Office Demand In Shanghai Free Trade ZoneAfter the Shanghai Free-Trade Zone (FTZ) was inaugurated in September, increasing numbers of companies, mainly small-to middle-sized and domestically-funded ones, are rushing to register in the zone, triggering a sharp rise in both buying and leasing demand for office space over the past few months.

According to the official from the administrative committee of the FTZ, more than 1,400 companies have granted licenses to operate in the new zone, with over 6,000 companies still waiting for approval. Most of the new entrants of the zone were small-and medium-sized local companies, with an average registered capital of RMB 25 million. Foreign-funded companies comparatively are of bigger sizes, with an average registered capital of over RMB 91 million, but they only account for a fraction of less than 3% of the total new companies(14 of which are from Hong Kong).

Fuelled by a surge of demand from these new companies, office rents in the FTZ have experienced a period of rapid growth over the past few months. In some office buildings with better quality specifications, rents have grown nearly a double to RMB 120 per square meter per month, up from less than RMB60 per month early this year.

The surge of office rents is also attributed to a lack of office supply. Prior to the launch of the FTZ, office development was not commercially viable to developers due to remote location and a lack of amenities and infrastructure. In which, Yangshan Zone was a port area specialising in shipping and trading, while Pudong Airport Zone was mainly for aviation supporting services including distribution and aircraft leasing. The shortage of office space is especially acute in Waigaoqiao Free -Trade Zone, which is poised to be the core business center of the FTZ. The zone was designed to focus on logistics and value-added industries and is largely occupied by industrial buildings and warehouses. Most of the office buildings in the Zone are mid-class developments built in 2000s, including Tomson International Trade Building, 3UDC, Shanghai International Communication & Trade Building, with rents ranging from RMB 40 to RMB 60 per square meter per month.

The continuous influx of new entrants has also stimulated developers’ appetite for commercial land plots. 70% of land has been assigned for industrial use, making remaining 30% available land a highly sought-after asset in the eyes of developers. Land prices have been going up after the launch of the Zone. For instance, the auction for a commercial land plot located at Meisheng Road received overwhelming response in October. The land plot was finally sold after 81 rounds of bidding for RMB 230 million – 91.67% higher than the starting price. On the other hand, an industrial land plot in the Zone was also sold at a price 109% higher than the starting price in November.

Looking ahead, Grade A office space will remain in great demand as more companies will enter the FTZ in the future, especially for small-and middle-sized office units which are favoured by new entrants mostly SMEs. On the supply side, office shortage is expected to remain in the near future as it would take years before new supply comes onto the market.