Room to grow

A positive business outlook, rising investment growth and steady corporate hiring have been boosting office leasing demand in China. While these drivers underpinned stellar office rental performances in 2010 – particularly in first-tier cities like Shanghai, Beijing, Guangzhou and Shenzhen – they are inspiring confidence for another strong year in 2011.

In the fourth quarter of 2010, Beijing recorded the largest office rental growth in the Asia Pacific region at 9%. This was impressive, given that the Chinese capital began the year with a relatively high vacancy rate of 28.5% and saw the addition of 700,000 square meters of new office supply throughout the year.

However, by the end of 2010, 1.3 million sq m of net office space had been taken up. Rental prices rose by 27%, while the city’s vacancy rate dropped to 12.4%. Last year’s experience in Beijing is further confirmation that the rental market is a function of demand – and that this situation reflects China’s ongoing economic expansion.

In Shanghai, average Grade A office rents of US$611 per sq m per annum ranked fifth in the Asia Pacific in the fourth quarter of 2010, behind Hong Kong, Tokyo, Singapore and Mumbai. Beijing (US$544 per sq m per annum) ranked sixth during the same period, while Guangzhou (US$325 per sq m per annum) came in 14th place. These figures reflected strong quarterly growth of 7.9%, 9% and 6.9%, respectively.

The situation in second-tier cities is much different. Most are not as well-developed and are still building out their central business districts.

At the same time, supply is expected to bloom in these markets over the next three years – and this means vacancy rates will remain relatively high. Chengdu, for example, was a strong performer last year, with a solid 100,000 sq m of net take-up. This growth is likely to continue in 2011 as the office market continues to mature.

What explains such strong performances in first-tier cities in 2010? There are two significant factors. First, China’s office market saw domestic growth rebound in the latter part of 2009 and this upswing was evident throughout 2010, as the country’s emerging multinational corporations and high-growth companies (42 of which are now on the global Fortune 500 list) continued to invest for the future.

Secondly, in the latter part of the second quarter of 2010, demand for office space among MNCs operating in China started to pick up again.

At Jones Lang LaSalle, we are often asked whether this increased need for office space among MNCs reflects pent-up demand – a spillover from the dark financial days of 2009 when most investments were put on hold. The answer is that the opening of some bottleneck demand was evident, but this alone doesn’t illustrate the true diversity of office space demand we have witnessed in recent months.

 

Many overseas MNCs have recently shown a stronger committment to expanding in China. A December 2009 survey by the American Chamber of Commerce in Shanghai revealed that 65% of companies were planning to increase their investments in the country in 2010. Moreover, 59% of survey respondents (up from 39% in 2008) said their primary business purpose for being here was to serve the Chinese market – rather than producing for export.

These sentiments are only growing stronger. In January, the American Chamber released a follow-up survey, showing that 80% of member companies are planning to increase their investments in China this year. 

These figures suggest that such investments will be focused on the long-term as companies seek to increase their domestic market share. It is not just a reaction to the improved global conditions following the financial crisis. Both foreign and domestic companies are seeking to raise head-counts and to expand their operations in China, for China.

Furthermore, they are not being sidetracked by issues such as inflation, higher wages and currency values. China’s construction boom shows limited signs of abating, so we expect to see a continued increase in office supply in first- and second-tier cities. Shanghai, for example, is expecting about 800,000 sq m of new Grade A office space in Pudong. The boost in commercial supply will also be significant in Guangzhou and Shenzhen, but sustained demand is expected.

Given the strong market fundamentals in China and a positive corporate outlook, the driver of high performing office markets throughout 2011 will continue to be demand, demand, demand.