Demand remained strong in major Chinese office markets during 2005, despite government controls to slow growth, and more companies ventured deeper into new cities. Even in oversupplied markets, good quality buildings remained in high demand.
Several background factors, some of them related, define the landscape that multinational companies face as they enter and grow in China. All are relevant to the office markets across China, and include consumerism, research and development (R&D), supply constraints, cost control and second and third-tier cities (see box).
Current trends in China include Guangzhou’s office market, which remained balanced in 2005, a function of sound demand and limited quality options. Supply in 2005 was at its highest for nine years, although like many of China’s cities, demand was concentrated in a few buildings. Companies continued to migrate to Tianhe from older districts, a result of building and infrastructure development in the district.
Take-up measured 171,500 square metres, up 9% on 2004. Demand was underpinned by business services, financial, industrial and consumer products industries, as well as firms using the city as a back-office location. A government ban on the use of residential properties for offices stoked demand.
The vacancy rate rose slightly to 12.98%, and rentals remained stable at RMB161 ($20) per square metre a month (/sqm/month). Top-tier buildings, most of which are in Tianhe, commanded a premium. With new supply concentrated at the end of 2005 and a continued influx of new office supply in 2006, the leasing market is expected to remain very active. Rentals are expected to remain relatively stable and vacancies will rise moderately.
Meanwhile, new development in Shenzhen was focused on the Futian district, which is growing in popularity as a destination for both domestic and international enterprises. Many of these developments are available for sale or lease. While providing quick returns for developers, such strata title buildings are unattractive to multinational firms, who mostly prefer to lease.
In 2005, better-quality new buildings – including China Resources Building, International Chamber of Commerce Tower and the New World Centre – were quickly absorbed. Demand came mainly from business services, logistics, finance and technology industries. Continuing from last year’s strong demand, rentals rose moderately to RMB148/sqm/month, compared with RMB144/sqm/month at the end of 2004. Vacancies dropped from 11.4% to 7.97%.
Shanghai remains the centre of preference for many multinationals in China, as evident in the city’s office market. Supply has been unable to match growing demand, and pre-leasing campaigns in 2005 were extremely successful. Availability of top-tier office properties remained very tight throughout last year. Take-up dropped to 250,000 sqm from 365,000 sqm in 2004 due to limited availability. Reflecting Shanghai’s growing stature as a world-class city, demand was balanced across many business sectors.
Due to supply constraints and rising costs in prime districts, and the growing number of R&D operations in Shanghai, decentralised locations became popular destinations. Led by Zhangjiang High Tech Park, these areas offer lower occupancy costs, potential government incentives and support, and increasingly higher-quality facilities.
Low vacancies, especially in Shanghai’s prime office districts, pushed average rentals significantly higher to RMB312/sqm/month, a 20% increase from the beginning of 2005. New supply of grade A offices is due to taper off considerably, and vacancies are forecast to fall below 5% in 2006. Rents are forecast to climb by 8% to 10% in the first half of this year.
In the capital Beijing, the market felt the first waves of a surge in supply that will continue until the Olympic Games in 2008.
Strong demand coupled with ample new supply led to take-up of 330,000 sqm, the highest level since the technology boom in 1999-2000. Prime destinations in the eastern part of the city saw demand from financial, business services and China head offices across a variety of industries. Zhongguancun in the western part of the city and Wangjing in the north-east attracted large-scale telecommunications, electronics, software and other technology businesses, most of which feature a significant R&D component.
Rents go up
Rents in top offices in Beijing’s central business district rose by approximately 11% to RMB318/sqm/month. Other submarkets did not fare as well.
New supply in 2006 and 2007 will double the stock of Beijing’s grade A office space. In 2006, new supply is estimated to be 1.3 million sqm, and this should depress rents, particularly in the eastern submarkets. While Financial Street will see a large amount of supply in 2006, rents are expected to remain stable, as many buildings are earmarked for sale to state-owned companies and government agencies for their own occupancy.
Meanwhile, in Tianjin, new supply was less than expected, with total grade A office stock increasing slightly to 491,000 sqm. Rentals rose by 10% from the start of 2005.
New supply and take-up was concentrated in Heping and Hexi, measuring 12% and 81.5% of the total market, respectively. Sectors in demand were mainly logistics, freight services and insurance companies.
With the injection of foreign investment in Tianjin, demand is expected to remain strong in 2006. Investment from France, Germany, Hong Kong and Singapore all doubled over the past year. However, the flood of new supply (estimated at 74,000 sqm) entering the market in 2006 will cause vacancies to rise, and will put pressure on rents.
Due to China’s ‘Go West’ campaign, Chongqing and Chengdu grew significantly in 2005. Chongqing had an increase in new grade A offices. JianBei is expected to become its prime grade A office district, with rents averaging between RMB93 and RMB124/sqm/ month. With a limited amount of new projects entering the market in 2006 and strong demand, prices are expected to edge higher.
In Chengdu, Grade A office rents were between RMB90 and RMB110/ sqm/month at the end of 2005. Despite an influx of higher quality offices expected on the market, the quality of these buildings will allow them to command higher rents, and overall rents are expected to remain stable in 2006.
The Dalian office market continued to grow, with steady demand soaking up excess supply of good quality properties. Vacancies remained high at 27.5%, although better quality buildings and large contiguous spaces from a single owner are in short supply. Demand is supported by many Japanese firms due to its geographic position, and by logistics industries as a result of its large port.
Dalian has also emerged as a desirable offshore centre for R&D and customer service, attracting the likes of General Electric, Accenture, SAP and Dell. A large amount of new supply is expected to enter the market in 2006, causing vacancy rates to rise and rentals to fall slightly.
Randy White is a senior director at DTZ, head of North Asia Global Corporate Services.
INFLUENCES ON THE MARKET:
Consumerism: The growth in China-focused businesses has caused a surge in demand, particularly from banks, insurers, and internet and telecoms firms.
Research and development: China’s large, low-cost engineering talent base has made it a rival for India in attracting large-scale research centres, notably in telecoms, electronics, computer hardware/software/peripherals, chemicals and semiconductors. Offshoring of non-R&D functions is also emerging in China, particularly servicing Asian customers.
Supply constraints: While the scale and volume of building is staggering, very few buildings ‘get it right’ on fundamental issues such as convenient location, good building specifications, stable ownership and reliable management.
Cost control: As companies have matured and reached critical mass, profitability in China is not just left for the future. Companies are rationalising choices to be in certain buildings or even certain cities, and thinking harder about the workplace environment for their staff and about how they procure real estate.
Competition for talent: Despite the sheer number of people, attracting and retaining the right talent is not simple. Locating in the wrong place (or in a building no one wants to work in) has an impact on business in China.
Second and third-tier cities: Related to all the above points is the strong increase in demand in cities such as Chengdu, Dalian, Hangzhou and others that most readers will not yet be familiar with. Shanghai and Beijing remain the first ports of call and continue to grow, but there is much more to China.