Foreigners drive Shanghai office prices

From his window on the 41st floor of Puxi's tallest office building, Remy Chan surveys the land standing above the gold mine.

"Do you want a 50 per cent return in two years?" said the head of China commercial sales for Jones Lang LaSalle. "Prime office rents are US$1 per square metre per day now and will reach US$1.50 by 2007. Add in the renminbi revaluation and what is your return?"

Mr Chan is not alone in considering the top end of the Shanghai commercial market as one of the most promising investments in Asian property, despite a fall in prices in the residential market for three successive months.

Foreign investors are falling over themselves to get into the market. Citigroup was the latest, paying US$50 million for a controlling stake in an office building on Nanjing Road, its first major foray into the city's real estate market.

Morgan Stanley Real Estate Fund, Macquarie and Goldman Sachs are competing to offer the first mainland real estate investment trust to the Hong Kong market next year, expected to consist of prime Shanghai and Beijing properties.

These two cities are the main beneficiaries of a flood of capital looking for a slice of the China boom, with the supply of prime office space in Shanghai less than 10 per cent of that in New York or Tokyo.

The new arrivals this year are US-backed funds, European institutional investors, German open-ended funds and Middle Eastern investors, flush with cash from high oil prices, in addition to the players already here, from Hong Kong, Taiwan, Singapore and Australia.

DTZ rates China the second-biggest property market for investment-grade commercial real estate in Asia, with US$486.6 billion, after Japan (US$1.1 trillion) and ahead of Australia (US$168.2 billion).

"The structural imbalance of tight supply in the grade A office market in Shanghai will continue for the next two to three years," predicted Colliers International in its latest research report.

"Few land plots are available for office development in the central business districts, especially Nanjing West Road and Huaihai Road, which will push vacancies to 4 per cent by the end of the year. It will become a typical landlord's market, with rentals and capital values expected to continue to grow in the fourth quarter," it said.

Driving the boom in prime sites is demand from foreign and domestic companies which have chosen Shanghai as their China headquarters, especially financial institutions preparing for the end of restrictions to their operations at the end of next year, under China's WTO commitments.

"Standard Chartered is looking for 10,000 square metres," said Mr Chan. "Bank of America, ABN Amro, Bank of East Asia and Hang Seng Bank all want more space. HSBC has 20,000 square metres in two buildings but it is not enough."

Also expanding are pharmaceutical firms such as Bayer, Pfizer, Wyeth and AstraZenica and consumer goods makers such as Nike, Adidas, Procter & Gamble, Johnson & Johnson and Unilever.

Unilever is typical of many multinationals in China, siting its manufacturing outside Shanghai but keeping key operations in the city. In 2003, it made Hefei, capital of Anhui province, one of its major global production centres, for household and personal care products. In Shanghai, it has its China headquarters, a global research and development centre and global purchasing centre.

Minoru Mori and Sun Hung Kai, who both postponed major projects in the Pudong district fearing a glut, now have started them to come on stream in 2008 after the financial liberalisation.

Mori's World Financial Centre, at 492 metres the tallest building in the world, will add 227,000 square metres of office space. Sun Hung Kai's development nearby will add 100,000 square metres.

The addition of such a large volume of space in a single year forces normally voluble property agents to speak more slowly.

"2008 will be a turning point. Rents will stabilise and not rise from the 2007 level," said Mr Chan.