The Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai) in western Shenzhen, just an hour from Hong Kong, is one of the new financial hubs that are proposing freer renminbi convertibility in China. A total of 3.7 million sqm of office space is likely to be built in the 15 sq km zone by 2020. In August, the first batch of three plots of mix-use land with a total GFA of 1.3 million sqm was auctioned for an accommodation value between RMB 15,948 and RMB 21,669 per sqm.
This new supply of office space raises the issue of oversupply and competition between Qianhai and other office submarkets in Shenzhen. In addition, the Futian and Nanshan submarkets will further add around 4.2 million sqm of Grade A and Grade B office space from now through 2017.
However, our opinion is that the reform measures proposed for Qianhai will boost office demand in Shenzhen because capital market and banking system liberalisation is such an important innovation.The capital account opening will not only attract additional foreign direct investment through companies establishing operations in Qianhai, but also domestic firms seeking cross-border investment opportunities will have reason to locate here. Other than financial reform, the favourable incentives on corporate income tax will also benefit qualified financial, professional services, high-tech, IT and logistics companies in Qianhai.
On the other hand, Qianhai only permits newly set-up entities to register in the special economic zone and enjoy the incentives, implying a restriction on existing companies already in Shenzhen. This is apparently a bid to target new investment growth and avoid competition with other submarkets. Furthermore, the Qianhai authorities will allow companies that register in the new zone to operate in other submarkets for five years. As a result, there are plenty of companies, both newly set-up and those potentially investing, who are looking for a considerable amount of office space in mature office submarkets in Shenzhen. Moreover, it is worth noting that some non-financial-related companies are taking the chance to regroup or establish joint venture financial companies. For example, six Shenzhen and Guangzhou-based enterprises, including FMCG, high-tech and logistics firms, have jointly set up Foresea Life Insurance in Qianhai.
The improved market sentiment and increased office demand led by Qianhai has also resulted in rents increasing during the first three quarters of the year, up by 5.7% in the Grade A office market. This has come at a time when some office markets in China are struggling with weak demand. Although there will be concern about tenant outflow to the new zone after five years, we believe the structural change in the economy to a higher percentage share of financial and service sector companies who are more sizable occupiers will drive a sustained demand uptick in the office market.
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