Shanghai’s office market has reached a turning point with strata-titled offices accounting for 17% of total Grade A stock, up from 12% four years ago. Strata-titled offices are not new to Shanghai, but the strata market is shifting decisively toward larger transactions amid a resurgence of demand from diverse corporate buyers.

Fewer small-size units will be available

Most of the commercial-use land plots in the CBD and even in many decentralised locations are now being carefully planned by the district governments in Shanghai. Having learnt the lesson that strata-titled offices usually ended up with low tenant profiles and poor tax contributions to their local districts when they were divided into small units (100-200 sqm), most district governments have started to impose strict requirements on the minimum size of strata-titled units during land tendering, typically at a whole floor**. This has had a significant impact on the structure of new supply over the past two years (see Figure 1). The trend is expected to continue in the near to medium term.

Figure 1: Supply breakdown by unit size

Source:JLL
*2015 number is based on the launched projects in 1Q15 and available information for seven upcoming projects.
**The typical size for a whole floor in Grade A offices is 1,500-2,500sqm in Shanghai.

The number of large-size deals will increase as demand mainly comes from corporate buyers

The lack of small-size strata-titled units is gradually pushing individual investors out of this market. Buying demand will mainly come from well capitalised domestic companies who have a long-term view on the Shanghai office market to invest their capital and who may also set up headquarters for self-use. They see value in buying Grade A office assets in the city as it helps them upgrade their corporate image and provides a hedge against future rental increases. Additionally, office assets are one of the few assets accepted by the banks as collateral in China, so corporate buyers can leverage their office assets to obtain credit. As a result, the proportion and the volume of transactions with a total price over RMB30 million has increased significantly over the past 2 years (see Figure 2).

Figure 2: Major strata-titled transactions (deal size above RMB30 million)

Source: Shanghai Real Estate Trading Center

Corporate buyer demand becomes diversified

Recently, the strata-titled market has seen strong buying activity and interest from private enterprises for self-occupation. Previously this market was dominated by state owned enterprises (SOEs). Companies from a wide variety of industries are actively looking to purchase large-size office space. These companies are mainly large Shanghai-based companies and industry leaders in China, from industries ranging from traditional manufacturing and trading to security services.

Figure 3: Recent notable strata-titled transactions

Source: Shanghai Real Estate Trading Center, JLL

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