It is expected that by 2010, Shanghai will have completed a major expansion of its metro system, providing comprehensive access in and out of the city for the estimated 20 million people who have made it their home. But the metro is serving another function for companies located in the city: it is allowing them to escape central Shanghai’s ever-increasing rental prices.
A report by real estate consultancy Jones Lang LaSalle found that rents for grade A office space increased 23.2% in Pudong and 7.5% in Puxi last year, while vacancy rates dropped to 2.63%.
“We have seen many manufacturing, logistics and trading companies move to grade B buildings, decentralized offices and to business parks,” said Jones Lang’s Shanghai head of research, Kenny Ho.
According to statistics from the Chinese government, Shanghai’s annual growth rate has remained above 10% for the past 15 years. Even if the official statistics are viewed with healthy skepticism, there is little doubt that the city is in the midst of a massive growth period.
Pudong, which was little more than farmland 15 years ago, now commands some of Shanghai’s highest rental prices. Last year, citywide grade A rents increased by more than 11%; this number is estimated to rise to 15% this year.
A company with an office in Shanghai’s city center confers enormous benefits to most companies: it’s easier on clients, easier for employees, and often confers prestige.
Yet basic economic principals dictate that as the price of something increases, all else remaining equal, people will consume less of it. In this case, it was only a matter of time before the city’s real estate market began forcing companies out towards the peripheries.
“The relatively lower rent of the decentralized areas combined with the increasing reach of the city’s public transportation system make relocation an attractive option,” said William Cheuk, head of DTZ’s commercial property department in Shanghai.
Areas like Zhangjiang offer rents that are often half what is charged in the city center. It’s estimated that in the next several years, these central business districts (CBD) will see phenomenal growth as the price-led exodus from the city continues. Roughly two million square meters of new CBD office space is expected to be built in Pudong and further east.
In addition to relocating, companies seeking to flee rental cost pressures have utilized several other options. Smaller companies often find that buying their own office space is a better way to reduce costs. The ability to buy, however, is becoming less and less feasible as property owners are looking to cash in on the rental price boon.
Another solution is to move the bulk of a company’s operations outside the city while leaving sales, marketing, and public relations departments downtown. This clearly has the downside of fragmenting a firm’s workforce, although many see the costs of doing so to be less than the benefits of consolidated workforce.
It is unclear just when renters can expect Shanghai’s cost pressures to ease up. Talk of a speculative bubble in the real estate sector has been around for quite some time and experience seems to indicate that one can only know if a bubble exists when it finally pops.
The Chinese government has undertaken extensive efforts in the past few years to dampen the real estate market experiencing rapid economic growth. While most of have focused on residential properties, efforts to rein in speculation by limiting short-term investments and ensuring the payment of taxes have targeted the commercial real estate sector.
These efforts appear to have largely been in vain, however, because recently released statistics reported that investment in urban fixed assets and factories increased by 23.4% in the first two months of 2007.
Fears of an overheated real estate sector are not keeping investors away. Most analysts see demand for grade A office space in Shanghai remaining high until 2010. Renters, meanwhile, should start drawing up cost management strategies.
“2007 will still be good for landlords,” Cheuk said. A good year for landlords, of course, means a bad year for corporate renters.
Rising business districts
Wujiaochang – Located in Yangpu district, Wujiaochang’s proximity to Fudan and other universities is making this a hot area for tech companies.
Zhangjiang – This new area deep in Pudong is emerging as a top high-tech business park destination.
Changfeng Park – A new subway line, which will be operational in about three years, will likely boost prices in this area, located in Putuo district in western Shanghai.
Tongzhou – This eastern district of Beijing is attracting logistics companies setting up bases here.
Changping – Government development zones are helping turn this northern Beijing district into a hub for high-tech companies.
Pearl River New City – Touted as a new business district in the mold of Pudong, this area will boast the impressive, eco-friendly Pearl River Tower as a landmark.