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grade-a-office-demand-in-china-where-itll-be grade-a-office-demand-in-china-where-itll-be

Grade A Office Demand in China: Where it’ll be

28/06/2019

Looking to the near future, given policy direction and current and expected macro-economic dynamics, Cushman & Wakefield believes six business sectors will largely drive demand for space in Greater China’s prime office market. These sectors are:

1. The Financial Sector

 China’s US$42 trillion Financial market is about to be further opened up. Joint venture ownership and business restrictions for overseas banks, securities firms, asset managers and life insurers are set to be eased under guidelines.

As overseas financial institutions have been allowed to gain a greater ownership share of joint venture entities, so capital allocation and wealth management across China could well be transformed. Such developments could fuel the business expansion and corresponding headcount growth that may follow, driving office demand.

2. The TMT Sector

Within the TMT sector, the biggest elephant in the room is China’s tech sector. The country’s burgeoning tech sector has seen phenomenal growth over recent years. Going forward, there is still tremendous room for growth for companies successfully operating in this sector. Two key reasons for this growth potential are:

  • The still untapped online market – With an online population base of 772 million people (in 2017, according to telecompaper) this total is huge. Having said this, the online penetration rate in China is still low at 54.6%. As more users go online, so more customers, sales and data are generated, captured and leveraged, which will benefit tech companies, and;
  • Innovation – Tech firms in China are now innovating at a high rate. One only needs to look at the country’s leading established tech firms and unicorns as evidence. As tech R&D spending grows and new tech-related products and services are produced/offered, so business growth in the tech sector will continue to grow.

3. The Manufacturing Sector

A number of transformational aspects should create positive business growth for the Manufacturing sector in China in the future, and five of these factors include:

  • Made in 2025 – Introduced in 2015, this policy is an initiative to comprehensively improve and upgrade industry and manufacturing in China;
  •  The domestic consumption market – China’s burgeoning US$6.6 trillion domestic consumption market will continue to present greater opportunities for manufacturers based in China to sell more goods to;
  • More factories set up in further-afield provinces – As China improves its transportation infrastructure and logistics network, so more factories will open up in areas which were once deemed inviable for the location of a manufacturing plant. Subsequently, costs will be kept in check, or reduced, given the cheaper land cost and salary levels evident in these areas;
  • Factory automation – Many plants in China are now using robotics, computer automation and virtual testing and simulation in their manufacturing processes. With the rise in smart manufacturing, so labour costs will be kept down while product quality will be increased, and;
  • The Belt & Road Initiative – This massive plan to facilitate global trading connectedness will create new ways for China-based manufacturers to access global markets.

3. The Healthcare Sector

The Healthcare sector in China will likely continue to enjoy sustained demand for healthcare services and medicine products as:

  • The economy further develops, as disposable income rises and as spending on healthcare increases;
  • China’s elderly population rapidly increases (according to the U.N., by 2030, China will have 245.9 million people aged 65 and above);
  • More of the workforce is exposed to sedentary desk-bound tertiary sector jobs, and;
  • A greater percentage of the population is faced with living and working in faster paced/more pressurised urban environments.

Reflecting on this situation, in October 2016, China issued the Healthy China 2030 Planning Outline. Under the plan, by 2030, China aims to:

  • Control health-endangering causes and factors;
  • Expand the health industry;
  • Establish a comprehensive and inclusive health-improvement regulatory system;
  • Significantly improve health services;
  • Seek a progressive improvement in people’s health, and;
  • Raise life expectancy to 79.

All these moves should create numerous new business opportunities for the Healthcare sector over the course of the next 12 years.

5. Co-working

The Co-working office sector is among the fastest growing sectors in terms of space absorption in the Greater China office market, expanding from a few sizeable venues just a few years ago to 670 locations in the key city markets in the region as of end-Aug 2018.

Moving forward, the Co-working office sector will continue to expand in the region on the back of several solid fundamentals, including:

  • An influx of capital from corporates and venture capital (VC) firms;
  • The rise of millennials and a new age of entrepreneurialism;
  • More multinational companies (MNCs) seeking flexible lease terms and cost-saving options, and;
  • Advanced technology spurring the co-working revolution.

What’s more, more corporates are opting for co-working space in Greater China. In some cases, moving their staff to co-working spaces allows corporates often to lower their real estate operational and maintenance costs as most of the office supplies (including furniture, phones and high-speed Internet) and services are included in the membership fees. The savings from renting desks in a co-working space that some companies have realised will likely fuel growing demand for co-working space from certain corporates and enterprises in the region.

Generally, over the next couple of years, the Co-working sector in Greater China will likely go through a period of consolidation, causing many small local players to lose out to those with wider regional networks. Moreover, the sector is likely to move into new secondary city markets in the region as operators seek new business opportunities.

Considering that the potential for increased office demand in the Greater China region is important, however, it is also essential to deliberate factors which might have the potential to diminish demand somewhat. One main area that warrants careful consideration is the ongoing dispute over trade between the U.S. and China.

6. Trade and Tariffs

After several years of trade liberalisation and open markets, the recently imposed higher tariffs between the U.S. and China could be viewed as a turning point in world trade.

If further heightened tariffs are implemented, they will produce greater business uncertainty and this uncertainty will eventually find its way to commercial property markets in the form of diminished demand from affected sectors for premium office space in Greater China.

On the flip side, however, if the trade tensions between the U.S. and China cools down, or affected U.S. and Chinese companies find ways to circumvent the impact of higher tariffs, then we may see a back-to-normal business approach adopted by these companies. As business certainty returns, these companies will then once again take a confident approach to their real estate strategy, resulting in more stable and sustained demand for quality office space in Greater China.

The above is an excerpt from the Greater China Top Office Demand Trends report.

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