Hangzhou, the capital of Zhejiang Province, stands out from other Yangtze River Delta (YRD) Tier 2 cities from a demand perspective due to its unique advantages – a high quality labour force, a favourable business environment, and an active indigenous private sector. These local private companies span across industries and are sensitive to economic dynamics, making Hangzhou a good bellwether city to gauge occupier sentiments relative to other markets.

Hangzhou’s downtown is also one of the YRD cities with the healthiest real estate fundamentals. The very limited amount of available space in the traditional downtown (DT), both in terms of built space and available land for future development, gives its DT landlords bargaining power for better terms and higher rents. The lack of available space and significant rental premium in the DT area also supports the case for companies relocating to QJNC, its new downtown, potentially making it one of the more viable new CBDs in the region.

With the impending opening of Metro Line 1 in 2012YE providing better linkage between QJNC and downtown, we had expected demand to begin spilling over in earnest in 2013 to QJNC. However, over the course of the quarter, we grew less optimistic with signs of enquiries beginning to soften for the first time since 1H10. In 4Q11, Grade A office rents, after growing nearly 12% through the first three quarters in 2011, flattened out. Hangzhou, similar to other office markets in the YRD, such as Nanjing, reacted in sync with Shanghai with respect to timing and market sentiment. Like Shanghai, enquiries in the downtown area slowed significantly around October. Both MNC and domestic tenants, citing increasing uncertainty regarding their business prospects, have held off or even cancelled, expansion, upgrade and new set-up plans (key drivers of office absorption in Hangzhou) in 4Q11.

With growing economic uncertainties and occupiers’ hesitancy with respect to expansion plans, we are less confident that the tipping point for demand in QJNC will occur as early as we had forecasted just a few months ago. Occupiers have also become increasingly conscious of the total relocation cost, factoring in higher soft costs due to QJNC’s distance to existing business districts as well as cultural and entertainment amenities. With overall take-up slowing in the market, a restart in momentum in QJNC now is waiting on a (few) large corporate users to physically move in. Barring a significant improvement in economic sentiment, the point at which QJNC becomes a viable alternative to the existing business cores will remain uncertain in the absence of more physically occupied space.

For more detailed analysis on Hangzhou Office Sector, check out the China Real Estate Intelligence Service report for Hangzhou Office 4Q11.

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