After a boom decade, Shanghai still needs room to grow

If the city continues to grow at this pace, its service sector is on track to overtake Hong Kong within two years

PUBLISHED : Tuesday, 05 July, 2016, 3:01pm
UPDATED : Monday, 18 July, 2016, 3:45pm

A decade ago, there were construction cranes everywhere in downtown Shanghai, and many market analysts were sounding alarms about overbuilding and predicted a downturn in the city’s office property market.

I had just arrived in the city to run Jones Lang LaSalle’s (now JLL’s) operations in eastern China.

As it turns out, despite a period when Pudong’s Lujiazui area reached 80 per cent vacancy, developers did not build enough offices in Shanghai, and Lujiazui is now close to 99 per cent occupied.

In the 10 years that I lived in Shanghai, the city’s stock of office space grew 200 per cent to more than 8.8 million square metres, according to JLL research.

This is quick expansion, but developers still have not kept pace with the city’s economy.

The service sector in Shanghai, which drives most of the demand for office space, has grown more than 3.5 times to reach 1.7 billion yuan last year, according to government figures.

If Shanghai continues to grow at this pace, the city’s service sector is on track to overtake Hong Kong within two years.

Despite this continuing rapid growth, observers are once again saying that Shanghai could be overbuilding as China’s economy slows from double-digit growth as recently as 2011 to about 6 per cent this year.

Even with China growing at a slower pace, however, the expansion of the service sector, particularly the development of financial services and the internet, will create demand for more offices in Shanghai.

Compared with 10 years ago, China is much more self-sufficient in services, and this change, along with the development of whole new sectors of the economy, is reflected in the companies occupying prime space in Shanghai.

Only in a fast-growth environment like China could an online finance spin-off of an internet start-up be leasing four floors of the world’s second-tallest building.

Unlike 10 years ago, where many projects relied on leasing grade A space to foreign companies, now there are local Chinese law firms leasing two or three floors each of premium-grade buildings in the downtown, just as local companies would do in other global centres. And these local companies will continue to drive future demand.

Only in a fast-growth environment like China could an online finance spin-off of an internet start-up be leasing four floors of the world’s second-tallest building

Much of the impetus for growth among local companies has been created by the freeing up of China’s financial sector. Beijing’s reform of restrictions on banks, insurers and other institutions has spurred the expansion of most of the companies that currently occupy Lujiazui’s office towers.

And that demand has driven rents in that financial district up to an average of 13 yuan per square metre per day.

With only 1 per cent vacancy in Lujiazui, Shanghai is facing a shortage of office space, and the city needs to be ready to have office capacity on a par with New York, London or Tokyo, if it expects to handle a similar volume of transactions as these financial centres.

Yet at the end of last year, Shanghai had 8.8 million sq metres of grade A office space for lease.

By comparison, JLL’s research shows New York had 65 million sq metres, London had 27 million and Hong Kong, where I lived and worked before moving to Shanghai, now has 11 million.

This does not mean Shanghai will be immune from the usual up and down cycles of real estate, but does demonstrate that the city’s office market is still in its infancy.

And this growth will mean the development of whole new areas of the city, thanks to Shanghai’s improving infrastructure.

When I moved to Shanghai, the city’s railway system had just five lines, and now the network is the largest in the world with 14 lines stretching more than 588 kilometres.

This rapid transit system means that a multinational corporation whose staff might have walked off if the company had relocated to Zhabei district 10 years ago can now relocate to a grade A building in that area, which is only five minutes by metro from West Nanjing Road in the city centre.

These “decentralised” business locations have been responsible for much of the expansion of Shanghai’s office market and will continue to become home to growing companies as the service economy expands.

Although I will not be a part of Shanghai’s everyday economy, now that I have relocated to Singapore, the expansion of Chinese companies beyond the country’s borders means that I will still be working with many of these same companies in my regional role, as the continued expansion of mainland companies sees them setting up operations in Hong Kong, Singapore and other global cities.

There is no denying that China is facing challenges, and that growth in the coming decade will be slower than it has been in the past 10 years. However, my time in China taught me not to underestimate the country’s potential for innovation and ability to overcome obstacles.

Even though I am no longer living in Shanghai full-time, I am looking forward to making frequent visits to the city and I do not doubt that, in another 10 years, the growth I see there will be far beyond any of our expectations.

Anthony Couse is JLL’s Asia-Pacific chief executive

This article has been amended to fix typographical errors