Firms upgrade to better offices in weaker market

SHANGHAI: With supply of grade A office space in Shanghai surging and rentals under downward pressure, some tenants are moving into more prestigious addresses from office buildings on the fringes of the core business district.

Ricky Cheng, a partner in a Hong Kong-based public relations firm, recently relocated offices from a 150 square foot unit in a grade B building to a 200 square metre grade A office unit in Shui On Plaza on Huaihai Zhong Road.

"Such a move was almost impossible a few years ago. At the time, landlords offered a price and you could take it or leave it," said Cheng. "They were not prepared to negotiate lower rents. If you could not make up your mind in two days, the unit would be taken by someone else."

Now landlords were willing to discuss incentives and their asking prices were negotiable, he said. Some landlords even agreed to pay electricity costs for the unit between 9am and 7pm as a leasing sweetener.

Cheng, who moved to Shanghai nine years ago, pays six yuan (RM2.79) per square metre per day for his new unit. The asking rent for grade A office space is around 8 yuan per square metre per day.

He did not rent the unit directly from the major landlord, Shui On Land, but from an individual investor who owns the unit. He believed the rent may have been below the prevailing market level because of the investor's weaker finances.

According to Anthony Couse, managing director of the Shanghai office of international property consultant Jones Lang LaSalle, one million square metres of grade A office space will come on stream in the city next year — three times more than the new supply this year.

"Tenants are taking this opportunity to get into a prestige address, as the market appears to be at a quite cost-effective level," Couse said. A prestige address also helped to attract good staff.

International companies moving to grade A buildings include Bristol-Myers Squibb, which has leased 6,200 square metres at Wheelock Square in the Jingan district; and Japanese fashion retailer Uniqlo which rented 2,700 square metres in Henderson Metropolitan, in the Huangpu district.

Couse said rental growth would slow to between 5% and 10% next year, from 15 to 20% this year because of the new supply. But he did not see any decline in rents as demand remained strong.

About 75% of the new supply will be in Pudong, but domestic companies have absorbed a major portion, he said.

Colliers International expected the increased supply to result in a fall in rents of up to 6% in the next four quarters.

With expectations of future rental declines, and significant new competition, some grade-A-office landlords are publicly reducing asking prices as well as offering generous inducements to both attract and retain tenants, Colliers said. The vacancy rate is expected to increase further, along with a slight decline in rentals, as new completions come on stream in the fourth quarter, it said.

The Shanghai grade A office market remained stable in the third quarter as market demand nearly matched new supply, leaving both vacancy and rents relatively unchanged. — South China Morning Post
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