Domestic demand shores up rents in top cities

Needs of state-owned and smaller firms are helping to stabilise the mainland office market

PUBLISHED : Saturday, 02 November, 2013, 3:14am
UPDATED : Saturday, 02 November, 2013, 3:14am

Office rents have shown signs of stabilising in top-tier mainland cities after falling in recent quarters, thanks to support from domestic demand.

Analysts said demand from multinational companies was unlikely to pick up in the medium term as most of them had put expansion plans on hold due to an uncertain economic outlook.

Marcos Chan, the head of China office research at Jones Lang LaSalle, said almost all tier-one cities were facing slow demand from multinational companies, especially those in the finance sector, as they held off on setting up new offices or expanding existing ones. "In Beijing, some multinational tenants even want to forfeit part of their space to landlords," he said.

But increased demand from state-owned enterprises and smaller local companies had helped stabilise rental performance, Chan said. "Even though we will not see a sudden increase in demand to push up rents, office rents do not face downward pressure."

Concerns about the outlook for the office market were heightened after Cheung Kong and Hutchison Whampoa, both controlled by Li Ka-shing, sold three office buildings - one in Shenzhen, one in Guangzhou and one in Pudong, Shanghai - for a total of 12.8 billion yuan (HK$16.2 billion).

Wang Shi, the chairman of China Vanke, the mainland's biggest developer by market value, warned in September on his microblog about potential investment risks in the real estate market in the wake of Li's asset sales.

Thomas Lam, the head of research and consultancy for Greater China at Knight Frank, said: "Ways to cash out or exit are limited in China. It might be a good time to guarantee the profit and then the company could look for other relatively attractive investment opportunities in other regions, say in Europe or the US."

Chan said the sale of assets by the two companies did not reflect a pessimistic outlook for the office sector, with rents for space in Shanghai, Shenzhen and Guangzhou - which had been falling since the middle of last year - now starting to stabilise.

"We may continue to see some rental decline in Beijing office rents, but the fall has been narrowing down," he said, adding that Beijing had previously seen three years of continued growth in office rents. "We have seen increasing inquiries in Shanghai in the third quarter."

Companies that were previously in wait-and-see mode are now more confident and have put expansion plans back on the agenda, according to Jones Lang LaSalle.

With no new supply for four consecutive quarters, the vacancy rate in Pudong has dropped to 4.1 per cent. Underpinned by both strong demand from domestic tenants and the very limited available space, landlords had strong bargaining power and continued to increase rents, it said.

Rents in Guangzhou rose 2 per cent in the first half of this year and those in Shenzhen increased 3.5 per cent, property consultants said, adding that the outlook remained stable.