The economic downturn across the globe may lead to a tough time ahead for Shanghai's grade-A office space market, real-estate analysts warn.
The analysts, quoted in the China Daily Business Weekly, said the sector would not surge in the short-term as international tenants were the key to its vitality.
But the long-term prospects for the city were positive. This week's Asia-Pacific Economic Co-operation forum in Shanghai and China's impending entry into the World Trade Organisation (WTO) would enable smoother land transactions, the report said.
As of the end of June, Shanghai had about 5.1 million square metres of office space, of which 2.6 million sq metres was classified as grade-A and 616,965 sq metres as superior international grade-A, according to FPDSavills.
The bleak short-term outlook is a switch from earlier this year, when the international grade-A office market surged and the vacancy rate tumbled to 7 per cent, the newspaper report said, adding Shanghai's economy was in good shape and showing no signs of a slowdown despite the global woes and problems associated with the September 11 terror attacks in the United States.
But a strong domestic economy was not enough, said DTZ Debenham Tie Leung. As Shanghai's office market was more dependent on multinational companies, it was hard for it to be immune from the fallout of the stock market turbulence and the rough ride of the technology industry in the US, it said.
Demand for grade-A office space fell dramatically recently, with a total net absorption of 70,859 sq metres in the third quarter - the lowest since the first quarter of last year. Since last year, companies have been taking space in four main business districts - the Jingan, Luwan, Changning and Lujiazui areas.
Rent for grade-A offices was low, but many potential tenants were watching for prices to drop further, the newspaper said. The few transactions going through were in less expensive projects of the favoured districts.
The sluggish demand showed in rent growth, which stalled in the third quarter for the first time in more than a year. It remained at an average of 63 US cents per sq metre a day.
The sales price for grade-A office space declined to US$2,433 per sq metre on average. To re-invigorate the sales market, the price had to drop to a rational level, DTZ analysts said.
The newspaper quoted DTZ sources as saying that overall vacancies fell from 17.5 per cent to 15 per cent last quarter. All major business districts except Hongqiao reported vacancy rates under 10 per cent. Hongqiao remained at 33 per cent as the Maxdo Centre again delayed its handover until the end of the year.
However, several office projects with 600,000 sq metres of new space will be completed by the end of next year. The World Financial Centre in Pudong, expected to be re-started early next year and put into use by 2006, will offer 150,000 sq metres of office space.
Industry players warned that land and housing authorities had to tighten regulations to avoid a market recession. Developers also were warned not to pour money into new developments as the market already was over-saturated.
'In the long-term, China's impending WTO entry will certainly benefit Shanghai's property market, but the very beginning will have little effect,' a DTZ report said.