China office rents slip amid new projects

Seven of 16 cities tracked by the SCMP-DTZ China office rental index recorded a decline in the first quarter, plagued by the completion of new projects.

Among the eight that saw growth, two recorded an increase of below 1 per cent, with Guangzhou rising to 97.91 from 97.7 in the fourth quarter of last year and Dalian edging up to 103.7 from 102.84. Chengdu is the only city that saw no change in the index.

"The key reason for the downward trend in rents is the wave of new office projects that have recently entered these markets," said Andrew Ness, the head of research for China with DTZ.

"The office leasing market in Changsha provides the best example to demonstrate how new project launches have acted to drag average grade A rental levels downwards in some second-tier cities."

Changsha posted the sharpest rental fall among the cities on a quarterly basis in the first three months of the year at 6.4 per cent. In year-on-year terms, rents dropped 2.6 per cent.

The Wuyi area saw the launch of a project by Dalian Wanda Group in the quarter, which added 230,000 square metres of new space to the market. This led to a gain of nearly 51 per cent in grade A stock in Changsha.

In Shenyang, rents fell 4.9 per cent on the quarter and 6.4 per cent year on year. The annualised decline was the highest among the 16 cities.

On the positive side, Chongqing saw the highest quarterly rental growth at 5.2 per cent. Year on year, rents rose 7.8 per cent.

Rents in Xian increased 3.2 per cent quarter on quarter and 3.9 per cent from a year earlier.

In Shenzhen, rental growth remained positive in the quarter at 1.8 per cent quarter on quarter and 20.1 per cent from a year ago. The pace of gain had slowed as rents had begun to reach a high level, said Ness.

Shanghai was similar to Shenzhen in quarter-on-quarter terms with a rise of 1.8 per cent, but the annual growth rate was much more moderate at only 2.8 per cent.

As rents in first-tier cities have reached a high level, Ness expects rental growth to decelerate amid slower expansion in the economy.

The rental gap between inner-city business districts and suburbs of first-tier cities would also narrow, he said, while alternative office strategies, including taking advantage of co-working space and subletting to reduce occupancy cost, would become more common.