Better City, Better Life, Better Office Space

Shanghai Expo 2010 marks a new era for office market

Issue: May 2010

Shanghai Expo 2010 – New Era for Office Market

Shanghai will open its arms to the world as the host of the World Expo 2010 from 1 May. Over a six-month period (from May to October), an estimated 70 million visitors from around the world will experience the cutting-edge urban development concepts, new lifestyle and working solutions in new century. This event, themed as “Better City, Better Life”, is expected to have a positive impact on Shanghai and will transform its real estate market landscape in the long run, especially the office market.

However, in the short term, Shanghai office market faces some challenges, with about 21 million square feet of prime office space in the pipeline over the next few years. But thanks to the World Expo 2010, Shanghai could take this opportunity to demonstrate its image of a good city to the world. Coupled with China’s solid economic growth expected in 2010, more MNCs and domestic companies will be attracted to set up offices in Shanghai for their business ventures in the region, which would boost office demand in Shanghai.

With the improvement of infrastructure, the development of Shanghai into an International Financial Centre by 2020 and the emergence of decentralized office space, Shanghai prime office market will become more vibrant in the post-Expo era.

Improvement of infrastructure

An Expo alone cannot change the status of a city, but it can act as a catalyst that will accelerate a transformation process that has been previously put into motion, including infrastructure improvement and tourist promotion. An estimated USD $45 billion is being invested in Shanghai Expo, most of which is in the city’s infrastructure development. The build-out of the metro network leading up to the World Expo 2010 is the largest urban improvement in Shanghai’s history. Chart 1 shows Shanghai’s metro line blueprint in 2010. The metro network will serve nearly 5 million people daily by 2010.

New commercial hubs are emerging at some strategic areas along the expanded metro system and close to the established CBD, which will offer attractive alternatives to tenants located in the CBD. Eventually, the CBD area will expand to cover those strategic commercial hubs and become a larger CBD. One such example is Zhuyuan area which acts as a major interchange for four lines (line 2, 4, 6 and 9). It merged with Little Lujiazui CBD and became a prime office area with the presence of some global and domestic banks and SOEs.

Chart 1: Metro Lines in Shanghai

Metro Lines in Shanghai
Source: JLL

In March 2009, the Central Government announced a policy initiative to develop Shanghai into an international financial centre. The plan is to develop a multifunctional and multilayer financial market in Shanghai with the introduction of more financial products, instruments, derivatives and futures. Foreign companies will be allowed to list in Shanghai and they will be permitted to issue RMB-denominated bonds. With these incentives, the financial and business service sector will become an important economic driver for Shanghai (Chart 2) in the next ten years. More international financial companies will then set up regional headquarters in Shanghai, which will boost Grade A office demand in the medium and long term.

Colliers predicts that Shanghai’s International Financial Centre is likely to generate about 15 million square feet of new prime office demand from various financial institutions. Banks, insurance and securities companies constitute about 65% of the new demand. Brokerages, asset management companies and private equity funds will account for another 20% of the new space while the remaining 15% will be taken by business service companies.

Chart 2: Financial Added Value in Shanghai and Hong Kong

Financial Added Value in Shanghai and Hong Kong
Source: Colliers

Emergence of decentralised office space

The emergence of decentralized prime office space is a natural next step in the evolution of Shanghai’s maturing office market. The extension and upgrading of the metro line system for World Expo have created a platform for the decentralisation. For example, Metro line 2 (one of the most important lines in the city connecting Pudong and Puxi) will run from the east to the west , from Xujingdong to Pudong Airport, passing through Shanghai’s inner CBD, outer CBD and suburban office area.

Over the next few years, a decentralized prime office market will emerge in Shanghai, providing tenants with flexible and lower-cost options and proximity to CBD. Projects in the decentralized prime office market represent the first generation of Grade A quality space outside the CBD and offer high-quality specifications catering for large multinational occupiers. According to Chart 3, decentralized prime office space in Shanghai is expected to grow to 19 million square feet, about five to six times that of 2009’s total Shanghai office stock.

Chart 3: Decentralized Prime Office Space Stock (2006-2013)

Decentralized Prime Office Space Stock
Source: JLL

In summary, Shanghai’s prime office market will enter a new era with the World Expo 2010. Significant improvements to infrastructure, especially the metro network, is one of the key drivers. Owing to rapid and efficient metro network, decentralized office space will play a role in the city’s real estate market in the next few years. The plan of developing Shanghai into an “International Financial Centre by 2020” will also make prime office market more vibrant and attract higher quality tenants like international and domestic banks, as well as insurance companies in the near future.

Article contributed by Dr Boaz Boon and Neo Poh Har of CapitaLand’s research team

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