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Financial storm batters Grade A leasing

By Wang Ying (China Daily)
Updated: 2008-11-01 13:37

Shanghai's high-rise buildings including the Shanghai World Financial Center (SWFC), the world's third tallest tower, may become the latest victim of the ongoing global financial crisis as premium tenants slash their rental budget and postpone expansion plans.

"Some of our American financial institutions have thought of leasing offices in the SWFC, but the leasing demand from other countries remain active and strong," Minoru Mori, Japan's most influential building tycoon and president of Mori Building Co Ltd, said at a forum in Shanghai on October 26.

Another newly finished high-rise building in Lujiazui Finance & Trade Zone, Mirae Asset Tower, has also been hit by the sagging market. The Korean building which has had space available since the third quarter is still more than half empty. "In good years, the building will have a 70 to 80 percent occupancy rate, however, after one year of pre-leasing, the Tower has only secured 40 percent," said Regina Yang, head of research at the London-based property consultancy Knight Frank.

"Worsening global economic conditions have dampened multinational corporations' expansion plans and we saw rentals drop seven percent in Pudong over the last quarter," noted Anthony Couse, managing director of Jones Lang LaSalle Shanghai.

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SWFC celebrated its grand opening on October 25. It quotes office rental at an all-time high of 20 yuan, or $3 per square meter per day.

At present, SWFC has signed Commerzbank of Germany, BNP Paribas SA of France and banks from other countries. According to Mori, SWFC is expected to secure more tenants international financial institutions as tennants in its vacant offices.

What may pose another threat to the low vacancy rate of Grade A office buildings is the saturated market. The newly finished SWFC and China Fortune Tower alone added more than another 291 sq m to the market in the city.

The office leasing market in Shanghai has hit a rough patch in the third quarter as Pudong's average rental has dropped 2.3 percent quarter-on-quarter, the first downward movement since 2005 due to the huge supply injected into the market, according to a CB Richard Ellis report. As a result, the average vacancy rate of Pudong's office buildings rose to 9.9 percent.

Real estate adviser DTZ also predicted that over the course of the following four quarters, around 622,209 sq m will enter the market. As a result the vacancy rate is set to rise further as there will be substantial internal competition within the Grade A office market in the near future.

In an oversupplied market, high-end tenants are placed in a strong position and they take their time making the most cost-efficient choice. months.

In order to attract more tenants, developers are offering unprecedented favorable terms for their sales, such as paying larger commissions to real estate agents in helping to secure the leasing.