Shanghai Tower, the 632-metre-high skyscraper in Shanghai Lujiazui, just topped out two weeks ago. As the tallest building in China, it attracted lots of public attention recently and led to extensive discussions from various scholars, industry professionals and news media. Among them, some raised their concerns over the potential oversupply of office space, with a few commentators even predicting an economic collapse in China because of a loose historical correlation between the completion of ‘the world’s tallest building’ and the peak of economic cycles. We hold an optimistic view on the future performance of this landmark based on our understanding of the market.

Scheduled to be completed in 2015, Shanghai Tower will provide some 230,000 sqm of Premium Grade A office space to the market. The office leasing market in Lujiazui is currently very tight with the vacancy rate standing at just 2.8% as of 2Q13. Availability in this submarket will remain tight throughout the next five years because very few sites remain for new development and much of the upcoming supply is likely to be taken by owner occupiers – as illustrated in the chart below. On the demand side, with Shanghai gradually transforming into a global financial centre, long term growth in the domestic financial services industry will continue to underpin the Lujiazui market. At the same time, foreign financial institutions are slowly restarting expansion plans to pursue market share in China as uncertainty towards the economy diminishes and gradual reform opens up new markets for them to pursue. Given limited new supply in the pipeline and the average annual historical take-up, we expect the vacancy rate to remain below 5% in Lujiazui through 2014. The completion of Shanghai Tower in 2015 will in fact provide the Lujiazui submarket with much needed high-quality office space. As such, Shanghai Tower should not cause concerns on its own.

Source: Jones Lang LaSalle Real Estate Intelligence Service

However, we believe the concerns over the large number of super-tall buildings planned or under construction in tier II and III cities are warranted. Cities like Changsha, Tianjin, Wuhan and Dalian are in various stages of developing new CBDs, following the example set by Shanghai’s Lujiazui. Often as the centrepiece of the urban planning, these new CBDs feature super-tall buildings, which we believe are symptomatic of the short to medium-term oversupply problem in the office market in these cities. The massive scale of on-going construction in these new CBDs will inevitably result in a supply influx well ahead of demand in most of tier II and III cities as economic growth moderates. The logical solution to this situation is to delay these skyscrapers further into the future, which in reality we are already seeing in many cities as the developers rationalise their project pipelines. The likely scenario is that the wave of skyscraper development will not enter the market in the next two to three years and instead will be delayed to future years, allowing the demand to catch up with the new supply.

Login

Label

Name*

Email*

Website

Company

Label

Name*

Email*

Website

0 Comments

Inline Feedbacks

View all comments