The frequent headlines about falling house prices in China could lead an observer to the conclusion that the country’s property market is in trouble. Yet, in the office sector, nothing could be further from the truth.
Years of price rises have made office rents in Beijing more expensive than in midtown Manhattan.
Having risen 75 per cent last year, occupancy costs in downtown Beijing are $1,082 a square metre for a year, compared with $992 in New York, according to a survey by Cushman and Wakefield, a commercial property services company.
While costs elsewhere in China are lower, the trend has been similar. From the financial centre of Shanghai to cities such as Chengdu in the west, office rents have been soaring.
A big rise in demand and a shortage in supply have fuelled the rises.
With more offices now being built and the economy beginning to slow, the galloping market may calm down a little this year. But few in the industry are prepared to call its top yet.
“We still think it’s going to be very healthy,” says Alastair Hughes, Asia-Pacific chief executive for Jones Lang LaSalle, a property consultancy.
There was net absorption of about 34m sq ft of “grade A” office space across China last year, according to Mr Hughes.
He forecast a take-up of 25m sq ft this year, down from 2011 but still extremely strong by international standards.
What has perhaps been even more remarkable about the expanding office market has been the environment in which it has happened.
Housing prices have started to fall across the nation after an aggressive government campaign to bring them down.
Officials had been concerned that homes were becoming unaffordable and that too many blocks of apartments were being built.
But the government has refrained from applying its tightening measures to commercial property: in effect, it has given developers a big nudge to shift their focus to offices.
“It has been a story of two sectors,” Mr Hughes says.
The most important shift in the office market has been the nationality of the tenants.
Foreign companies used to account for about 60 per cent of new lettings of Shanghai’s top commercial properties. The remaining 40 per cent went to domestic companies. That ratio flipped last year.
Domestic tenants took 60 per cent of new office lettings, according to Savills, the international estate agency.
Another important change, though still in its infancy, has been developers’ growing attention to detail in their planning.
With labour and energy costs going up, it is becoming more costly to run buildings. Construction is also becoming more expensive, as raw material costs rise.
“It used to be ‘I want my project done yesterday’,” says Mark Budden, a partner at EC Harris, a built asset consultancy.
“Now, rather than reactively knocking up a skyscraper or a business park, people are thinking more strategically and for the longer term.”
Amid the bullishness, there are also some warning signs.
All property markets are prone to boom-and-bust cycles. The peaks and troughs can be especially sharp in a fast-growing country such as China, where demand is hard to predict.
Three years ago, the office vacancy rate in Beijing was more than 20 per cent, with many empty buildings. The rate has now dropped to about 9 per cent.
The recovery from the doldrums of 2009 has been impressive, but some worry that the comedown from the current highs will be painful.
China’s second-tier and third-tier cities – that is, the dozens of places with populations from 1m to 10m – have been particularly aggressive in building industrial and commercial zones to lure large companies.
Mr Budden says: “There is a lot of speculative development going on in lots of cities and there is a real sense of urgency in terms of one second-tier city after another trying to attract big-name clients into their offices.”
Wuhan in the central province of Hubei is an example of one that has been successful. It has transformed itself into a hub for pharmaceutical companies.
But others are struggling to realise their ambitions.
Tianjin, just east of Beijing, has set out to build the world’s biggest financial centre by area. So far it has attracted just a sprinkling of bank branches and private equity firms.
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