for of GDP and the finance sector will account for 2% of GDP. It is worth noting that in 216, Shanghai s total GDP was RMB 2,746 billion (USD398 billon). Another reason is that the pent-up demand in mature submarkets of business parks ought to translate into leasing demand. LJZ Software Park Zhabei Zhangjiang Waigaoqiao High-tech enterprises, in particular internet and IT companies, and R&D centres for manufacturers, as well Zizhu as the back office functions for finance companies should continue to generate strong demand for business park property. We do not forecast any material slowdown in this demand over the next few years. In terms of manufacturers, it is expected that Shanghai pillar industries including pharmaceuticals, automation and chemical industries will continue to invest heavily in research and development facilities to drive their expansion plans, in turn creating strong demand for such facilities. As seen in our analysis, we forecast that domestic tenants will continue to dominate both the leasing and investment market for business parks. MNCs will continue to be active, drawn by growing per capita income and consumption expenditure, but they will remain in the minority, according to our forecast. Figure 25: New Supply, Net Absorption and Vacancy Rate & Rent Forecast of Business Parks in Shanghai (217-221) New Supply (sq m) Net Absorption (sq m) Vacancy Rate Av. Rent (RMB /sq m /day) Rental Growth y-o-y 217 1,75,171 761,13 2.2% 4.21 4. 218 564,618 456,698 16.7% 4.41 4.8% 219 536,698 429,647 17.2% 4.62 4.6% 22 178,73 82,171 11.9% 4.78 5.1% 221 2,43 13,833 12.2% 4.93 5.6% Figure 26: Forecast of Rent and Rental Growth 6. 5. 4. 3. 2. 1.. 26 27 28 29 21 211 212 Rent 213 Given this sustained demand, we forecast that the vacancy rate will remain low and further decline in the coming three to five years, as the market digests the new supply of the past two to three years. This tightening 214 215 216 217F 218F Growth Rate YOY 219F 22F 221F 1 1% % - -1% -1 9 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

availability will in turn support rental growth, particularly at desirable business parks with high-quality buildings, mature amenities and convenient access to the city s metro system. New completions will have higher specifications and improved amenities, supporting buoyant rental growth. photonics R&D facilities. The University of Cambridge provides office space, which is essential for the business services of the companies that are active here. Figure 28: Land Use of Cambridge Science Park Domestic investors should continue to be the most important, although the performance of the business park market is likely to attract certain knowledgeable overseas investors too. Incubators 3% Facilities 8% Offices 24% Case Study of International Science & Innovation Parks From Silicon Valley to Cambridge Science Park, and from Singapore s One North to the Hong Kong Science Park, international science and technology parks are a boon to their country s economy, and to their markets for high-quality office space. In order for China to become a developed economy, it must upgrade its industrial structure and improve Total Factor Productivity through technology and innovation. Business parks are the sites where this can happen. They provide the offices, R&D facilities, laboratories, incubators, and conference and training centres that are essential to create science and innovation centres. Case Study: Cambridge Science Park The Cambridge Science Park is in southeast England, three miles from the city centre and 6 miles from London. It is one of the most famous science and business parks in the world. Figure 27: Location Map of Cambridge Science Park R&D Centers 6 Source: Website of Cambridge Science Park, Colliers International Research To date, there are more than 1,2 companies in the Cambridge Science Park with a total of 35, employees. Computer hardware and software, scientific instruments, telecommunications, nanotechnology, wireless and mobile telecommunications all have major research institutes here. The incubation and innovation centres are located in the heart of Cambridge Science Park with 35 fully equipped offices for start-up enterprises. The enterprises have synergy and cooperation with the university and other research institutions, including the training of researchers, guidance about their industry, and cooperation with MNCs to build institutes and laboratories. Figure 29: Masterplan of Cambridge Science Park Source: Website of Cambridge Science Park Source: Website of Cambridge Science Park The park covers 61.5 hectares and includes incubators, a start-up centre, chemical R&D offices, and physics and 1 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for

This has created the so-called Cambridge Phenomenon, a cluster of high-tech companies. The park adds 5 job opportunities each year with GDP growth of 6.3%, much higher than national GDP growth in the UK. The park s pillar industries are biotech, IT, telecommunication, scientific instruments, new energy and new materials. example for the future development of business parks in Shanghai. The park provides business services, including venture capital, advisory, IT support, transportation, conference facilities, entertainment & leisure, and incubators. In addition, Cambridge Science Park has nine fully equipped conference rooms, restaurants, cafes, bars, a gym, squash courts and health facilities. It even has a baby-sitting centre for employees children. Figure 3: R&D Office of Cambridge Science Park Source: Website of Cambridge Science Park Conclusion The Cambridge Science Park is a driver of technological development and industry in the UK, because of the support it receives from the university and government. The park has synergy and close cooperation with universities and R&D institutions, as well as comprehensive business services including venture capital, advisory, IT support, transportation, conference facilities, incubators and amenities such as F&B and leisure facilities for its employees. Furthermore, government policies support SMEs through capital, tax and legal incentives, while two national incubation associations in UK, The United Kingdom Science Park (UKSPA) and UK Business Innovations (UKBI) help with training and incubator programmes. Through the Cambridge Phenomenon which it has created, the business park has become the heart of technological development in the UK. Cambridge Science Park demonstrates the importance of close cooperation between the university and research institutions, comprehensive business services, supporting facilities and policies. It provides an excellent 11 How Can Shanghai Build China s Best Science and Innovation Centre? A New Strategy for