Following the national government’s pledge to speed up financial reform and the announcement of 12 specific opening-up measures in the 2018 Boao Forum for Asia, Shanghai has launched its action plan of a 100 measures to further open-up the economy and boost the city’s position as an international finance centre.

35 out of the 100 measures announced are related to the financial sector and are aimed at firstly easing market access in the banking industry for foreign capital; secondly relaxing the restrictions on the proportion of shares and business scope in the securities industry for foreign investors; and thirdly encouraging the opening-up of the insurance industry.

When we studied the average office take-up of ten global finance companies across key cities we saw that Shanghai has the potential to grow office demand from foreign finance companies. In-terms of scale, Shanghai still has a long way to go compared to the world’s finance hubs such as New York and London. However, in China, Shanghai is the runner up after Hong Kong in terms of foreign finance company presence (Chart 1).

Chart 1: Average Office Take-up of Top Foreign Finance Companies (2Q 2018)
Source: JLL Research, 2Q18

Last year, Shanghai’s Grade A office market net absorption reached over 1.3 million sqm GFA, and finance companies were the biggest contributors accounting for 38% (Chart 2). Our view is that the new initiatives will lead to further increased office demand from the finance sector, even in the short-term.

Chart 2: Shanghai Grade A Office Net Absorption by Industry (2017)
Source: JLL Research

We have already witnessed an increased demand in leasing enquiries from two areas both newly registered foreign finance companies that are looking to set up their first offices in Shanghai; and existing foreign finance companies that have obtained licenses in new business areas and are looking for expansion.

The question is which locations are likely to benefit from an increase in demand from foreign finance companies? Based on transactions that have happened in Shanghai in the first half of 2018 (with both domestic and foreign companies), Lujiazui is still the top destination, for finance companies, especially from banking sector. But Lujiazui is not the only destination. For example, in Pudong, finance companies are also flowing into Zhuyuan and Yanggao Road areas. In Puxi, besides core CBD Nanjing W. Road submarket, the emerging CBD North Bund submarket is also capturing significant demand from finance companies.

Chart 3: Top 6 Destinations for Finance Companies (based on 1H 2018 lease transactions)
Source: JLL Research

As the financial markets continue to open up we expect an increasing demand for office space. Lujiazui will continue to strengthen its status as the financial centre of Shanghai, however rising rents and supply-shortage post 2019 will encourage spill-over demand to particularly the nearby high-profile business areas.

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