Over the past few months, one of the most common questions we hear in China from clients has been what effect the gyrations in China’s stock market might have on the performance of the office market in Shanghai.  Some investors have assumed – perhaps drawing a connection between Shanghai’s status as a financial centre and the stock market crash’s disproportionate impact on financial services – that the stock market’s post-June slump will negatively impact the Shanghai office leasing market.  The numbers do not bear this out, however: net absorption for the year through 3Q15 has already exceeded 1 million sqm[1], and we believe Shanghai’s Grade A take-up is on track to reach a record high in 2015.

Three factors are driving the record high absorption.  First, domestic financial service firms have increased leasing activity in both the CBD and decentralised markets.  Encouraged by ongoing financial reform and liberalising policies in the Shanghai Free Trade Zone, both traditional domestic finance firms (like retail banks and insurers) along with non-traditional internet finance companies have been active in setting up new offices and expanding their office space in Shanghai.  Several examples of such leases are shown in Figure 1:

A second key driver is MNC tenants, who have demonstrated particularly strong leasing demand in decentralised areas. Recognising that China’s middle class population is expanding the country’s consumer potential, MNCs in the retailing and media sectors are actively expanding their business, and many have found they require more office space in Shanghai. The large volume of new supply in the decentralised market has tapped into pent-up demand from MNCs that seek large contiguous spaces for consolidation and expansion. In addition, many MNC professional services firms such as consulting companies have retained a positive outlook toward their China business, and have shown strong interest in office expansion. See Figure 2 for details:

The third main driver of take-up this year has been firms self-using space that they build or acquire.  In the decentralised market, several companies – notably domestic financial institutions – have acquired or developed buildings, and have reserved large shares of space for their own use. See Figure 3 for examples:

Aside from the three main demand types discussed above, other tenant types have also contributed to this year’s robust demand, including domestic retailers and professional services firms.

We expect leasing momentum to remain strong through the remainder of the year. As a result, Shanghai’s overall net take-up is expected to reach a record high of above 1.4 million sqm in 2015.  The Shanghai stock index may have taken a dive, but the take-up in the city’s Grade A office market is heading skyward.

[1] Gross Floor Area basis

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