Recently, I have been frequently asked by clients “What is the new demand trend in Shanghai’s office market?” One of the most significant new trends in this market is the rising demand from domestic private enterprises.

China’s private sector has become a strong force supporting economic growth and generating employment. Value added from the private sector contributed to more than 60%[1] of China’s 2013 GDP, and private sector firms accounted for 58%[2] of total employment in urban areas. In 2014, private investment in fixed assets accounted for 64%[3] of China’s urban fixed-asset investment.

During the past decade, China’s private sector has successfully upgraded itself from labour-intensive industries to higher value-added industries. Private enterprises now are dominant in many sectors, and some even have grown into major multinational companies.  Successful examples include Tencent and Alibaba in the IT sector, as well as Dalian Wanda in real estate. In its efforts to reduce the power of state-owned monopolies in key sectors, China’s new leadership has allowed private enterprises access to sectors of the economy that previously were off limits.  In July 2014, China approved the establishment of the first three purely private-financed banks as one of the steps in financial reforms.

As more and more private enterprises set up and expand business in tertiary industries, their needs for high-quality office space are rising significantly. Therefore, private companies have been very active in both the investment-grade office buying and leasing markets. In 2013-2014, private companies in Shanghai were active in purchasing large amounts of office space or even entire buildings for self-use. See Figure 1 for details.

Private enterprises also have been active in Shanghai’s Grade A office leasing market. In 2014, both the Puxi and Pudong CBD markets witnessed a rising number of deals as well as new inquiries from domestic private companies for office expansion or upgrade. Demand from domestic private companies was estimated to have contributed around 40% of the 2014 net absorption in Shanghai’s CBD Grade A office market. Benefiting from generous leasing budgets, many private companies have upgraded by moving into Premium Grade A buildings, where space traditionally has been dominated by MNC companies. See Figure 2 for details.

Looking forward, we believe that the government will continue to encourage market competition by allowing private enterprises access to more sectors. Demand from China’s private enterprises is expected to grow gradually and become a stronger force in occupying Shanghai’s investment-grade office space, accounting for rising shares in both the buying and leasing markets.

[1] Source: All-China Federation of Industry & Commerce.

[2] Source: China Statistics Yearbook 2013. The definition of private sector applied here includes limited liability corporations, share holding corporations, private enterprises, and self-employed individuals.

[3] Source: China’s National Bureau of Statistics.

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