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Strong expansion demand from foreign companies pushes up Grade-A rentals
June 2, 2011, Thursday
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DEMAND for office space on both sides of the Huangpu River has prompted landlords to raise rental prices in the first quarter of 2011. With more multinational companies executing their expansion plans in China, the growth looks set to continue for the rest of the year.
Continued demand from foreign companies in Puxi led to an increase in office rents of 8.8 percent quarter on quarter in the first quarter of 2011, the fastest quarterly increase since the same period in 2005. Multinational occupiers continue to implement expansion plans, fuelling confidence and pricing power among landlords.
An increasing number of multinational companies across all industries expanded as a result of a positive outlook for their China businesses. The rapidly growing China market compels them to make a significant investment in headcount.
The momentum of leasing demand remained strong in the early part of the year despite the Chinese New Year holiday. Net take-up in Puxi totaled 43,140 square meters, representing a nearly 80 percent increase compared with the same period one year earlier in the first quarter of 2010.
For example, Aecom committed to 6,300 square meters of space in Wheelock Square, expanding by approximately 60 percent from their previous office space.
Due to strong demand and the absence of new completions during this quarter, the Puxi vacancy rate dropped to 4.9 percent, 3.9 percentage points lower than the previous quarter and the lowest level since the second quarter of 2008.
Pudong growth
In Pudong, financial companies continued to be the dominant sector driving absorption in the market. Morgan Stanley leased 6,000 square meters in SWFC and 8,000 square meters in Kerry Parkside. In addition, foreign professional services and manufacturing companies were also actively expanding their presence in Lujiazui. For example, PricewaterhouseCoopers (PWC) expanded in-house in DBS Bank Tower by about 100 percent and took an additional 5,400 square meters of space while Fujitsu pre-leased 5,400 square meters in Taiping Finance Tower.
Meanwhile, the tight Central Business District (CBD) market and the widening rental differential between the CBD and decentralized areas together made decentralized options more popular.
Kerry Parkside reached a commitment rate of almost 50 percent before completion, and it will house many companies which were unable to find available expansion space in their current buildings in the CBD.
No new projects reached completion during the first quarter of 2011 in the CBD areas. With strong demand and no new supply, the market vacancy rate dropped to 5.6 percent. The majority of existing buildings on both sides of the river were full, with the available space mainly concentrated in a handful of recently built projects.
Two new projects in decentralized areas were completed in the quarter. Kerry Parkside, located near Pudong's New International Exhibition Center, added gloss floor area (GFA) of 88,732 square meters this quarter, helping to alleviate tight market conditions in Lujiazui.
In the Puxi decentralized market, City Point, located in the Zhongshan Road W. precinct in Changning District, was handed over, adding a total GFA of 40,000 square meters to the market.
Pricing power
As the market continued to tighten, a growing number of landlords began to take advantage of their strong position.
Robust expansion demand from multinational companies resulted in significant rental growth in Puxi, where average rents grew by 8.8 percent quarter on quarter in the first quarter of 2011 to reach 8.2 yuan (US$1.3) per square meter per day. This quarter's growth was, for the second consecutive quarter, the fastest quarterly growth rate observed since the first quarter of 2005.
In Pudong, average rents rose steadily by 3.7 percent quarter on quarter to 7.7 yuan per square meter per day. Rents in Premium Grade A buildings increased even faster, growing by 10.9 percent and 4.1 percent quarter on quarter in Puxi and Pudong, respectively.
Strong demand is expected to continue to drive strong rental growth throughout 2011, with an expected 20 percent rental increase in Puxi for the full year and 15 percent in Pudong.
In Puxi, more multinational occupiers are implementing their expansion plans, fuelling the confidence and pricing power of landlords of both existing buildings and new buildings.
Two upcoming quality projects in core locations, ICC (International Commerce Center) Phase I and Eco City are both receiving many inquiries from tenants that are unable to find additional space in current Grade A office buildings or that are upgrading from Grade B office buildings.
Meanwhile, many landlords of existing buildings are also receiving inquiries about in-house expansion. In Pudong, the delay of the China Merchants project to 2012, combined with a number of upcoming buildings targeting owner occupiers, means market conditions will be even tighter in Lujiazui this year than previously expected.
Approximately 53 percent of the new supply this year has been either pre-committed by owner occupiers (accounting for 43 percent of new space) or leasing occupiers (accounting for 10 percent of new space). This leaves a remaining lettable space of 260,000 square meters, which is basically the same as the average net take-up in Pudong for the past two years. As a result, the vacancy rate will remain low and rents are expected to continue rising.
(Jones Lang LaSalle Research)
Continued demand from foreign companies in Puxi led to an increase in office rents of 8.8 percent quarter on quarter in the first quarter of 2011, the fastest quarterly increase since the same period in 2005. Multinational occupiers continue to implement expansion plans, fuelling confidence and pricing power among landlords.
An increasing number of multinational companies across all industries expanded as a result of a positive outlook for their China businesses. The rapidly growing China market compels them to make a significant investment in headcount.
The momentum of leasing demand remained strong in the early part of the year despite the Chinese New Year holiday. Net take-up in Puxi totaled 43,140 square meters, representing a nearly 80 percent increase compared with the same period one year earlier in the first quarter of 2010.
For example, Aecom committed to 6,300 square meters of space in Wheelock Square, expanding by approximately 60 percent from their previous office space.
Due to strong demand and the absence of new completions during this quarter, the Puxi vacancy rate dropped to 4.9 percent, 3.9 percentage points lower than the previous quarter and the lowest level since the second quarter of 2008.
Pudong growth
In Pudong, financial companies continued to be the dominant sector driving absorption in the market. Morgan Stanley leased 6,000 square meters in SWFC and 8,000 square meters in Kerry Parkside. In addition, foreign professional services and manufacturing companies were also actively expanding their presence in Lujiazui. For example, PricewaterhouseCoopers (PWC) expanded in-house in DBS Bank Tower by about 100 percent and took an additional 5,400 square meters of space while Fujitsu pre-leased 5,400 square meters in Taiping Finance Tower.
Meanwhile, the tight Central Business District (CBD) market and the widening rental differential between the CBD and decentralized areas together made decentralized options more popular.
Kerry Parkside reached a commitment rate of almost 50 percent before completion, and it will house many companies which were unable to find available expansion space in their current buildings in the CBD.
No new projects reached completion during the first quarter of 2011 in the CBD areas. With strong demand and no new supply, the market vacancy rate dropped to 5.6 percent. The majority of existing buildings on both sides of the river were full, with the available space mainly concentrated in a handful of recently built projects.
Two new projects in decentralized areas were completed in the quarter. Kerry Parkside, located near Pudong's New International Exhibition Center, added gloss floor area (GFA) of 88,732 square meters this quarter, helping to alleviate tight market conditions in Lujiazui.
In the Puxi decentralized market, City Point, located in the Zhongshan Road W. precinct in Changning District, was handed over, adding a total GFA of 40,000 square meters to the market.
Pricing power
As the market continued to tighten, a growing number of landlords began to take advantage of their strong position.
Robust expansion demand from multinational companies resulted in significant rental growth in Puxi, where average rents grew by 8.8 percent quarter on quarter in the first quarter of 2011 to reach 8.2 yuan (US$1.3) per square meter per day. This quarter's growth was, for the second consecutive quarter, the fastest quarterly growth rate observed since the first quarter of 2005.
In Pudong, average rents rose steadily by 3.7 percent quarter on quarter to 7.7 yuan per square meter per day. Rents in Premium Grade A buildings increased even faster, growing by 10.9 percent and 4.1 percent quarter on quarter in Puxi and Pudong, respectively.
Strong demand is expected to continue to drive strong rental growth throughout 2011, with an expected 20 percent rental increase in Puxi for the full year and 15 percent in Pudong.
In Puxi, more multinational occupiers are implementing their expansion plans, fuelling the confidence and pricing power of landlords of both existing buildings and new buildings.
Two upcoming quality projects in core locations, ICC (International Commerce Center) Phase I and Eco City are both receiving many inquiries from tenants that are unable to find additional space in current Grade A office buildings or that are upgrading from Grade B office buildings.
Meanwhile, many landlords of existing buildings are also receiving inquiries about in-house expansion. In Pudong, the delay of the China Merchants project to 2012, combined with a number of upcoming buildings targeting owner occupiers, means market conditions will be even tighter in Lujiazui this year than previously expected.
Approximately 53 percent of the new supply this year has been either pre-committed by owner occupiers (accounting for 43 percent of new space) or leasing occupiers (accounting for 10 percent of new space). This leaves a remaining lettable space of 260,000 square meters, which is basically the same as the average net take-up in Pudong for the past two years. As a result, the vacancy rate will remain low and rents are expected to continue rising.
(Jones Lang LaSalle Research)
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