Shanghai office developers running short of prime land

The launch of Shanghai Tower, the city's tallest building, and other new projects in 2015 will add considerable pressure to office building price growth and occupancy rates, according to a new report on its realty market by international property consultants DTZ.

The 632-meter-tall structure is due to have its soft opening in March and official opening in June and will add some 220,000 square meters, or around 12.8 percent, of space in the city's premium and Grade A office building market, the report said.

"It is estimated that about 6.34 million square meters of high-quality office space will be added to Shanghai market between 2015 and 2019, which will make the office building market competition even fiercer," said Shen Jie, director of the office building department of DTZ China.

"Rental and occupancy growth may be challenged in the next few years, especially in Pudong."

About 404,800 square meters of Grade A office building space are expected to be added to premium locations in Pudong, considered the city's financial hub, which already hosts thousands of financial institutions.

Average rental costs in the area are already around 9.71 yuan ($1.56) per square meter per day, a 14 percent year-on-year increase.

However, its average vacancy rate also reached 4.38 percent last quarter, more than double that of the first quarter of 2014, DTZ said.

A recent report from Cushman & Wakefield, another leading property services provider, concluded that new supply of office space in Shanghai "will reach record levels in 2015 and 2016, as many projects are still under construction and will be offered over the next couple of years".

It said that the Puxi district, on the west bank of the Huangpu River, will also see more supply, especially in its emerging business hubs, such as Hongqiao.

"We have seen a 'go-to-the-west' trend among occupiers as more move from Pudong to Puxi, while occupiers of central Puxi are moving further westward to emerging centers," said Shen, a result of limited land supply for new projects and urban planning policies, which may create new financial and trade clusters in the west of the city.

Analysts say Shanghai's supply of new land, however, may become extremely limited over the new few years with any plots of idle land scattered around the city being targeted for commercial projects or office buildings under new guidelines from authorities.

"It has become almost impossible to find large parcels of undeveloped land at premium locations in central Shanghai, so many developers are looking at alternatives in their search for the next hotspots," said Zhang Rong, a Shanghai-based property agent.

According to the DTZ, combined land supply between 2014 and 2020 will be about 156 square kilometers, far short of expected construction demand.

Gu Yueru, director of the evaluation and consultancy department at DTZ East China, said: "The city's idle land stock, estimated at around 195 square kilometers, may help fill the gap in supply and demand, if tapped cleverly."