Shanghai office space: stock and demand
Massive building projects have become less welcomed in Chinese cities in the wake of the country’s slowing economy and tight money supply, but Shanghai remains a mecca for commercial property developers.
As more foreign companies move into the East China city to reach the expanding Chinese market and a series of pilot reform policies stimulate entrepreneurship, there is an increasing demand for office space.
Among many major projects is the Shanghai Hongqiao Central Business District (CBD) taking shape in a western suburb of the city. The project’s developers see it as a major base camp for domestic and foreign companies, as well as a new growth engine for the city.
But concerns about the slowing GDP growth of the world’s second-largest economy also have produced questions about the ambitious project.
In a February report, British real-estate research firm Knight Frank said that its survey of developers in the Hongqiao CBD showed construction of its buildings may be delayed by up to 24 months beyond the scheduled time frame of late 2015.
The 16-page report also raised concerns about the quality of the project and the marketing strategy after its completion, citing challenges such as “tightening lending policy, more specification restrictions, expected delays in interlinking infrastructure and many of the developers’ limited experience of building mixed-use properties”, the Wall Street Journal reported.
In a document given to China Daily, officials with the administrative committee of Hongqiao CBD addressed concern about the completion date: “The year of 2015 is only an estimated time for the Hongqiao CBD to complete basic construction. It’s not a fixed schedule, and does not apply to all the buildings.”
According to public data, the Hongqiao CBD covers an area of 86 square kilometers, with a core area of 4.7 sq km. It includes two major projects: the Hongqiao Comprehensive Transport Hub — the world’s largest transport hub — and the National Exhibition and Convention Center.
The transport hub has been operating since 2010 and is one of the world’s busiest with an annual passenger flow of 400 million, while the exhibition and convention center will hold its first exhibition in October.
“Hongqiao CBD is a large area comprising many buildings. It’s not a residential project, so it’s impossible for all the buildings to be completed at the same time,” said an official who declined to be named. “There are still offices under construction in Manhattan and Lujiazui, but we cannot say these districts are not complete.”
The first companies will move into the office buildings in the second half of this year, according to the official.
Another concern raised by Knight Frank is that on top of nearly 1 million sqm of gradeA office space in 2014-2016 offered by the Hongqiao CBD, there will be an additional 4 million sqm becoming available in the city, making it a challenge for the Hongqiao CBD to attract tenants.
But a recent report by Jones Lang LaSalle (JLL) suggested that continued rapid growth in the service sector will absorb the future supply of office space.
With its aspiration to become a global finance and shipping center in 2020 and the expansion of various reforms after the launch of the China (Shanghai) Free Trade Zone, JLL estimates that the demand for grade-A office space will be edging closer to the supply, decreasing the office vacancy rate of 15 percent to 10 percent in 2020, when both supply and demand will be around 12 million sqm.
“We expect a strong growth outlook for finance, professional services, healthcare and retail brands as well as for emerging sectors and Chinese domestic enterprises,” said Graham Coutts, head of strategic consulting with JLL China.
The increasing size of the middle class will also lead to expansion in stores and office operations. For example, Denmark-based toy manufacturer Lego is making a strong play for the mainland’s increasingly affluent middle class, aiming to build its Asian distribution center in Shanghai following the recent construction of a new factory in Zhejiang province.
Liu Yingkui, director of Zhenro Group’s Hongqiao project, said FTZ in Pudong and Hongqiao CBD are two major growth areas in Shanghai’s commercial property market, but because the Pudong market is basically saturated, there is a great opportunity for the Hongqiao CBD.
That is also shared by Knight Frank’s head of research in Shanghai, Regina Yang.
“Hongqiao CBD’s underlying demand fundamentals and its proximity to the transport hub will make it an appealing destination for international and domestic firms seeking to do business in Shanghai and the delta region,” she said.
“In addition, government policies will benefit key industries and help sustain demand over the next few years, calming fears of a market oversupply. The Hongqiao CBD shall fight the challenges, grow under pressure and get ready for the take-off.”
Yang said that government policies will benefit key industries and help sustain demand over the next few years and calm fears of a market oversupply.
“The Hongqiao CBD shall fight the challenges, grow under pressure and get ready for the take-off,” she said.
Office towers are starting to put pressure on historic neighborhoods like the Shikumen area of Shanghai, above.