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

1

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

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 ObjectivesCompare 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

210

ERD Demand is a function

of rent and economic activity

Demand equals non vacant space in equilibriumSUvD )1(

)1(lnlnlnln 22100 vSUER

Stages of Chinese Commercial Property Market

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Stage 1 Experimental period 1980s to 1992

Laws and regulations regarding land transfer came into effect. Unavailability of internationally acceptable office property

Stage 2 Transformation period (1993-1996)

Entry of domestic investment and development companies Entry of foreign companies through joint venture Commencement of commercial real estate development in large scale Substantial increase in supply High demand High rental growth High capital growth

Stage 3 Oversupply period (1997-1999)

Low take-up rate High vacancy rate Falling rental values

Stage 4 Maturing period (2000-onward)

Substantially increasing demand for office property Moderate increase in supply Rising rent Entry of foreign investment and development companies

GDP of Beijing and Shanghai to National GDP

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4% 4% 4% 4% 4% 5% 5% 5%

4%

5%

4%

6%

4%

5%

4%5%

4%

3% 2% 2% 3% 3% 3% 3% 3% 3% 4% 4% 4% 4% 4% 4%3% 4%

0%

1%

2%

3%

4%

5%

6%

7%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

GDP (Shanghai)

GDP (Beijing)

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

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Year FDI

National FDI

Beijing FDI

Shanghai % of Beijing and

Shanghai to nation 1993 275.15 11.17 31.75 16%

1994 337.67 13.72 39.89 16% 1995 375.21 10.80 52.98 17% 1996 417.26 15.53 75.10 22% 1997 452.57 15.93 63.45 18% 1998 454.63 21.68 48.16 15% 1999 403.19 19.75 59.99 20% 2000 407.15 16.84 53.91 17% 2001 468.78 17.68 74.10 20% 2002 527.43 17.25 50.30 13% 2003 535.05 21.91 58.50 15% 2004 606.30 30.84 65.41 16% 2005 603.25 45.52 68.50 19% 2006 630.21 35.26 71.07 17% 2007 747.68 50.66 79.20 17% 2008 924.00 60.82 100.66 17% 2009 900.30 61.20 103.18 18%

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Year National

Growth rate

(national) (%)

Office investment

(Beijing)

Growth rate

(Beijing) (%)

Office investment (Shanghai)

Growth rate

(Shanghai) (%)

Beijing and Shanghai to national (%)

1999 40.94 6.35 9.83 40% 2000 36.02 -12% 5.47 -14% 6.95 -29% 34% 2001 37.24 3% 8.71 59% 3.17 -54% 32% 2002 46.07 24% 11.77 35% 4.05 28% 34% 2003 61.47 33% 17.26 47% 8.06 99% 41% 2004 78.86 28% 22.72 32% 10.07 25% 42% 2005 92.27 17% 23.72 4% 12.36 23% 39%

2006

118.83 29% 27.75 17% 15.91 29% 37%

2007

140.63 18% 32.91 19% 21.40 34% 39%

2008 162.57 16% 24.93 -24% 27.23 27% 32%

2009 201.46 24% 24.37 -2% 27.65 2% 26%

Average 18% 17% 18% 36%

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

9Source: DTZ, China

0

10

20

30

40

50

60

0

20

40

60

80

100

120

rr_sh

vr_sh

Real Rent and Vacancy Rates: Shanghai

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Source: DTZ, China

0

5

10

15

20

25

30

35

0

10

20

30

40

50

60

70

80

90

rr_bj

vr_bj

Real Rent and Vacancy Rates: Beijing

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Comparison of Office Rents in Beijing and Shanghai

0

20

40

60

80

100

120

140

rr_bj

rr_sh

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Comparison of Vacancy Rates in Beijing and Shanghai

0

10

20

30

40

50

60

vr_bj

vr_sh

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Estimated Models

ttttt uvStockGDPR )1(4310

Long Run Model

Short Run Adjustment

Also tested with FDI as an additional explanatory variable and with employment to represent demand instead of GDP

tttttt uvStockGDPR 143210 )1(

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Long Run Model: BeijingDependent Variable: Real Rent in Beijing Method: Least Squares Sample (adjusted): 1994S2 2009S2 Included observations: 31 after adjustments

Variable Coefficient Std. Error t-Statistic Prob. C 7.688020 0.404062 19.02685 0.0000

Real GDP 0.357042 0.110213 3.239563 0.0032 Stock -0.388848 0.056417 -6.892448 0.0000

1 - vacancy rate 0.167099 0.055704 2.999755 0.0057 R-squared 0.801199 Mean dependent var 3.535732

Adjusted R-squared 0.779110 S.D. dependent var 0.373180 S.E. of regression 0.175390 Akaike info criterion -0.523692 Sum squared resid 0.830567 Schwarz criterion -0.338662 Log likelihood 12.11723 F-statistic 36.27150 Durbin-Watson stat 0.970387 Prob(F-statistic) 0.000000

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Short Run Adjustment Model: BeijingDependent Variable: Change in Real Rent Beijing Method: Least Squares Sample (adjusted): 1995S1 2009S2 Included observations: 30 after adjustments

Variable Coefficient Std. Error t-Statistic Prob. C -0.029392 0.037716 -0.779283 0.4431

Change in Real GDP 0.183792 0.240670 0.763668 0.4522 Change in Stock -0.115772 0.134279 -0.862172 0.3968

Change in 1 – vacancy rate 0.155456 0.080057 1.941806 0.0635

Error Correction -0.456206 0.172693 -2.641714 0.0140 R-squared 0.309759 Mean dependent var -0.046662


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Long Run Model: ShanghaiDependent Variable: Real Rent Shanghai Method: Least Squares Sample (adjusted): 1994S1 2009S2 Included observations: 32 after adjustments


Real GDP 0.838141 0.215823 3.883458 0.0006 Stock -0.660881 0.104411 -6.329621 0.0000

1 – vacancy rate 0.141858 0.067835 2.091220 0.0457 R-squared 0.848843 Mean dependent var 3.638322


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Short Run Adjustment Model: ShanghaiDependent Variable: Change in Real Rent Shanghai Method: Least Squares Sample (adjusted): 1994S2 2009S2 Included observations: 31 after adjustments


Change in Real GDP 0.036936 0.178647 0.206754 0.8378 Change in Stock -0.377527 0.180023 -2.097106 0.0459

Change in 1 – vacancy rate 0.101235 0.046353 2.184012 0.0382

Error Correction -0.362089 0.139992 -2.586499 0.0156 R-squared 0.428195 Mean dependent var -0.040289


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Demand as Measured by EmploymentLong Run Model Beijing Shanghai Coefficient t-stat Coefficient t-stat Constant -0.147311 -0.049782 -3.020281 -1.382777 Employment 1.236858 2.519298 2.089298 5.311956 Stock -0.239426 -8.317784 -0.383121 -10.42833 1 – vac rate 0.187655 3.172698 0.255826 5.898448 Adjusted R2 0.751635 0.871751 DW 0.648748 0.980526 Prob F-stat 0.000000 0.000000 Short Run Adjustment Model Beijing Shanghai Coefficient t-stat Coefficient t-stat Δ Constant -0.018766 -0.622194 -0.006113 -0.181039 Δ Employment 2.100893 3.081486 1.483364 1.950571 Δ Stock -0.075361 -0.616327 -0.307941 -1.374379 Δ (1 – vac rate) 0.126830 1.616287 0.106886 2.170878 Error Correction -0.435108 -2.660060 -0.392571 -2.140457 Lagged Real Rent 0.249517 1.350247 0.166120 0.874992 Adjusted R2 0.298417 0.294540 DW 2.033541 2.078689 Prob F-stat 0.016877 0.015453

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FDILong Run Model Beijing Shanghai Coefficient t-stat Coefficient t-stat Constant 7.772463 12.19926 8.962443 14.55174 GDP 0.326860 1.579508 0.609395 2.561209 Stock -0.385600 -6.381277 -0.577014 -5.850340 1 – vac rate 0.168214 2.946231 0.168620 2.439706 FDI 0.035955 0.173610 0.409071 1.875720 Adjusted R2 0.770880 0.841171 DW 0.950901 1.023482 Prob F-stat 0.000000 0.000000 Short Run Adjustment Model Beijing Shanghai Coefficient t-stat Coefficient t-stat Δ Constant -0.029654 -0.770827 0.012709 0.388560 Δ GDP 0.168484 0.683109 -0.004643 -0.032806 Δ Stock -0.124697 -0.889656 -0.401471 -2.749871 Δ (1 – vac rate) 0.152262 1.859653 0.112456 3.706956 Error Correction -0.445198 -2.511585 -0.379538 -2.361945 Δ FDI 0.062719 0.376463 0.075907 0.438992 Adjusted R2 0.168037 0.333377 DW 1.739466 1.789915 Prob F-stat 0.091158 0.008372

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Elasticities

Beijing Shanghai Price Elasticity -2.577 -1.513 Income Elasticity 0.920 1.268

Market Structure and Vacancy Rates

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Following Voith and 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.

ititit vv *

)(* tfv iit

ititiitiit vtv 1)1(

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Impact of City, Time, and Market

City Component

Time Component

Market Component

Beijing 10.74749** 0.00104 0.79947***

Shanghai 7.32099** 0.01142 0.73091***

The time component is insignificant in both cities.

City and market components are significant The market component suggests slow

adjustment to shocks

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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.

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

Documents

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shanghai office markets

gdp of beijing

comparison of beijing