Shanghai's office market prospect looks positive in light of increasing demand from both domestic and multinational companies despite the global economic dowturn. Property consultants believe that China's World Trade Organisation (WTO) entry will attract more foreign companies to set up or expand operations in the mainland and fuel the need for more offices. Office rents in Shanghai have bounced back dramatically since last year on the back of economic growth. Shanghai's gross domestic product registered US$43 billion (HK$334.5 billion) for the first nine months this year, a 10.3 per cent increase compared to the same period last year. Foreign direct investment significantly increased by 65.5 per cent to US$5.84 billion. The first three quarters saw the city approve 1,845 new foreign invested enterprises, 35 per cent up year on year. The absorption of foreign companies is no longer the only contribution to demand, with mainland enterprises becoming the driving force. Given the country's strong economy, many mainland companies have expanded and relocated their operations to higher grade office buildings in order to improve the working environment and upgrade their corporate image. FPDSavills says evidence from the market shows that occupation of grade A office space in Shanghai by mainland companies has increased from 3 per cent at the beginning of last year to 8 per cent early this year. Total grade A take-up for the industry was 717,083 sq m last year, including 146,500 sq m of owner-occupied space in Pudong area. According to the property consultant, grade A office rents in Shanghai fell by 44 per cent in 1997 and 1998, and hit rock bottom at US$10 to US$20 per sq m per month in June 2000. Since then rents have rebounded by 26 per cent in prime central business district areas and 15.8 per cent in areas like Hongqiao and the Bund area. FPDSavills general manager in Shanghai, Sam Crispin, says rents are expected to continue to rise, although less sharply than previously forecast. He says more foreign companies are setting up business and expanding operations in China with the country's WTO entry. But the slowing US and world economy can only have a negative effect on the real estate market in the short term, he says. The economy notwithstanding, supply and demand are the main driving forces behind the property market. Office supply in Shanghai is expected to be 221,000 sq m for 2002 and 215,000 sq m for 2003 - roughly half the annual average for the period of 1996 to 2000. Mr Crispin says: 'We remain broadly positive about office demand for the coming two years with WTO and the continued comparative strength of the Chinese economy. We expect demand for new projects to be reasonable, provided they are offered at market rents.' The office rebound has slowed over the summer with limited increases seen during the third quarter and the first month of the fourth quarter. Some reports suggest that the majority of tenants are resisting higher rents and increasingly favouring decentralised locations such as Hongqiao over the expensive offers in core areas. According to Colliers Jardine, in contrast to the large-scale office expansions and upgrades that were common in 2000, the majority of multinationals have now turned to lease restructuring to address their office accommodation needs. Cushman & Wakefield estimated that net effective rents of prime grade A offices in Shanghai continued to pick up in October to an average of US$24.92 per sq m per year. Rents increased by 1.6 per cent in Hongqiao and 0.4 per cent in central Puxi area. Those in Lujiazui financial district remained unchanged. The consultant expects rental growth to moderate over the next 12 months. Few leasing activities were recorded in October, mainly due to the long National holiday and the APEC conference. Cushman & Wakefield say the deterioration in investors' confidence after the September 11 terrorist attacks is likely to result in slower business conditions, thus making tenants and purchasers more price sensitive.