Jeremy Kelly, director of global research programs at real estate services firm JLL, discusses Shanghai’s rise as a “super city” why he thinks Hong Kong isn’t going to make the cut.
You talk about the changing hierarchy of cities. Could you elaborate a bit about what that entails?
Basically we’ve identified three themes that are driving that changing hierarchy: Globalization, urbanization and digitization. Those are the three things that are turning the economic geography of the world on its head.
Urbanization is really about cities in the emerging markets that are expanding through “flash urbanization,” as you sometimes call it. And so just by pure power of influence and size and dynamic, they are asserting themselves more on the world stage. You’re getting cities like Wuhan and Chengdu that only ten years ago were just not on the radar, but now are certainly moving into the top 100 cities.
The second is globalization, and by that, what we’re finding is that there are certain cities that are benefitting from the increasing interconnectivity between cities both in terms of transport, but also in terms of the virtual connections between sets of people, such as London and Dubai.
The third theme is what we call digitization, and that’s just a phrase that we use about how technology is making the world smaller. How is that translating into city dynamics? It’s allowing smaller cities that traditionally would have been quite difficult to build up to have a quite strong global profile, through for example strong technology-based growth, strength in social media and the new media areas. So you’ve got these smaller, what we call agile cities that are moving up the hierarchy, or the network of cities.
Are there any examples in China of this development?
Well, I think it needs a density, it needs culture, and so I think Shanghai is probably the only example of a city that has the ingredients to start to build that culture, I would argue, at this stage. Because technology has often been about business parks, as you know – London’s Western Corridor and Silicon Valley, but now some of the real innovations are in downtown San Francisco, or downtown London, or Berlin, or Amsterdam, so it needs that cultural burst, which at the moment I only really see that in Shanghai.
You were talking about the global city, and how you see that Shanghai has some of the things in place that can move towards that, so can you talk more about how Shanghai compares to its global peers?
What we’ve observed, certainly from a real estate perspective, is the emergence of what we’re calling the super cities. And at the moment we can see four cities that are sticking their head above the parapet: London, Paris, New York and Tokyo. And they have largely four key ingredients. One is pure economic size and economic influence as financial trading hubs. They have very deep corporate bases and many headquarter locations. They have deep liquidity in terms of huge turnover of real estate, in terms of investment. All four of them are head and shoulders above the rest in terms of investment. And they account for about 20% of global commercial real estate investment, so huge concentration in these four cities. And then the final component of that is a large and diverse real estate stock.
Our thesis is that Shanghai has the ingredients to move to super city status, we’re saying by 2025. The reality is in the positions of these cities, is that it’s a steady progression, and therefore you’re not overnight going to see Shanghai being catapulted to super city status. Even in a place like China, it does take time to put in those ingredients. What we’re saying is there is real commitment by the central government to establish Shanghai as a truly global, international financial and trading hub. So there’s the commitment and the vision and the determination. But then if you look also at the global corporate base where business activity is happening, you’re seeing the rise of many Chinese domestic corporations, and that really does give you a hint of where the future geography of global business activity is shifting. So we see a much stronger corporate base evolving in Shanghai that is as much domestically driven as multi-national corporations.
The third element is the liquidity issue about real estate investment, and Shanghai at the moment is in eleventh position globally. If you look at it relative to how the city is growing, and the growth of its real estate stock, there is a huge potential for it to move from eleventh up into the top five, with predictions of investment activity increasing by at least 50%. So there’s that factor.
How about the development of the commercial real estate stock in Shanghai?
It’s been interesting to listen to the debate recently about concerns about oversupply in Shanghai. But I think if you look at it over a longer-term horizon, essentially what Shanghai is doing is building the real estate infrastructures to move into its new skin as a super city. Thirteen million square meters by 2020 is what we’re saying here, of grade-A office stock. Compared to London and Paris and New York and Tokyo it’s not huge, and therefore cities like Shanghai will go through those cycles of supply-demand disequilibrium, but there is a long-term demand base that one can see that would allow that space to be occupied.
It’s not like Dubai where you can see all these buildings with 40% vacancy rates, and although it’s a very dynamic city – I know I may be proved wrong – but you just really can’t see where the demand base is going to come from. Whereas in a place like Shanghai, it has the economic power and strength, and corporate dynamics to enable the space to be absorbed over a relatively short period of time. I’ve seen it elsewhere, and I think Shanghai has been through several cycles where its supply has looked uncomfortably high, but in many transitional markets we often get vacancy rates of 20-30%. It’s a part of that evolutionary process.
What are the implications of Shanghai becoming a super city?
I think success breeds success. What we’re finding is that as a super city there is huge gravitational pull of people, capital and companies. So that will encourage economic growth. But I think, just to be a bit more provocative, there are downsides to that. As we’re seeing in London, there are inevitably issues of affordability, there are issues relating to social cohesion, congestion and diseconomies of scale. So I know I can speak for London about its contributing to economic success, and these cities are succeeding as a result of being truly open, but there are issues.
Obviously Shanghai is the standout candidate from China, but given your China 50 report, what emerging cities do you see?
The two that I would highlight, and perhaps neither of them would be a huge surprise, would be Chengdu – which has certainly emerged from our China 50 work as the premier city outside of the top tier of Shanghai, Beijing, Guangzhou and Shenzhen. I think that’s very much driven by the openness and the deliberate policy of Chengdu to attract multinational corporations. And so it’s a much more international city than others. It also has that livability component to it. The other one is now Wuhan. And so from our City Momentum Index [published in January], Wuhan was fifth globally in terms of momentum, and what’s driving that one is the official recognition about central China. It’s already happened on the coast, it’s already happened in western China as a result of the Go West policy. But there is a strong potential in central China, and Wuhan’s natural position as the hub of central China, its reemergence as truly an industrial powerhouse. Its real estate mar
ket is perhaps lagging to some of the other Tier 2 cities, and therefore it really is just starting to move into liftoff. Then it’s also got the ingredients of long-term success, as one of the major education hubs of China. But it does need to lift its game, I think, in terms of building on its educational excellence, so that it becomes a global player as opposed to being one of the best in China.
Of the four big global cities you mentioned earlier, Hong Kong wasn’t in there?
Hong Kong is not in those five cities, and that is contentious. We’ve actually created a simple model which looks at economic power, corporate base, real estate stock and investment volumes. That’s where the four cities have come from, and Shanghai is moving up there. Hong Kong falls just outside of that. I think that we’re not asserting that it will become a super city. It certainly has many of the ingredients – it’s an international trade hub – and we’re not predicting the decline of Hong Kong by any means, but we just think that Shanghai has got that real momentum. So I would say if you look at comparisons Hong Kong does have many similarities as an international trading hub with the Singapores, New Yorks and Londons. But what Shanghai has is I think it will be developing as the main financial and trading hub of mainland China, and therefore has got that extra boost. But I certainly don’t think Hong Kong is going to suffer.
Earlier this year the Hong Kong-Shanghai Connect program was launched. Once that opens we expect to see a large flow of capital from mainland China into the Hong Kong exchange, so that re-ignites the debate about where Hong Kong and Shanghai stand.
I think Shanghai – there are issues with transparency. In our most recent Global Real Estate Transparency Index, which is about effectively measuring the ease of doing business from a real estate perspective, we’ve seen that the Tier 1 mainland Chinese cities, Shanghai and Beijing, over the previous surveys have actually made some reasonable improvements, so that they’re moving up the ranking. But we have found in this last survey that there’s a degree of treading water, you haven’t really seen any big improvements in transparency. And so there are still issues in Shanghai’s long-term projection. It still needs to fix a few things – which are fixable – in terms of financial de-regulation, improving the transparency of the transaction process, and I’m talking real estate here, improving the transparency of non-performing loans. So there are those legal, financial de-regulation issues that still need to be faced. But they could be fixed, so that Shanghai could truly meet its potential.