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The Evolution of Chinese Office Markets: A Comparison of Beijing and Shanghai

The Evolution of Chinese Office Markets: A Comparison of Beijing and Shanghai. * Qiulin Ke and **Michael White *Nottingham Trent University, Nottingham ** Heriot -Watt University, Edinburgh. Motivation for Research.

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The Evolution of Chinese Office Markets: A Comparison of Beijing and Shanghai

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  1. The Evolution of Chinese Office Markets: A Comparison of Beijing and Shanghai *QiulinKe and **Michael White *Nottingham Trent University, Nottingham **Heriot-Watt University, Edinburgh

  2. Motivation for Research • Global investors have been searching for higher returns beyond their local markets. • Emerging markets in Chinese cities have been increasingly targeted for investment opportunities. • Beijing and Shanghai (Tier 1 cities (JLL, 2008)) have the largest investable real estate assets in China and are the most transparent markets in China. • Due to the emergent status of these markets, empirical studies on Chinese office markets are rare.

  3. Research Objectives • Compare and contrast rental adjustment in the Beijing and Shanghai; • Examining the amplitude of fluctuation in rents and vacancy rates in the process of market adjustment; • Testing the role played by foreign direct investment.

  4. Methodology • Demand is a function of rent and economic activity • Demand equals non vacant space in equilibrium

  5. Stages of Chinese Commercial Property Market

  6. GDP of Beijing and Shanghai to National GDP

  7. FDI: China, Beijing, and Shanghai in ($ billions)

  8. Office Property Investment and growth rate in Beijing and Shanghai (in billion RMB)

  9. Real Rent and Vacancy Rates: Shanghai Source: DTZ, China

  10. Real Rent and Vacancy Rates: Beijing Source: DTZ, China

  11. Comparison of Office Rents in Beijing and Shanghai

  12. Comparison of Vacancy Rates in Beijing and Shanghai

  13. Estimated Models • Long Run Model • Short Run Adjustment • Also tested with FDI as an additional explanatory variable and with employment to represent demand instead of GDP

  14. Long Run Model: Beijing

  15. Short Run Adjustment Model: Beijing

  16. Long Run Model: Shanghai

  17. Short Run Adjustment Model: Shanghai

  18. Demand as Measured by Employment

  19. FDI

  20. Elasticities

  21. Market Structure and Vacancy Rates • Following Voithand Crone (1988), and Grenadier (1995) • The final model permits testing hypotheses of city specific (α), time specific (β) and market specific shocks (ρ) to the vacancy rate.

  22. Impact of City, Time, and Market • The time component is insignificant in both cities. • City and market components are significant • The market component suggests slow adjustment to shocks

  23. Conclusions • Cointegration tests support evidence of a valid long run relationship in Beijing and Shanghai office markets. • The error correction coefficient implies adjustment to market imbalance in both markets. • Shocks show evidence of persistence • Quite large difference in price elasticity of demand for space. • Unlike previous study of Shanghai office market, FDI is insignificant for both Beijing or Shanghai in both the long and short run.

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