Pudong escapes slump in market

Chinese cities weather property storm as vacancies climb above 30pc

Thanks to the Shanghai free-trade zone, the city's business district is attracting financial companies, fuelling the demand for space

The mainland office market has been caught in a property storm with vacancy rates exceeding 30 per cent, but Pudong, in Shanghai, still enjoys a glint of sunshine.

In the core area of Pudong, vacancy was 2.6 per cent in the third quarter, much lower than the rates for its Puxi counterparts - Nanjing West Road and Huaihai Road - as well as those of other major cities, according to property consultant CBRE.

Pudong also set the pace in rental growth, with gains of 7 per cent since the beginning of the year.

The development of the free-trade zone indirectly helped draw financial companies to Pudong, analysts said.

"We have not seen any major new supply of quality office buildings in Pudong over the past two years," said Sam Xie, a senior director at CBRE Research.

According to CBRE, the market saw a supply of 40,000 sq metres since the beginning of the year, but the average annual demand is about 150,000 to 200,000 sq metres.

Pudong includes the Lujiazui financial district. It is also where the Shanghai free-trade zone is located. The zone is to serve as a testing ground for the nation's further economic liberalisation.

The 28.78 sq km free-trade zone covers the Waigaoqiao free-trade zone, Waigaoqiao bonded logistics park, Yangshan free-trade port tax area, and the Pudong airport free-trade zone.

The development of the Shanghai free-trade zone appears to have accelerated recently, as evidenced by the recent announcement which targets the relaxation of entry barriers for corporations wanting to register in the zone, according to Credit Suisse's recent research report.

Xie said the regulatory framework was getting clear and its progress had been accelerating recently with a number of regulations during the third quarter.

For instance, in July, customs regulations were relaxed for companies registered in the zone, allowing them to declare goods at customs anywhere in the country.

About 12,000 firms have established in the zone since its launch in September last year, according to government data.

The positive office market performance in Pudong comes against the backdrop of other cities facing abundant supply and high vacancies.

Major cities saw office vacancy rates of more than 15 per cent, with Changsha, in Hunan province, reaching 33 per cent, the report showed.

However, Xie said there was no evidence to prove that the rise in registrations in the free-trade zone had directly resulted in strong demand for office space.

But what was certain was that it indirectly attracted companies from different sectors such as financial companies to nearby area such as Lujiazui in anticipation for the zone's future growth potential, he said. That made the district's performance better than elsewhere.

The vacancy rate in Puxi is 7.9 per cent but Pudong's was only 2.6 per cent at the end of the third quarter, according to CBRE.

James Shepherd, the head of research for Greater China at Cushman & Wakefield, said Beijing also experienced low vacancy rates and rental growth, but Pudong performed better.

Shepherd said the impact of the free-trade zone's development on the overall Shanghai market was minimal.

He said rental growth would be offset by traditional districts where there was sufficient supply.

According to Cushman & Wakefield, the average grade A vacancy rate in the Shanghai central business district edged up 0.9 percentage point on the quarter to 6.8 per cent in the third quarter.

Credit Suisse said the vacancy rate in Pudong would be significantly lower than Shanghai's overall rate at less than 5 per cent until 2017. Rents in Pudong will see annual growth of 5 per cent from now until 2016.

Shepherd expected to see continuous direct impact on the four areas included in the zone.

Cushman & Wakefield's research indicates that as of June, office rents in Waigaoqiao had risen to between four yuan (HK$5) and eight yuan per square metre per day, depending on the size and use of the office, since the proposed free-trade zone was announced in July last year. Given the rate of two to three per square metre a day before the announcement, this represented a doubling of rents.

This article appeared in the South China Morning Post print edition as: Pudong escapes slump in market