MARKET OVERVIEW
Office availability has remained generally stable over the quarter with the exception of smaller budget offices, where more second-hand stock was seen to come onto the market. Recent media focus has been on Pudong, where significant development activity and the opening of second offices by some of the leading agencies, presages more activity over the coming year as the market anticipates a large influx of foreign financial firms post China¡¯s opening of its financial services industry. However, we don¡¯t anticipate the level of rents being asked in new buildings in Pudong will be sustainable over the next 2-3 years. Smaller and medium sized offices in the downtown area being sold on gross yields of 7.0% and offer excellent opportunities to hedge against projected future rental inflation.
LARGER OFFICES
There was a rise in the availability of 300-500sqm offices through the quarter, up to 58. Availability of this stock was reasonably evenly spread, with 17 units in the RMB3.0-4.00/sqm/day range (i.e. mid-range Grade-B office towers) and a further 21 units available under RMB5.5/sqm/day. Excluding new developments, the more established Grade-A office towers showed a modest increase in units availability with 11 units in the 400-500sqm range. However, this shortage continues to be offset by pre-leasing in the new developments such as Plaza 66, Donghai Plaza and Park Place.
MEDIUM OFFICES
The number of units in the 200-300sqm remained broadly stable quarter-on-quarter with 48 available as of March. There were some 22 units available below RMB4.0/sqm/day rental bracket and a modest rise to 26 units available between RMB4.0-8.0/sqm/day. Ben Ben Mansion continues to provide attractive alternatives for clients looking for newly completed offices in this size range, with rents starting at just RMB4.8/sqm/day. Good value second hand buildings include Jin Hang Building also at RMB4.8/sqm/day and Jian Jing Mansion on Beijing Rd. with offices from RMB2.5/sqm/day.
SMALLER OFFICES
Availability of smaller units in the sub 200sqm range rose from 131 at the end of December to 155 in March. Distribution remained broadly constant with 70 units at the budget end in the sub RMB4.0/sqm/day range and a further 21 units available under RMB5.5/sqm/day. We found only 10 units available for above RMB7.0/sqm/day. Again much of this stock might not be suited to the majority of international companies, however it continues to have two important functions. The first, is obviously provision of budget offices and secondly, helping to trim rent rises in medium quality office buildings.
ALTERNATIVE OFFICES
One of the large international advertising companies secured 3,500sqm of studio style offices on Suzhou Creek last quarter, thus continuing the trend of more established companies locating in alternative locations. A number of new developments have continued to come onto the market, including a stunning 2,700sqm stand alone historic warehouse on Suzhou Creek and some interesting spaces in Jing¡¯An including an Art Deco style warehouse and a 1,700sqm stand alone historic building with warehouse style annex. Both of which continue to attract attention from local and international tenants.
Much like China¡¯s stock market, we expect a period of volatility in rents this year but with a general upward trend. Pudong will probably offer the best value for occupiers of new buildings, although we believe rents may not be sustainable there over a 2-3 year time frame. For those companies established in the Shanghai market, we strongly recommend you consider purchasing your office as a long term investment against rental inflation and short lease terms. The smaller and medium sized office ownership market remains relatively undeveloped and currently offers attractive opportunities.
