Since the beginning of 2013, the Shenzhen Grade A office market has been surprisingly strong. This is in contrast to the slowing market dynamics seen in most Chinese cities. Shenzhen’s quarterly rental growth has been fastest among the four Tier I cities in the prior four quarters. In terms of net absorption, Shenzhen reached a record high of just over 450,000 sqm in 2013, again, highest among Tier I cities for prime locations. We believe that this trend for Shenzhen is likely to continue, buoyed by demand from the finance and emerging technologies sectors.

Source: JLL

Apart from being an important financial centre in China, Shenzhen is also home to many of the leading domestic hi-tech giants such as Tencent (parent of WeChat) and Kingdee in software, and ZTE and Huawei in hardware. In 2013, the hi-tech segment accounted for 32% of Shenzhen’s GDP. Based on this platform, Shenzhen is expected to benefit from the national development plan for industrial upgrading.

While many Chinese cities are dealing with slowing economic growth, manufacturing overcapacity and cost-conscious MNCs, in Shenzhen, emerging technologies, including IT & communications, energy, and biomedical and materials science are among the most prominent drivers of economic growth. These Chinese hi-tech companies are starting to move past their international competitors using innovation to capture China’s domestic market, which has the largest number of mobile phone and internet users in the world. In addition, companies like Huawei and ZTE are taking a leading role globally in the deployment of 4G networks.

In addition, most of Shenzhen’s high-tech headquarters space is in self-built high-quality office buildings in core sub-markets, particularly in Nanshan. Of the Grade A office projects to be completed in the next four years, around 57% of total space (3.7 million sqm) is slated for headquarters use. With a growing number of these headquarters buildings occupied by emerging technologies companies, such as Tencent, Baidu and Alibaba, Shenzhen is strengthening its position as a hi-tech industry cluster. Additional headquarters office space will be built to capture demand from new headquarters and R&D centres, as well as expansion and consolidation of current office space.

Moreover, demand for headquarters buildings is also coming from the banking and finance, energy and other sectors. In all, the emergence of headquarters districts will fuel economic vitality and create new demand for office space from the professional service industry. As a result, underpinned by demand for self-use headquarters space, the annual net absorption in the Shenzhen Grade A office market is expected to average over 500,000 sqm for the next four years. Given the large volume of new supply, though, the vacancy rate is nonetheless projected to climb to over 25% by end-2017, from 7.8% at end-1Q14.

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