Friday 30 October 2009
Behind Lujiazui building boom is a promising future
New office towers continue to mushroom from construction sites all over Shanghai’s Lujiazui financial district and to the casual observer it would seem an oversupply disaster looms, with 450,000 square metres of new grade A office space expected to come on to the market in each of the next two years.
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Behind Lujiazui building boom is a promising future
Anthony Couse
28 October 2009
New office towers continue to mushroom from construction sites all over Shanghai’s Lujiazui financial district and to the casual observer it would seem an oversupply disaster looms, with 450,000 square metres of new grade A office space expected to come on to the market in each of the next two years.
Beneath the sea of cranes, however, a more promising picture is taking shape.
Recent en bloc purchases, development for self-use and leasing pre-commitments, it emerges, will take up fully 50 per cent of the upcoming space until the end of 2011.
Meanwhile, robust leasing demand from domestic financial services companies and provincial banks has helped to steadily take up recently completed office space.
Even the Shanghai World Financial Centre (Mori) is finally filling up with tenants.
This improvement in the market has, meanwhile, prompted a shift in landlord strategy and, since several landlords have started raising rents, we believe the market is forming a bottom with a return to steady increases likely next year.
The domestic financial sector has become dramatically more active in the Lujiazui market since earlier this year, when the central government announced the goal of making Shanghai a global financial centre by 2020.
New buildings such as the BEA Financial Centre, Mirae Asset and One Lujiazui have been filling up at a healthy clip as tenants upgrade from older grade A and grade B buildings nearby.
And while the buildings of the present steadily fill up, the towers of the future are already being claimed.
About 33 per cent of the space to be completed by the end of 2011 has already been purchased by domestic end-users or is widely expected to be bought up.
Another 14 per cent of the space, at a minimum, will go to domestic insurance companies for self-use and 3 per cent is committed by major tenants.
That demand will grow, as large tenants turn their focus from today’s increasingly fully occupied buildings to the future supply in order to find the big blocks of space they require.
At the end of the day, at least 50 per cent of the future space in the Lujiazui financial district will never hit the leasing market and in due course that could exceed 60 per cent.
The pressure on landlords to reduce rents has abated and many are grasping the opportunity to reverse the trend.
Global financial centre or not, Shanghai’s position as the mainland’s financial hub is assured.
Domestic banks are buying space to secure their name in Shanghai’s postcard skyline alongside global giants like HSBC and Citigroup, and the ready availability of onshore capital is enabling lenders to go ahead with purchases of large amounts of space in buildings originally slated for the leasing market.
For example, Agricultural Bank of China bought a 41-storey office tower that is part of the Citic Shipyard development.
The second tower will also go to a domestic end-user. Zhongrong Group sold more of Jasper Tower, with Shanghai Rural Commercial Bank acquiring 10 office floors and four retail units.
Now purchased, space in these buildings will no longer put pressure on the leasing market.
By the end of the year, rents will have bottomed in Lujiazui.
Effective rents paid by tenants will start increasing as rent-free periods are shortened, fit-out allowances are reduced and only more expensive high-zone floors are available.
With reduced levels of space entering the leasing market over the next two years, vacancy rates will fall, driving rents in Lujiazui higher and establishing a permanent rental premium over the Puxi market.
The changes taking place are part of the maturation process of the city as a whole and bring Shanghai’s financial district in line with its counterparts around the world where office space commands a premium.
Before the global economic crisis forced multinationals to freeze investment and headcount expansion, Puxi was the heart of the Shanghai office market. Today, the Puxi grade A office market remains highly dependent on demand from foreign companies and lags, while Pudong steps into its intended role as the mainland’s financial centre and capitalises on domestic demand.
No one is counting multinational corporations out of Shanghai’s future; quite the contrary as the pursuit of China’s growth becomes more important than ever. But until investments and headcount return, Puxi will underperform.
Lujiazui, in the midst of all of that construction, is emerging as the hottest area in Shanghai.
Anthony Couse is the managing director of Jones Lang LaSalle Shanghai
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