Investors look to tier-2 Chinese cities for a better office deal
Competition hots up as soaring prices and shortage of supply hit Shanghai and Beijing
Foreign funds have returned to the Shanghai real estate market in a big way, running up an unprecedented 12 billion yuan (HK$15 billion) in deals in the first five months of this year.
Most transactions were in the office sector, which saw its capitalisation rate - or rate of return based on the expected income that the offices will generate - driven to an historical low of 4-4.5 per cent; grade-A office prices have risen more than three times from an average price of 25,000 per square metres a decade ago. The prospect of rising rents and shortage of supply has driven the sector's cap rate down and will continue to keep it low.
New supply in tier-1 cities has lagged historical supply levels. According to DTZ, in Beijing, for example, the limited new supply of 283,957 square metres last year was equivalent to just 4 per cent of its existing stock.
Shanghai's new-supply-to- existing-stock ratio was 11 per cent. The implication of this is that in these major cities the supply shortage is set against strong demand from business expansion, resulting in exceptionally low availability of office space in these cities, thus boosting price growth.
Since 2004, office prices have risen 220 per cent in Shanghai, and 250 per cent in Beijing. There are also major gains in office prices in Shenzhen and Guangzhou. The sharp price rises in tier-1 cities have prompted investors to begin eyeing investment opportunities in tier-2 cities, where office prices are much cheaper.
Total investment in offices in second-tier cities rose 88.5 per cent quarter-on-quarter to US$29 billion in the fourth quarter last year, with deals accounting for 78.8 per cent of total investment volume.