Shanghai’s recent skyscraper boom has become a source of troubles recently as multinational companies aggressively cut costs to survive the hard times. The commercial building vacancy ratio in Shanghai, especially in the Lujiazui Financial Zone, Pudong District, is rising, and rents are slumping.
Savills, a global real estate services provider, reports that the vacancy ratio of A-level commercial buildings in Shanghai, which was only 5% at the beginning of 2008, soared to 15.4% by the end of the year. In Pudong, the percentage is as high as 25.6%, up to even 50% in some high-end commercial buildings. The vacancy ratio of commercial office space in Shanghai has been higher than 50% only once before, during the ‘97-‘98 Asian financial crisis.
The total supply of A-level commercial office space has reached 837,000 square meters, 619,000 square meters of which are located in Pudong. The total demand in 2008 was only 366,000 square meters.
Shanghai’s A-level rental prices, which hit serious highs in the past several years, are now declining. The average daily rent at the beginning of 2008 was 8.25 yuan per square meter, rising to 8.41 yuan in the third quarter, but it dropped to 7.68 yuan by the end of the year. Average daily rent in the Lujiazui Financial Zone dropped by 10.7% from 8.97 yuan per square meter in the third quarter to 8.12 yuan in the fourth.
The global financial troubles are forcing many multinational companies to readjust their business growth goals and their demand for office space. Many companies have moved from key commercial areas to non-commercial or even industrial areas.
DTZ, one of the world’s largest real estate service companies, estimates that, in 2009, a further 752,608 square meters of commercial office space will be built, pushing the vacancy ratio even higher. The vacancy ratio is often a leading indicator of prices. More vacancies mean lower rents. DTZ estimates that average room rent in 2009 will be about 8 yuan/square meter/day for high-end A-level commercial space, 5 yuan/square meter/day for medium A-level space, and 3 yuan/square meter/day for B-level space.
November, 2008, figures from JLL, another real estate service company, show average rents for Shanghai’s A-level space to be 9.2 yuan/square meter/day, a drop of 7.7% over October. Due to a vacancy ratio as high as 16.8%, this slumping trend will continue in 2009. JLL estimates new commercial space opening in 2009 will amount to 870,000 square meters, adding greatly to the current surplus.
Savills predicts about 754,000 square meters of A-level space will be constructed in 2009, 435,000 square meters of that in Pudong. It says the large surplus will bring rents down by 5-15%, and the average price will drop to 6.5 yuan/square meter/day.
Macquarie Group, Australia largest investment bank, is aiming to sell its hotel in Shanghai for 300 million yuan, or 25% lower than its purchasing price of 400 million yuan three years ago. A source said the price cut had attracted potential buyers, but offers were in the 270 million-300 million yuan range, tending towards the lower number.
As the AUD has depreciated recently by 20-30%, Macquarie’s loss won’t be so big after the exchange from RMB. More than half a year ago, it sought to sell the hotel at 26,000 yuan per square meter, but failed to find a buyer. Although Macquarie has now cut the price to less than 19,000 yuan per square meter in hopes of cashing in as soon as possible, its potential buyer’s offer of 270 million yuan will knock that price even lower, to less than 17,000 yuan per square meter, 32.5% below Macquarie’s purchasing price.
Morgan Stanley has also sought to sell property in Shanghai over the last several months, but has yet to find a buyer.
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