Technology sector driving China’s future growth

February 12, 2020 / By  

In 2019, China surpassed the US for the first time, to become home to the world’s largest number ofcompanies, the majority of which are tech firms.

The scale of China’s digital economy reached 31.3 trillion yuan in 2018. On a comparable basis, the nominal increase was 20.% Y-o-Y.

Chinese tech firms have evolved from “followers” to “leaders” on the global stage, particularly in areas such as mobile payments, 5G, big data, and more.

More importantly, innovation is considered the key to China’s future growth, which will continue to promote the sustainable development of the technology sector.

Three main tech trends to drive future office demand growth

I. Tech sector to complete its industrial chain – great potential for industry segmentation and optimization

‘Dcompanies (which focus more on hardware) usually expand/set up in business parks due to their special requirements for building specifications. They are cost-sensitive due to lengthy R&D and large up-front investments.

For IT Solutions & Software Developers, their new business usually involves office expansions/split offices. Embracing advanced technologies such as big data and 5G, they are starting to serve more clients from traditional companies, and their businesses are expanding quickly to new areas.

Gaming/Platforms  usually require quick expansions at strategic locations for a quick gain in the market share and increased brand awareness.

II. Tech firms to expand national footprint – strategically leveraging city-level resources

National expansion of tech firms will further boost office demand. Tier 1 cities are mainly driven by market-oriented factors, such as high-end talents within the tech sector, capital accumulation, and total market size. We forecast the tech-sector-driven new demand  will account for a larger proportion of the total Grade A office demand,  increasing from 18% in 2016 to 27% in 2020.

In terms of tier 2 cities, we noticed that many enterprises plan to expand beyond their headquarters, whether it is a dual centre with different functions at the front and back ends or a multi-point expansion across the country. New demand from technology companies will almost double in tier 2 cities, from 9% to 17%.

Figure 1: Tech firm’s contribution to Grade A office net absorption

*Tier 2 cities include Chengdu, Chongqing, Wuhan, Nanjing, Hangzhou, Suzhou, Xi’an, Tianjin, Qingdao, Dalian, Shenyang, Zhengzhou, Wuxi, Ningbo, Changsha, Xiamen
Source: JLL

III. Traditional companies to integrate tech capabilities – with an increased focus on digital transformation

The investment in corporate digital transformation is growing by 20% per annum, globally as well as in China, where it will reach USD420 billion by 2021.

Figure 2: Total investment in digital transformation by companies across all industries

Source: IDC, JLL

According to surveys by Grant Thornton and Forrester, 69% of CFOs are planning to increase their investment in technologies while 38% of executives reckon technological changes (e.g. digital transformation) will have the greatest effect on business decisions.

In conclusion, tech firms are becoming an important demand driver in the office sector, and this major trend cannot be ignored in China, especially at a time when overall office demand is relatively weak. Now, finding ways that shift the attention and leasing focus onto tech firms will be an opportunity to captivate.

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