Shenzhen sees biggest rental increase in Q3

Shenzhen's high-end office market recorded the highest overall rental increase at 17 percent in the third quarter, driven by the strong demand from Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, an office index showed on Wednesday.

China Business Office Building Index, released by the China Real Estate Association with technical support by international real estate consultant company DTZ, analyzes high-end office market performance across 16 cities in the country.

Beijing, Shenzhen and Nanjing were all classified as category 1 cities in the third quarter, as they attained highest index scores of office market competitiveness. Category 1 cities were those which in the office leasing market are most robust, from a landlord's point of view, the report said.

"This was basically due to the fact that these three cities displayed the lowest vacancy and highest absorption rate amongst the markets surveyed. However, factors which underpinned this strong leasing market performance varied considerably between them," said Andrew Ness, head of research of DTZ North Asia.

Among the Category 1 ranking cities, Beijing is the only one which has recently displayed consistently tight availability, with availability not exceeding 4 percent during the past four years.

Beijing's tight vacancy and strong demand are attributable to the fact that for the past several years, Beijing has witnessed consistently high expansionary requirements on the part of finance, TMT and professional services occupiers, with faster absorption speed.

In Shenzhen, where the performance of the local high-end office market was less than vibrant as recently as the first quarter of 2014, the market experienced a sudden turnaround in the second quarter when a growing corporate interest in registration in the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone began acting as a strong stimulus for Shenzhen office take-up.

As there is no office supply available for occupancy in Qianhai at the moment, the over 7,000 companies which have already been incorporated in Qianhai have, as an interim measure, taken up offices in Shenzhen's mature office precincts of Luohu and Futian.

In the meantime, as the existing stock in Shenzhen remains somewhat tight, new developments in core business districts have achieved very positive pre-leasing take-up. As a result of this phenomenon, in the third quarter the Shenzhen high-end office market recorded the highest overall rental increase at 17 percent year-on-year of any major office market in China.

In Shenzhen, tight availability, low vacancy and strong demand have combined to shorten the number of months required for newly completed office properties to achieve 80 percent occupancy, which now stands at 12 months.

"With more projects to be completed, Shenzhen will face some rental growth uncertainties within two to three years," said Ness.

Somewhat counter intuitively, given Shanghai's position as a strong Tier I city and great prospects as an emerging international financial centre, its office market only achieved a Category Two in the Q3 office index grading results.

The reason why Shanghai has slipped from being a Category One city this quarter is due to the fact that it has witnessed virtually no high-end rental growth over the past year.

Substantial new supply across a number of areas in the city has sparked strong competition between landlords to boost occupancy. In a bid to secure longer term income, many landlords have chosen boosting occupancy over protecting rental levels.

However, apart from the issue of the present spike in supply having dampened short-term rental growth, Shanghai is, in fact, one of China's strongest markets with respect to being the focus of strong demand for quality office accommodation, from both domestic and international occupiers.

Hence, despite the recent weakening trend in Shanghai high-end office rents, the high-end office vacancy rate in the city remains one of the nation's lowest, at around 8.8 percent. Shanghai also has one of the fastest rates of leasing absorption.