Mainland market points to future economic activity

PUBLISHED : Friday, 16 March, 2012, 12:00am
UPDATED : Friday, 16 March, 2012, 12:00am


The office leasing market has long been one of the best sub-indices for gauging general economic activity. Prices, demand and the overall mix of tenants provide a snapshot of broader change and serve as an accurate pointer to future investment trends.

That accounts for the close attention to deals and developments in the mainland's office sector. What happens there is significant for the likes of architects, agents and property companies. But economists and fund managers around the world are also becoming adept, for example, in the distinction between tier-one and tier-two mainland cities as they search for clues to new investment prospects and future sources of profit.

'For most companies, China remains one of the few markets still exhibiting top-line growth,' says Michael Klibaner, head of China research at Jones Lang LaSalle. 'But multinationals are shifting their focus away from exports towards capturing a share of the domestic market in their respective industries. In the process, they are keen on expanding in the more inland regions to tier-two and tier-three cities like Chengdu, Wuhan, and Chongqing, so we are seeing demand for new set-ups there.'

Klibaner notes that strata-owned buildings are the mainstay of such markets, where most local companies still prefer to own their office space. However, this is changing, with many cities now building central business districts (CBDs) to meet and spur demand for higher-quality grade-A office premises.

The new supply coming on stream puts a limit on landlord pricing power in the traditional core areas, where vacancy rates tend to be low. And it creates options to either buy or lease for businesses keen to upgrade and expand.

Developers know what is required and design accordingly: high ceilings, adequate lifts, column-free layouts, and easy access to shops and transport. Where possible, they also aim to provide buildings with single-ownership and reputable property managers.

'Traditionally, multinationals have understood the value of locating in high-quality buildings in terms of brand image, convenience, staff attraction, and retention,' Klibaner says. 'Increasingly, domestic companies are demanding similar levels of quality and for similar reasons.'

There is a clear move towards mixed-use developments which include office space. Those offering associated amenities - hotel, retail, restaurants, and serviced apartments - lease faster and perform better in terms of rental rates. 'As the government determines land usage before sale at auction, it is predetermined that mixed-use projects will become more typical,' Klibaner says.

He notes that, at present, average net office rental rates in a tier-two city might be 3 yuan to 5 yuan (HK$3.68 to HK$6.12) per square metre per day on a gross-floor-area basis. Typically, there is also a rent-free period to allow for fitting out, and other negotiable terms may lower the effective rent over the life of lease.

Looking at prospects for the mainland's tier-one cities, including Beijing, Shanghai and Guangzhou in most classifications, Thomas Lam, Knight Frank's head of research for Greater China, expects supply shortage to drive rental growth. He foresees average increases of 10 to 15 per cent in the grade-A office market, underpinned by the arrival or expansion of multinationals who prefer to rent.

So far, government cooling measures are focused on the residential market and, as long as big companies are prepared to pay up and sign leases for three or more years, no official intervention is likely.

Lam notes that rental rates for high-quality CBD or finance district offices now average around US$50 per square metre per month in Beijing. In Shanghai, prices are about US$44, and in Guangzhou about US$23 on the same comparative scale.

'The multinationals, finance and law firms feel they have to be in these places,' Lam says. 'There may be licensing issues, but it is also a question of marketing, brand promotion, and having a 'presence' in the [more cosmopolitan] cities.'

He suspects restrictions on the residential side will prompt certain developers to review their priorities.

'I believe that most will try to reformat their portfolios to generate more income from retail and office properties,' Lam says. 'The difficult thing is finding prime locations; a grade-A office in a 'remote' area of a city doesn't attract tenants.'

Like others, he sees the activity and potential in the so-called emerging cities from Shenyang and Tianjin to Chengdu and Nanning. 'Relatively speaking, these markets take more time to develop. But they should benefit as US and European industries come to China to find new opportunities.'