“Ten years ago, there were construction cranes everywhere in downtown Shanghai,” recalls Anthony Couse, the outgoing Managing Director of property consultancy JLL’s Shanghai and East China offices. The city was in the midst of a massive construction boom. Many analysts commented that Shanghai had overbuilt and warned about the consequences for the city’s office property market.
For Couse, who moved to Shanghai in 2006, the city just needed time to catch up. “People forget that the vacancy rate in Pudong’s Lujiazui area was 80% at one point,” says Couse. “Now, it’s at 2% — and it’s extremely difficult to find a crane in downtown.”
A decade later, Shanghai’s office space has grown 213 percent to more than 8.8 million square metres, according to JLL research. The fast growth in offices has mirrored the city’s economy. Between 2005 and 2015, Shanghai’s service sector, which is a primary driver of demand for office space, grew from RMB 478 billion to RMB 1,691 billion, according to the city’s statistics bureau. At the current pace of growth, the city’s service sector is on track to overtake Hong Kong in one or two years, by the agency’s estimates.
Despite this remarkable growth, some are again sounding the warning siren about oversupply. But Couse’s opinion hasn’t changed. “Shanghai needs more office space,” he cautions.
Watching Shanghai’s Office Explosion From the Front Row
Since relocating from Hong Kong to Shanghai in 2006, the one-time leasing broker has had a ringside seat for one of the world’s fastest developing real estate markets, and has grown his company’s eastern China operation from 80 employees to a staff of more than 400. Now, after having taken on the role of Asia-Pacific CEO in Singapore, Couse reflects on his time in China’s commercial capital and makes some predictions for the future.
The changes have been dramatic. “Only in China can a city achieve what Shanghai has achieved,” says Couse, who credits the municipal government’s emphasis on infrastructure development. He cites the subway system, which had just five lines when he arrived. “Now,” Couse says, “we’re the largest metro network in the world and they built it in five minutes, relatively speaking. London takes 15 years to build a single line. Shanghai built an entire network.”
Part of this transition has been a diversification of the city’s economy, which has created whole new categories of office dwellers. “While many people outside the region still see China as a copy-cat economy, there’s some real innovation going on here in financial services and technology over the past ten years,” Couse points out. Adding that, “now we see a online finance spin-off of an Internet startup occupying four floors in one of the world’s tallest office towers. That’s something you wouldn’t see in New York or Hong Kong.”
Couse sees this get-it-done attitude as being the driving force behind the development of the city’s office market.
“Ten years ago, decentralized’ was almost like a dirty word,” Couse says, referring to the establishment of grade A office projects in districts such as Zhabei, Hongkou and Yangpu. “In 2005, would a large multinational corporation have contemplated putting their head office in Zhabei?” he asks rhetorically. The district is only a 10-minute drive from the towers of West Nanjing Road but was long considered too far off the beaten path. “Today, Zhabei is part of Jing’an and ‘decentralized’ is a good thing,” Couse says, citing the 2015 merger of the two districts and the change in perception regarding desirable locations. “Who would ever have guessed that?”
“A decade ago, a year with 300,000 square metres of office leasing was considered busy,” Couse recalls. “Today, it’s 1.5 million square meters.” says Couse.
Domestic Companies Now Dominate Shanghai Grade-A Market
This explosion in demand has come from two major changes in the market. The first is a shift in the tenants. In the past, landlords of prime buildings preferred multinational clients, who they considered to be more stable and able to afford higher rents. “Now, just like in Hong Kong or other global centres,” Couse says, “the perception is that local companies are more likely to grow and would arguably pay a better rent.”
“We see Chinese law firms taking two or three floors in downtown premium-grade office buildings,” Couse points out. “Five years ago, that was unimaginable.”
To Couse, this heralds a coming transformation in Shanghai’s traditional downtown. “The future of Puxi is going to change massively,” he says. “We will see a huge wave of Chinese companies —and this is what should happen. In London, New York or Hong Kong, landlords principally lease prime space to domestic companies, not international companies. And Shanghai, as a world city, will be doing the same.”
The other factor has been the growth of the city’s financial industry, set off by the government’s easing of restrictions on banks, insurers and other financial institutions. “Financial reform has brought forth the eagerness of Chinese companies to build their own businesses,” Couse says. Lujiazui, which now has Shanghai’s most expensive office space at an average of RMB 13 per square metre per day, is predominantly home to banking and finance companies.
A City of 20 Million That Needs Room to Grow
Those two changes are the basis for Couse’s optimism for Shanghai’s office property market, and his assertion that Shanghai does not have nearly enough space for its growing businesses.
Rather than fearing a surplus of office space, Couse considers the new projects in the pipeline, at around one million square meters per year, adequate to fill “a little gap” but says, going forward, that’s a problem. “If Shanghai really aspires to be that world city,” Couse predicts, “it has to have the same amount of office space as New York, London or Tokyo, but it’s nowhere near it.” At the end of last year, for example, Shanghai had 8.8 million square meters of Grade A office space for lease. By comparison, New York had 65 million square meters and London had 27 million square meters, according to JLL research. Hong Kong now has 11 million square metres.
“Demand is going to continue,” Couse says. “Yes, there will be some ups and downs but the office market is still in its infancy.”
Couse’s move to Singapore last month saw him take on responsibility for all of Asia-Pacific, but the executive doesn’t see his shift in location as leaving the China market, which he believes still holds the greatest growth prospects for JLL in the region.
Dealing Regionally as China Becomes a Global Player
And for JLL globally, the importance of Asia as a whole is on the rise. In particular, Couse sees Asia’s role as an exporter of capital making it a player on the global stage, “whether that means Japan, India, Singapore, Indonesia or Hong Kong”, keeping him busy for years to come.
As for the ongoing rivalry between Hong Kong, his former home, and Shanghai, his home for the past ten years, Couse is confident that Shanghai will eventually rival Hong Kong as a global financial capital, even if it’s still some ways off. He points to Shanghai’s airport, the development of skilled service sector professionals, and the need for continuing commitment to regulatory reform in the financial services sector as all having room for improvement if the city wants to contend with Hong Kong.
But ten years in Shanghai has taught him not to underestimate the city’s progress. He is careful to say that it will be quicker than anyone thinks. “In ten years,” he concludes, “everyone will be astounded by how Shanghai has changed. A decade ago, you would have never forecast anything like today. The growth will be way beyond anyone’s expectations.”
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