Shanghai focus turns to Hongqiao CBD
Multinationals with plans for a presence or expansion in the Yangtze delta will soon have an attractive alternative
China's gross domestic product grew at compound annual rate of 10.7 per cent over the past eight years, and from 2006 to last year commercial office completions in Shanghai grew at a compound annual rate of 10.8 per cent.
That's despite the impact that uncertain global economic conditions have had on corporations' property portfolios, especially in Europe and the US.
With more multinational businesses seeking a presence in Shanghai, rising rents in the industrial real-estate sector have forced corporations to move westward along the Yangtze river to where land is more abundant, rents are lower, and government tax rebates provide attractive incentives for the manufacturing, logistics and trading sectors.
Recent trends in the office property market include the improvement of Shanghai's grade-A offices. Decentralised "creative" business parks specialising in particular business segments have also been developed.
In an attempt to control inflation in the residential sector, the government has invoked measures that tightened the market, which pushed many big residential developers towards the commercial office market.
The majority of developers in Hongqiao CBD Phase 1 have residential experience and are hoping their big investments will lead to future commercial projects.
With many of the world's economies still in an uncertain state, the Hongqiao CBD will strengthen China's ability to support its economy through domestic growth and spending. Phase 1 of the development will provide over 1.7 million square metres of new office, retail, apartment, exhibition, and hotel space over the next two to three years.
The Hongqiao Transportation Interchange (HTI) aims to develop into Shanghai's largest decentralised commercial business hub. Commerce and trade, product services, and logistics are examples of industries in the Yangtze delta that will benefit from the HTI.
Tenants will be attracted for the same reason people are drawn to the Hongqiao CBD itself, and that is domestic business commuting.
Companies which base their headquarters in Shanghai yet have back offices or manufacturing facilities in satellite cities across the delta find the commute time-consuming, especially when multiplied by numerous employees on a weekly or even daily basis.
Relocating offices from a central city location to the Hongqiao CBD will shorten commuting times and lower business operating costs. Given the demand in the Changning CBD and office an occupancy rate of almost 100 per cent, we expect that multinationals will view Hongqiao CBD as an alternative to the skyscrapers filling Shanghai's CBD areas.
The timing of HTI's completion is a key factor. With Shanghai's tallest building, Shanghai Tower, set for completion in Pudong, as well as the completion of Yangpu's The Springs, Shanghai's total grade-A office supply is forecast to increase by 50 per cent between 2014 and 2015. New office supply will grow by five million square metres, of which 1.5 million square metres will be within the CBD, 1 million square metres in the HTI, and 700,000 square metres in decentralised locations.
In 2014 and 2015, Shanghai may experience challenging new supply conditions, and grade-A rentals are likely to be under pressure if global conditions continue on their current trajectory.
Given the outlook for both the United States and European economies, it is unlikely that multinational corporations will be looking to Hongqiao's CBD commercial hub for large-scale business growth and expansion. Instead, with a growth trend toward mergers and acquisitions and consolidation of business units, we may find the area a better match for business consolidation and cost control.
From a strictly financial point of view, the cost of relocating outside the CBD may sometimes outweigh the benefits. Unless the market reacts to the rentals and landlords are willing to accept a substantial reduction, the assumption that tenants will flock to Hongqiao's CBD may be exaggerated.
However, business decisions are not typically rental-focused and there will be those interested for other reasons.
There have been rumours that local authorities will offer inducements for businesses to register their tax address within the area. The policy remains to be confirmed, but appears to be widely welcomed.
The market eagerly awaits the completed project, but questions remain on demand and rental trends in 2014 to 2015. It also is debatable if authorities will implement an incentive structure.
We are positive about the Hongqiao Transportation Hub and expect it to become a new commercial arena of Shanghai in the long run.
Thomas Lam is a director and head of research, Greater China at Knight Frank