The great mall of China
Premium retail and office space in Beijing and Shanghai is going upscale despite the downturn, says Lucy Davis
"Jones Lang LaSalle predicts that in the next three years, over one-third of the new supply entering Shanghai’s Central Business District (totalling over 13 million square foot) will be marketed as Premium Grade A"
Residential property prices and development may have stalled in the Middle Kingdom, but the commercial sector remains in good health, with both the retail and office markets continuing to show promise in spite of the global economic downturn. Shanghai is a case in point, where Grade A retail in particular remains a bright spot, with high demand and limited space attributing to sustained rental growth.
However, according to a recent report by Jones Lang LaSalle (JLL), Shanghai’s retail market has slipped somewhat as a whole, and in the face of larger supply against slackened demand, vacancy levels have increased to 9.8 percent, the highest since 2004. Landlords have faced pressure on leasing, and more flexible terms are being offered by some. Nevertheless, demand is still high for Shanghai’s hottest precincts and as a result, landlords at this end of the market hold strong negotiating power over would-be tenants.
With limited Grade A space available, landlords have been successful in upgrading the overall image of Shanghai’s existing shopping malls by replacing middle market brands with high-end and luxury brands. Marc Jacobs, for example, has taken up a recently expired lease in CITIC Square, Nanjing Road West.
It is not just Shanghai’s malls that are going upscale: Huaihai Road in Nanjing is also repositioning itself as a high-end shopping destination. One major change sponsored by the district government is the adjustment of the tenant-mix of street-side shops, and these stores will also be rearranged to create a more attractive shopping environment. Dunhill and Vacheron Constantin have recently leased street-front stores, and Huaihai Road 796, a restored historic building, is sure to boost the area’s image further.
As with retail space, Shanghai’s office vacancy rate is expected to go up progressively as the supply-demand imbalance reverts to excess supply. That said, according to a recent report by Colliers, office rentals remain stable at RMB3 (HK$3) square foot per day, and rental of Grade A offices along Nanjing Road West in Jing’an is steady at RMB4 per square foot per day.
According to Colliers, the recent completion of four projects located in Pudong and Jing’an has added 4,681,225 square foot to the supply of Grade A office space, half of which came from the Shanghai World Financial Center (SWFC) in Lujiazui, Shanghai’s latest landmark. Mirae Asset Tower in Lujiazui and China Fortune Tower in Zhuyuan have also just come up, as has The Exchange in Jing’an.
JLL reports that, with an additional 32 million square foot of Grade A office space coming on stream by 2011, not all Grade A buildings will appeal equally to each of Shanghai’s diverse tenant groups. The group predicts that in the next three years, over one-third of the new supply entering Shanghai’s Central Business District (totalling over 13 million square foot) will therefore be marketed as Premium Grade A. JLL also predicts that Shanghai’s Premium Grade A market is set to enter a new period of rapid development.
Unlike in Shanghai, lack of supply in Beijing remains an issue for would-be office tenants. Due to the temporary restrictions imposed by the local government, aimed at creating a greener environment for the Olympics, Beijing’s office space sector only received modest new supply during the first half of 2008. Driven by the expansion and relocation activity of many multi-national companies and large-scale domestic enterprises, the second quarter therefore continued to see strong demand in the office leasing sector. According to Colliers, while the overall vacancy rate decreased significantly this quarter, the overall asking rental increased to RMB57 per square foot per month, up 1.62 percent quarter on quarter.
While the office sector hasn’t experienced much growth over 2008, several new malls of note have opened in the city this year, including Beijing APM in Wangfujing, Joy City in Xidan and Chaowai SoHo in the Central Business District. The huge upsurge in supply looks set to continue into next year, when 13 shopping centres with a total area of almost 9 million square foot are slated for completion.
According to Colliers, tenants continue to shell out more on rent, however, and the average ground floor rent of mid- to high-end shopping centres in Beijing was approximately RMB239 per square foot per month, up 8.48 percent quarter on quarter.
As Beijing’s residents’ GDP per capita is set to exceed US$8,000 (HK$62,000) by the end of 2008 - putting living standards on a par with that of middle developed countries around the world - demand for luxe consumer goods continues to increase. Both Gucci and Cartier are planning to expand in the Chinese capital.
Beijing and Shanghai’s office and retail space, it seems, is going luxe, and that’s a sound idea - assuming affluent mainlanders can ride out the economic crisis.
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