New CBDs are not uncommon in China. We’ve seen at least one or two new “prime” downtowns in each of the Tier 2 and 3 cities within our coverage. As analysts, the question we’ve always asked ourselves is when we expect these new downtowns to become viable alternatives for prime office tenants. What are some of the success factors? How many government incentives and amenities are necessary to draw prospective tenants out to a new area? How full does the existing downtown need to be before spill over begins to occur? How large do rent differentials need to be? What amenities need to be provisioned? In other words, what are the factors that drive take up.

For Hexi, Nanjing’s new CBD, located in Jianye District, one could suppose that some key criteria, including metro accessibility, are already in place. Government incentives, including direct monetary and tax refund incentives, aimed at recruiting financial and professional services companies to setup regional or provincial headquarters in the precinct began as far back as 2009. However, overall occupancy in the district really didn’t pick up until much later – namely this year, or nearly one quarter after the handover of the 65-story Nanjing SunnyWorld Center (Sunnyworld), the only completed Grade A office building in the precinct.

With Jianye Government’s aggressive push to recruit tenants, referring over half of the occupiers for the building, occupancy rates at Sunnyworld have outperformed our expectations. City Gateway, another recently delivered high-quality office tower in Hexi, is also making good leasing progress. The coincidence that overall occupancy performance picked up upon the delivery of high quality buildings in the area was quite apparent, as we believe that the 84,000 square metres of lower quality stock completed prior to Sunnyworld’s handover might not have been appealing to these prime office tenants. Our takeaway – while government policies are critical to the viability of a new CBD, the availability of high quality buildings, though not the only ingredient needed to attract occupiers to a new downtown, remains an essential one.

That said, will another 91,000 square metres of new office space scheduled to be delivered in the Hexi precinct in 2012 further enhance the viability of the submarket or simply erode landlords’ bargaining power? We shall find out.

For more detailed analysis on Nanjing Office Sector, check out the China Real Estate Intelligence Service report for Nanjing 3Q11.

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