Grade-A offices in Shanghai, such as those located in the city’s Hongqiao, Huangpu and Pudong districts, will enjoy further rental demand in the coming years as more international firms and service providers set up base in China’s financial capital, according to real-estate consultancy Jones Lang LaSalle.
The city’s new free-trade zone will underpin the local office property market as authorities use the zone to implement key financial reforms and boost the services sector, said Michael Klibaner, regional director and head of research for Greater China at Jones Lang.
As the municipal government is unlikely to develop the free-trade zone into a new central business district (CBD) due to lack of infrastructure facilities and limited land resources, professional firms registered in the zone may have to locate their offices at the city’s existing central commercial districts, Klibaner told EJ Insight.
Increased demand for Grade-A office space in the CBDs from financial services firms such as insurers, banks and accountancy and law firms will push up rentals, driving some manufacturing companies, which are generally more sensitive to rental costs, to other locations, he said in an interview.
Grade-A office rents in Shanghai could rise 1 to 2 percent this year and jump 15 percent over the next four years, also helped by the nation’s recovering economic growth, he said.
“We have recently seen recovering demand for offices from MNCs… This reflects [receding fears] of a hard landing for the Chinese economy,” Klibaner said. International firms’ business confidence and their outlook on the economy is important as those firms account for a large portion of the Shanghai office space take-up, he said.
“Office market in Shanghai is so unique that no other Chinese city comes close,” he said, referring to the high level of dependence of the market on foreign companies. “So, what happens among MNCs is hugely important for the outlook of the office market.”
In the first quarter of 2013, Grade-A office rents in Shanghai’s Pudong New Area surpassed those in the city’s Puxi district for the first time in more than two years while overall rents in the city were almost flat, according to Jones Lang in April. For the third quarter last year, rents in Puxi remained flat at 9 yuan (US$1.49) per square meter (sqm) per day, the property consultant said separately.
In the Puxi Premium Grade-A market, as pre-leasing activity in future high-quality projects intensified competition with existing projects, more landlords were willing to compromise on rents in order to retain large corporate tenants. Puxi Premium Grade-A average rent dropped 2.1 percent in the three months to September to 10.6 yuan per sqm per day, compared with the previous quarter.
In Pudong, underpinned by strong demand from domestic tenants and very limited space availability, landlords maintained stronger bargaining power and continued to increase rents, Jones Lang said. As a result, Pudong Grade-A rents increased by one percent from the previous quarter to 9.2 yuan per sqm per day, while the Pudong Premium Grade-A average rent reached 10.9 yuan per sqm per day, up 1.9 percent from three months earlier.
Tier-1 cities on a roll
As for the office market in Beijing, it does not face any risk as many companies based in the capital city are state-owned enterprises or related entities.
According to Klibaner, Grade-A offices in Beijing saw a vacancy rate of 28 percent in 2010, but the absorption was so fast that the rate fell to a historical low of 4 percent in 2012. That implies that about 25 million square feet of office space was absorbed in two years time.
“We expect the office market in Beijing to be quite stable – with overall rents growing at about 3 percent in 2014 — as there is hardly any downside risk,” he said.
Elsewhere, the Shenzhen office market could benefit from the development of the Qianhai special economic zone. “Professional services companies may look for office in Shenzhen downtown or Futian before they can move into Qianhai,” Klibaner said.
After all, facilities in Qianhai are still under construction, he said, adding that it might take at least five years before companies can move into the area.
Qianhai remains in the land-sales stage at the moment. Authorities said last month that they will allow foreign companies to bid for a commercial site in the experimental zone. The site covers 51,416 square meters, of which 477,000 square meters can be built on.
More than 303,300 square meters are allocated for offices and 50,000 square meters for hotels. Bidding is open to domestic and foreign firms and they have until Jan. 23 to file their documents. The winners cannot sell or pledge their stakes in the development within three years after construction is completed.
Oversupply in 2nd-tier cities
While there is little downside risk in first-tier cities, the office market in second-tier cities is facing some headwinds amid high vacancy rates and excess supply.
“Oversupply might last for a few years in the second-tier cities but we are confident that it could be resolved in the medium term, as the services sector will soon be expanded to the second-tier areas and they will need office buildings,” Klibaner said.
Currently, office markets across the tier-2 cities are not very uniform. Chengdu, for instance, had 41 percent vacancy rate in the grade-A office market as of the end of last year. The market is expected to see a huge amount of new supply in the coming four years, with total stock seen expanding to 4.1 million square meters at end-2017 from 1.8 million square meters at the end of 2013.
Meanwhile, Shenyang was the only city that had 9 percent or less vacancy rate among 16 second-tier cities that Jones Lang tracked.
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