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While readers are away on holiday, it seemed a good idea to cover some of the more technical aspects of the real estate market in Shanghai. My hope being, most people are away enjoying some more sensational stories from ¡®The Guardian¡¯ and ¡®Times¡¯ or the highbrow offerings from the ¡®Sun¡¯ and ¡®Daily Mail¡¯. Whatever their whim, let them read on and be merry. For those of you still in Shanghai, well, I hope at least you didn¡¯t miss the drama of the second Test Match.
If you have ever been stumped by the way real estate works out here, don¡¯t worry, you are in good company. However, and particularly for those new to the city, there are a number of essentials which should be considered and covered when dealing with an office lease in Shanghai.
Coming from the UK, one of the most important issues to be clear on is that, in Shanghai the areas of all office units are quoted gross ¨C rather than net. This means, if you¡¯re renting and paying for a 100sqm office, in reality the useable area will be around 70sqm (the net to gross ratio on average is about 65-70%). In the UK, unit sizes are quoted net ¨C you pay for what you get. Well, not quite.
There is some logic in the Shanghai approach; the gross area is calculated on the basis of your unit and its share of the public areas of the building ¨C WCs, passages, lift lobby, entrance lobby etc. Without these the unit wouldn¡¯t and couldn¡¯t function. But be aware of this is when planning your layouts.
Two interesting asides to this: (i) the effective price per sqm and (ii) comparable prices with other countries. If you are contrasting the relative merits and financial value of a unit, make sure you do so taking the net effective rent (i.e. total monthly rent divided by net area). This will often show that, some rents which appear low are actually rather higher than first appeared, when assesd on a useable net sqm basis.
The second, entirely unpractical issue are the oft quoted rental variations between cities around the world ¨C with London usually at the top. Well, it is expensive because it¡¯s such a marvellous city. However, unless the survey has allowed for London rents being quoted net and competing rents being quoted gross, then London rents will always appear about 30% higher than comparative cities.
A second issue, specifically for those companies setting up an operation here for the first time, is the Lessee Title. As a lease needs to be created prior to establishing the legal entity in China, this can create a catch-twenty two situation: the company actually entering into the lease is the head office back in the UK. To avoid complications at a later date, it is therefore advisable to specifically include a clause in the contract stating that the Lease interest will be transferred to the China registered company once it has been established. This may seem obvious but it is surprising how often I have heard of it not being done.
On another point, when dealing with renovations of the unit, the lease will quite correctly state tenants may not carry these out without the prior written approval of the landlord. This is normal fare. However, make sure the Lease also specifies that such permission ¡®may not be unreasonably withheld¡¯. (Omitted from the official Shanghai Government Issued leases). It¡¯s a small point, shouldn¡¯t cause problems, but is worth being covered on.
And finally, with the introduction of the new exchange rates for the RMB, there has been a slight shift in implication for Representative Offices (ROs), as these rely on FX transfers from the UK. Historically some landlords permitted rent payments (and sometimes even requested them) in US$ (which would now be to those Tenant¡¯s advantage). Landlords are now scrambling to ensure all rental payments are in RMB, even though most rents are quoted in US$. This is normal practice but it is worth checking your lease to determine exactly which currency rent is payable in. It is surprising how vague some leases have been on this. And close scrutiny might even give a well earned one-up on your landlord.
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