FPDSavills said the most surprising figure was the small proportion from Hong Kong but this would probably be redressed by extending the survey across a wider range of buildings.

It said companies' choice of location depended on the nature of the business and priorities of the key decision-maker.

Locating in Pudong was generally a plus and for banks wanting to conduct yuan business an office in 'Little' Lujiazui was now a must.

Companies occupying offices of up to 250 square metres account for 63 per cent of grade-A office space in Shanghai with only 14 per cent of space occupied by companies taking 1,000 sq m or more, the survey shows.

'The most recent news is more positive than we have heard for some time,' said Sam Crispin, research director at FPDSavills Shanghai.

'HSBC has confirmed its commitment to Shanghai and there will undoubtedly be others. The WTO [World Trade Organisation] has inspired confidence among foreign companies that the medium- to long-term outlook is positive.' Despite the more positive outlook for prime properties, FPDSavills said there was no doubt the overall market remained hugely oversupplied with little cause for immediate optimism.

Rents in lower-grade properties would continue to fall in the next 12 to 18 months while rents for the best-quality buildings stabilised, resulting in a return of significant rental premiums for prime properties.

In the short term, however, Mr Crispin said: 'It is the buildings that continue to reach for the sky rather than rents.' FPDSavills said the greatest threat to a recovery in the Shanghai office market was the next wave of prime properties. Some of these were likely to be delayed but if they started to come on to the market before a recovery set in, the slump was likely to extend beyond 2002 and 2003.

On the residential sector, the consultant said expatriates moving to Shanghai now had almost as much choice as they could wish for as quality housing was available in greater numbers, in a wider range of locations and at lower cost than ever before.

New supply of luxury apartments since 1998 had brought rents down 25 per cent over the past 12 months.

Larger luxury and serviced apartments were in particular demand at present and tenants had to move early to secure the best stock.

The Hongqiao area including Gubei, which was the first part of Shanghai to be developed on a large scale, continued to enjoy a building boom.

Hongqiao offered quality projects at rents competitive with other locations and developments in the city, FPDSavills said, adding that further falls in rents would be gentle and in line with the ageing of completed developments and the general market.

In Pudong, the newly opened Pudong Airport will improve the area's chances of catching up with Puxi.

'The area already has a sense of space and amenity that is missing from most parts of Puxi with golf courses, international schools and the Shanghai Football Club,' Mr Crispin said.

Pudong developments used to be cheap compared with similar projects in Puxi but the gap in rents has closed in the past 12 months, reflecting supply and demand dynamics and the relative age of stock in each area.

Despite China's imminent entry to the WTO, FPDSavills believed it was unlikely foreign companies would immediately change tack from the consolidation phase that most were now in.

Localisation was resulting in increased employment stability among locals, however, which was likely to speed up the merging of the overseas residential sector with the domestic housing market.

OFFICE SECTOR It is buildings that continue to reach for the sky rather than rents