By Sam Crispin, Head of China Research, FPDSavills

1998 saw further rent reductions in the Shanghai office market, vacancy rates as a percentage of total stock have stabilised and in some cases fallen. Chinese companies are beginning to show an appetite for some of the surplus new space, especially in Pudong where many in the forest of new buildings are for owner occupation. The amount of vacant Grade 'A' and International Grade 'A' office space is set to increase to over 900,000 sq.m. by the end of 1999.

Total Grade 'A' supply for the whole of 1998 was around 420,000 sq.m. taking total stock of Grade 'A' office space to approximately 1,600,000 sq.m. Grade 'A' supply was again way below expectations at the start of the year due to delays which led to 44 per cent of supply scheduled for 1998 being pushed back to 1999, including the 88 storey Jinmao Building which is now leasing.

Demand has been little affected by the lower than anticipated supply and analysis of take-up of new supply and existing stock reveals that 365,000 sq.m. of new and old Grade 'A' and International Grade 'A' space was absorbed during 1998 giving a year end vacancy rate of 35 per cent, equivalent to 577,000 sq.m. of vacant space.

Foreign companies are selective about quality and 1998 has seen Shanghai Kerry Centre achieve occupancy of 30 per cent within three months of completion, Shun Tak's Central Plaza overlooking People's Square has achieved 80 per cent per cent occupancy since completion in January 1998. In Lujiazui the Senmao International Building has occupancy and committals for about 60 per cent of the space since completion in 2nd quarter of 1998.

Local media reports suggest that domestic demand is beginning to 'kick in'. Since reducing rents in early October to Rmb1.6 per sq.m. per day (equivalent to US$5.78 per sq.m. per month) the Jinsui Building in 'Little' Lujiazui has leased 5,000 sq.m. to local companies including locally listed Jinka, Shanghai 3F and others. As a result the developer claims the building is now over 80 per cent occupied since completion at the end of 1997.

Developers and landlords continue to offer attractive lease packages as they compete to win tenants and generate cashflow as empty buildings cost money. Tenants with space requirements of more than one floor can usually secure rent-free periods of 6 months in many of the new buildings. The biggest bargain in Shanghai has to be the Jinsui Building in Lujiazui, owned by the Agricultural Bank of China which is currently asking rents of US$6 per sq.m. per month for lease terms of over 2 years, an incredible one 15th of highest rents in Shanghai just 4 years ago.

Supply will increase significantly in 1999 with 801,006 sq.m. of new Grade 'A' and International Grade 'A' space forecast. We boldly predict a year end vacancy rate of 39 per cent, the increasingly subdued economic outlook may make our take up forecasts look on the optimistic side by the end of the year but at the same time delays to supply can also be expected again this year.

The Jinmao Building in 'Little' Lujiazui is ready for occupation and, based on current levels of interest, we expect reasonable take-up of this building. Other quality buildings in prime locations, such as CITIC Square on Nanjing West Road and Shanghai Central Plaza on Huaihai Middle Road are also expected to enjoy rapid take-up.

Rents are already falling within the range we forecast for this year of US$10 to US$20 per sq.m. per month for Grade 'A' and International Grade 'A' space. Those who try to defy the market will find their occupancy rates suffering as a result. The market will be undoubtedly be difficult, but as we have stated before, there is still evidence that those developments at the top end of the market will achieve sufficient occupancy to keep their heads above water. Any wounds that are going to be inflicted should be visible by September. For some developers the bleeding looks set to go on for a couple more years while tenants have a ball.

_____________________________________________________ To talk to someone who understands your real estate needs in China call FPDSavills in Shanghai on 6474 8908 or for further information e-mail Sam Crispin on scrispin@fpdsavills-sh.com