When it comes to investing in office space in China, the attention mainly falls to its two biggest and most influential cities. While Beijing is the political and cultural heart of China, Shanghai has long been the commercial face of the Asian superpower, where many international multinational corporations have chosen to base themselves.
But this could be changing. There is such strong demand for office space in Beijing that availability is among the lowest in the world according to a recent report by JLL. For the last few years, vacancy rates have stood at less than five percent in Grade A office buildings in the Chinese capital for the last few years, and rents in Beijing’s office rents now rank fourth highest worldwide after Hong Kong, London and New York.
“Rents for Grade A buildings in the city’s priciest office district – Finance Street – have grown so high that a significant number of foreign firms have departed or downsized, giving the opportunity for domestic finance firms to move in,” says Steven McCord, Head of Research, North China, JLL. “These domestic firms now occupy 86.4 percent of leased space in Finance Street.”
“We expect to see this trend deepen and domestic firms increasingly dominate the market, similar to the New York market where U.S. firms make up the majority,” says Eric Hirsch, Head of Markets, JLL Beijing.
“Key sources of future demand will come from the rise of the finance sector, the upgrade trajectory of IT firms, and in the internationalisation of China’s burgeoning global companies.”
It is also projected that China’s One Belt, One Road initiative will lead to more domestic companies setting up base in Beijing. “As homegrown giants expand overseas and require more office space to oversee this activity from a dependable home base, the Chinese capital will have the most to gain as it is already home to a high-density of decision-makers, in both state-owned enterprises and private-sector firm,” adds McCord.
With Beijing’s office market reaching a key turning point in terms of geographic maturity, tenant composition, and building quality, Hirsch observes that more companies are requiring better quality buildings and moving out of the core areas. “We’ll see a market that’s increasingly decentralised, driven by the development of two up-and-coming commercial areas, Lize and Tongzhou,” adds Hirsch.
Shanghai’s supply surge
Over in Shanghai, JLL’s research shows the city’s central business district will be adding 1.1 million square metres of grade A office space by 2020 after years of supply crunch. In addition, another 3.3 million square metres of office development will available in decentralised Pudong, Hongkou and Minhang submarkets. This will bring total Grade A office space in Shanghai to 11 million square metres by 2020 – replacing Hong Kong as the largest office market in Greater China.
“Domestic firms are expected to drive demand for Grade A office space in Shanghai, while more multinationals are anticipated to vie for prime office space to capture a larger slice of the burgeoning Chinese consumer market by 2020,” says Joe Zhou, Head of Research, China at JLL. “This high level of forecast demand for office space is likely to absorb the massive supply pipeline over time.”
Many firms are also eyeing areas outside of the traditional CBDs areas where rents are rising, with fringe districts such as Railway Station, the North Bund and Qiantan looking especially attractive to tenants due to convenient access to CBD core areas.
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Head of Research, JLL China