Since 2013, more and more of my friends have chosen to invest their spare cash in Yu’e Bao, the online financial product platform launched by Alibaba. Just like my friends, Chinese customers are increasingly embracing internet finance companies, which offer services including third-party payment processing, peer-to-peer (P2P) lending, high interest savings, fundraising and other investment products on mobiles and web-based portals. The internet finance sector’s growth has been boosted by several trends:

1. Internet companies branching into the finance business
2. Traditional finance industry companies expanding their sales channels to online platforms
3. e-commerce growth driving demand for online payment solutions

China’s internet finance sector has grown rapidly. According to the China Payment Industry Report (2014) released by the Payment & Clearing Association of China in May 2014, the transaction value of online payments in China reached RMB 8.96 trillion in 2013, up by around 30% y-o-y. Also, a prominent website focused on China’s internet finance industry released a 2014 P2P Lending Service Industry White Paper in June 2014 showing that the online transaction value in China’s P2P market leapt to around RMB 110 billion in 2013, more than ten times the figure from 2012.

Seeing the internet finance industry as a potential step towards broader financial reform, local governments have announced a series of policies to support its development. In August 2014, the Shanghai municipal government issued guidelines to support internet finance through administrative, financial and legal means. The city will streamline registration procedures, and has pledged financial support through dedicated funding and tax incentives to encourage the establishment of internet finance entities. In March 2014, Shenzhen issued similar guidelines to boost the growth of its own internet finance sector.

Meanwhile, realising a relatively high default risk and moral hazard in certain sectors – such as P2P lending – China’s Central bank and local governments are also planning to regulate the internet finance sector to curb risk. Additionally, the service scope of internet finance is expected to expand as financial reform leads to the creation of new markets, services, and products such as unrestricted deposit rates and potentially the distribution of asset backed securities.

As an emerging source of demand for office space, internet finance companies are becoming increasingly active in China’s office leasing market. Rising demand from this sector has benefited different sub-markets. Some companies have chosen to locate their front offices (including sales functions and management) in Grade A space in prime locations, while leaving IT and back office functions in decentralised areas or business park locations with more cost effective rents. In addition, many newly established internet finance companies are opting to outsource IT functions to third parties, leaving them only in need of front office space in high quality buildings in prime locations.

Looking forward, the implementation of related regulations will force internet finance companies with high-risk business models to exit the industry, thus leading to industry consolidation and improvement of business sustainability. As the internet finance sector continues to grow, office leasing demand from this sector will become more prominent and landlords are sure to pay increasing attention.

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