Negotiating Office Space Lease in China - 2015

From mid-2014, the Chinese Grade A office space market is experiencing a downward trend due to excess supply, low demand and an unstable financial system. This has caused a 7% -8% office space rent has declined. By 2016, an additional 8.2 million square meters of office space or additional 60% office space will be added to market, primarily from existing projects. The introduction of property taxes has increased holding costs for landlords; this will incentivize them to lease existing office spaces as quickly as possible, which will further decrease rents. In 2015, an increase in land development taxes has significantly decreased permits for new commercial projects. Irrespective of strict measures and robust demand from the growing services sector, vacancy rates will remain at high levels for the next two years.� This will be the right time for tenants with strong establishment in China to negotiate better rates for the next few years. Rents in a few suburban cities close to Beijing, Shanghai and Shenzhen likely to increase from 2017* onwards due to strict Government measures to curb supply and a growing demand from the services sector. However, in tier 2 and tier 3 cities there is high leverage on the tenants' side in bargaining rents with additional benefits.   Introduction - China Office space market overview (2014 - 2015) Sluggish residential market, an under-developed financial system, high local Government debt and weak domestic demand has affected the Chinese property market. Chinese property market remains weak with 10% y-o-y decline in property sales and 12% y-o-y decline in overall fixed asset investment. Supply of Grade A office space exceeded demand in most cities despite stable demand from the services sector. Few submarkets in tier 1 cities such as Shenzhen and Beijing have moderately increasing rents while all other cities experienced an overall 15% decline in rents. Chinese realtors speculated higher urbanization rates, growing asset prices and constructed several commercial buildings in two and three tier cities that continue to remain vacant. Grade A office space vacancy rates in tier 1 cities are 15% and in the tier 2 and 3 cities vacancy rates are as high as 25%.   Author: Chandhini Raghupathy