Tale of two cities as Beijing rents rise and Shanghai slides
Alex Frew McMillan
The mainland's major office markets, such as Beijing and Shanghai, are undergoing a new development which will probably swamp other markets.
The cities seem to be absorbing much of the space and industry watchers say there is a wariness about any signs of weakness as new buildings come on stream.
Rents have been rising in Beijing, which hasn't seen any significant new office buildings in three quarters. Savills says monthly rents are US$66.8 per square metre, as the city finally swallows up the massive construction leading up to the 2008 Olympics.
Rents remain weak in Shanghai, where they fell 3.2 per cent in the first half of this year, according to Savills, and now stand at US$59 per square metre per month, including management fees.
Given the large amount of new projects in Pudong and Puxi, rents are expected to lag the mainland's other main cities for the rest of the year.
'Prime rents in Shanghai corrected much more sharply during the global financial crisis than in Beijing and continue to slide,' real estate adviser DTZ noted in the first half of the year. 'We believe prime rents will remain under pressure in 2010 in Tianjin and Shanghai, both of which have a large supply pipeline.'
Guangzhou and Shenzhen are performing fairly steadily. Rents in Guangzhou were flat in the first half of this year, up 0.1 per cent to US$40.10 per square metre in the Savills data, while Shenzhen saw growth of 7.7 per cent to US$43.30 per month.
Long-term prospects for the biggest cities are solid. Growth of mainland cities is the major driver for real estate demand. Some 35 million people move from the countryside to the city each year, with the rate of urbanisation at 2.7 per cent per year for the past five years. But individual markets - and submarkets within cities - need to be watched carefully, experts say.
Mark Karlan, president of Strategic Partners Asia at CB Richard Ellis Investors, says the Beijing Olympics spurred overbuilding.
'Three to four years of inventory came on the market at once. That's an awful long time to fill a building,' Karlan says. 'In general, we red-lined offices in Beijing, waiting to see if the market would crash. But it hasn't. Owners of those buildings have been well capitalised.'
State owned enterprises (SOEs) and other government-directed entities own substantial amounts of real estate, so there's effectively a government intervention at a landlord level. They're also unlikely to default on their holdings.
SOEs 'have a stabilising effect on the market that you wouldn't see in other parts of the world', says Mark Ho, the Beijing-based assistant vice-president of the Pacific Star Group. 'Landlords are not as fast as in a free-market economy to adjust the rents to preserve their vacancy rates. So Shanghai and Beijing are able to sustain a higher vacancy rate.'
Financial Street has seen the largest rent increases in the capital, with Zhongguancun performing well too. But with seven new office projects due to introduce 5.7 million sqft in Beijing in the second half of this year, CB Richard Ellis (CBRE) says, there's likely to be pressure on rents.
Vacancy rates are surprisingly high in the main office markets. Beijing virtually built a new city for the Olympics, adding tens of millions of square feet of space. It has a vacancy rate of 17.8 per cent, Knight Frank says. Guangzhou's vacancies are at 16 per cent. Shanghai is at 13 per cent.
Shanghai's main development in the second quarter was Wheelock Square, a 1.14 million sqft project on Nanjing Road West. Huamin Imperial Tower and ICC Tower 2 will only be finished next year. But 6.5 million sqft is set to come on the market in the second half of the year, CBRE forecasts, for a full-year total of 8 million sqft - more than the 6.7 million average in each of the past five years. 'The substantial amount of future supply will keep the supply end of the market competitive and cool landlords' eagerness to lift their rental quotations excessively,' CBRE states. Although the market is stabilising, some 20 per cent of landlords keep cutting rents every quarter. 'This has resulted in what appears to be a see-saw scenario being played out between landlords and occupiers, a trend that looks like persisting over the rest of the year.'
Demand for institutional-grade real estate looks set to increase thanks to rule changes to allow insurers on the mainland and Taiwan to invest in real estate.
With the pressure on residential property in first-tier cities, Pacific Star is looking for opportunities outside the main cities, as it hopes to benefit from the mainland's infrastructure spending and urbanisation. Karlan is also keen on residential followed by office space in selective markets. But he says high-end office space is still cheap compared with London, New York or Tokyo.