The Shanghai Office Market Gains Traction


Prices for office space in Shanghai remained relatively strong last year. Due to a train of newly completed office spaces, which has created more supply in the market, the total floor space sold plunged more than half year-on-year to just 1,324,000 square metres in the first eleven months of 2017. Spurred on by a stable economic outlook and profitability potential, Shanghai office transactions are likely to remain on the uptrend.

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On the supply front, there were at least nine new office buildings, covering a total of 832,000 square metres, being launched in the core business district; this is significantly higher than the annual market absorption amount of approximately 400,000 square metres during 2011 to 2016. The nine new commercial projects include Shanghai Tower in Pudong’s Lujiazui, SOHO Tianshan Plaza in Puxi’s Changning, Bund Finance Centre S1 and S2 in Huangpu, Yueshang Tower in Jing’an, and Phase 1 of International Trade Centre in Xujiahui, among others.

In terms of demand, investment sentiment has been strong due to solid demand from domestic and foreign enterprises. Jiang’an’s Garden Square recorded RMB 9.25 billion worth of transactions and 50% stake of Bund Finance Centre in Huangpu was transacted in the first quarter of 2017. Other significant transactions recorded during the year included SOHO Hongkou in the North Bund commercial area by Keppel, Alpha Management and Allianz Insurance, and CITIC Capital’s purchase of Huiyin Building in Jing’an for RMB 1.58 billion, which is equivalent to RMB 75,602 per square metre.

Driven by regulators’ capital outflow controls and a stable gross yield of close to 5%, sentiment in office purchase is expected to continue for another year. We see a rising demand in Shanghai office space in core areas, mostly from domestic financial services, professional services, and IT-related firms, as well as relocating headquarters relocating in some state-owned enterprises upon their respective consolidation. Meanwhile, a proportion of property owners have shown an interest in office sales to cut debt or reposition their investment assets. Nonetheless, on the risk font, both the rental rate and capital value could be pulled down by a slower-than-expected growth in the domestic market.

In the leasing market, the year ended with an overall office vacancy at a double-digit level after a surplus of office completion last year. Vacancy in decentralised areas remain high, despite some cost-sensitive companies such as multinational manufacturers that have relocated to these areas. Due to an ample amount of supply, it will continue to exert pressure on growing the rental sector, though the supply of new office space may have already peaked.

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