China property

How Shanghai Tower has paid the price of China’s quest for height

The world’s second-tallest building has failed to attract big multinationals to set up their offices and was reportedly half empty until this year

PUBLISHED : Saturday, 19 May, 2018, 8:34am
UPDATED : Saturday, 19 May, 2018, 4:01pm

Twisting more than 600 metres into the sky like a giant corkscrew, Shanghai Tower is not just a remarkable feat of engineering but a symbol of the city’s rise to become one of the planet’s major financial hubs.

A testament to lofty ambition it may be, but until recently the glossy facade of China’s tallest building hid an interior that was by most estimates half empty. And those floors that were occupied were reportedly leased almost exclusively to domestic companies.

The big multinationals the tower had originally sought to attract were nowhere to be seen.

Since the beginning of 2018 – four years after the last beam was placed atop the building – there has finally been a surge in occupancy as more local businesses attracted by the tower’s status value entered lease agreements, hoping their prestigious address would impress clients and give them the right image.

But that has only taken the occupancy rate to about 80 per cent, and global conglomerates are still few and far between.

Some observers believe the Shanghai Tower’s failure to act as a magnet for large multinational firms, and its generally low occupancy rates, stem from the inevitable inefficiencies of a government-led vanity project. The sheer size and complexity of such an ambitious venture would have required the project management expertise of a private developer is the commonly held view.

But with so much at stake in a world where a financial centre’s reputation is often closely linked to the height of its tallest skyscraper, such an important undertaking was never going to be placed in the hands of the private sector.

It was built at a cost of 20 billion yuan (US$3.14 billion) by Shanghai Tower & Construction Development, a subsidiary of the Shanghai Municipal Investment (Group), who have never formally announced an opening date or held an inauguration ceremony.

The elevators and observation deck started operating in April 2016 and some retail and entertainment facilities were up and running by the end of that year. The building welcomed its first office tenants in 2017.

The slow take-up of space appears to be at least partially down to bureaucratic delays, while architectural deficiencies may help explain the lack of appeal for foreign firms.

The tower’s energy-efficient spiral shell, which lets in natural light and saves on air-conditioning costs, has come at the expense of an efficient interior design, forcing tenants to pay for space they cannot use, according to some experts.

Three professionals in the property industry who have business connections with the tower told the Post that this gap between the area actually used by tenants and the space they are charged rent for is enough to deter many overseas companies thinking of setting up in Shanghai Tower. Office rents range from 17 yuan (US$2.68) to 26 yuan per square metre per day, a lofty rate in the mainland’s commercial capital.

The skyscraper had been expected to open in mid-2015, but long delays were caused by the lengthy certification processes of the city’s safety watchdogs, such as the fire department.

The six-star J Hotel is hoping to open what it claims would be the world’s highest hotel, stretching 27 floors up to the 110th storey of the tower, by the end of the year. But a senior executive with the hotel’s operator, Jin Jiang International Hotel Management, said the necessary safety approval has still not been issued.

The city’s lack of experience and facilities for handling fires at such a height were the major stumbling blocks for the hotel to obtain an operating license from the local authorities, said the executive, who wished to remain anonymous.

Red tape has continued to stand between the tower and potential tenants.

Indeed, the rise in occupancy this year only happened when multiple office storeys finally got the go-ahead from the authorities to start operating, giving the sales teams a free hand to canvas new tenants.

In the absence of interest from overseas firms, they’ve mainly targeted home-grown companies with ambitions of internationalising their businesses. Their main selling point has been Shanghai Tower’s appeal as a status symbol.

“The prime location and the symbolic value of the tower remain attractive to [local] companies that seek to promote their brand awareness and expand businesses,” said Timothy Chen, research director for the eastern China branch of property services firm Colliers International.

The 632-metre building is in Lujiazui finance and trade zone in Pudong, dubbed China’s Wall Street, dominating the skyline sky along with two other super-tall skyscrapers – Jin Mao Tower and Shanghai World Financial Centre – providing a dramatic backdrop to photos by thousands of tourists each day.

The developer would not provide a detailed list of the tenants, but Chinese businesses rather than multinational companies appear to dominate, according to an incomplete list and an on-site check by the South China Morning Post. Exceptions to the rule include Lloyds and Fitch Ratings.

Allbright is one of several domestic law firms that occupy a portion of the skyscraper’s 220,000 square metres of office space. Others include Dentons and Joint-Win Partners.

“The office plays a role in enhancing the image of the law firms and the lawyers,” said Maggie Wang, a partner with Allbright. “A landmark building and world-class architectural designs at Lujiazui helps impress upon the clients that this is a reputable law firm worthy of their trust.”

Ant Financial Services, an affiliate of e-commerce giant Alibaba Group Holding, is one of the largest tenants with a lease on about 20,000 square metres of office space.

A clutch of financial services firms controlled by Shanxi’s provincial government occupy a whole floor of the tower, while Jiangsu-based Heilan Group, a clothing manufacturer, Tibet Trust Corp, Yiwu Rural Commercial Bank and Huajin Securities are among other tenants.

Shanghai Tower has 128 floors plus five basement levels, encompassing retail, office, hotel and entertainment spaces.

The skyscraper, second only to Dubai’s Burj Khalifa by height, is the tallest in China where about half of the world’s super-tall buildings – those of at least 150 metres in height – are currently under construction.

Why companies are turning away from offices in Shanghai’s main business areas

The rents at Shanghai Tower represent nearly a 50 per cent premium to grade-A office buildings in the city’s older, more established business zones such as Nanjing Road.

Rents near the Bank of Shanghai Centre in Lujiazui, which range from 10 to 14 yuan per square metre per day, are low enough to tempt many corporate tenants away from the super-tall tower, said the property industry professionals.

It was reported last year that the skyscraper’s office space had only a 50 per cent occupancy rate, a startling statistic confirmed by sources who recently spoke to the Post.

At that time, about 28 entire floors were vacant, according to The Financial Review.

But the occupancy rate started to pick up rapidly at the beginning of this year, hitting about 80 per cent now, according to an official with the developer and two sources with knowledge of the matter.

The retail and food segments are lagging behind the office space in canvassing tenants.

The food and beverage part is at about 40 per cent occupancy, though an official with the developer said leases on most of the spaces have been signed.

Over the past decade, Shanghai’s ambitions have known no bounds as it aimed to transform into an international hub of finance, commerce, shipping and innovation.

Shanghai steps up efforts to attract technology businesses, boost innovation

The city’s free-trade zone, launched in 2013, was supposed to be a free marketplace on a par with Hong Kong, where free cross-border fund and commodity flows are allowed.

Buoyed by a construction boom of grade-A office buildings in Shanghai, the mainland’s most developed metropolis is set to overtake Hong Kong as the country’s biggest office market by 2020, according to research by property service firms.