An econometric analysis of Shanghai office rents
| Date | 06 March 2009 |
| DOI | https://doi.org/10.1108/14635780910937836 |
| Published date | 06 March 2009 |
| Pages | 120-139 |
| Author | Qiulin Ke,Michael White |
| Subject Matter | Property management & built environment |
An econometric analysis of
Shanghai office rents
Qiulin Ke
School of the Built Environment, Nottingham Trent University,
Nottingham, UK, and
Michael White
School of the Built Environment, Heriot-Watt University, Edinburgh, UK
Abstract
Purpose – Shanghai is the most important economic centre in China. It also has the nation’s largest
modern office market in terms of floorspace and investment values. However, as with office markets in
other cities and countries, the Shanghai market displays rental volatility. This paper aims to examine
this issue.
Design/methodology/approach – Rental volatility is examined by econometrically constructing a
long-run equilibrium relationship between rent and underlying demand and supply side factors. In
order to establish the validity of this model, it is tested for the presence of a cointegrating vector. From
this a short-run dynamic adjustment model is constructed. This is an error correction mechanism that
links the short- and long-run models. The impact of office vacancies, foreign direct investment, and
changes in the real interest rate on the office market are explicitly considered.
Findings – The results indicate that both demand (as represented by gross domestic product (GDP))
and supply (stock) are significant determinants of rents. Space demand is found to be both price and
income elastic. In the short-run model the error correction term is significant and correctly signed. In
comparison to other office markets, the Shanghai market adjusts rather slowly. Foreign direct
investment is found to have a positive impact on long-run rents and the vacancy rate is found to
impact on short-term rental adjustment.
Originality/value – The Shanghai office market is the most important in China. However, it has
displayed significant rental volatility. This paper is the first to examine explicitly the rental
adjustment process in this office market. The results suggest a market that is performing as expected
by economic theory but which nevertheless displays relatively slow adjustment to market imbalances.
Keywords China, Office buildings, Rents
Paper type Research paper
1. Introduction
Intense competition for a limited pool of desirable assets, combined until recently with
yield compression in most global markets, has resulted in real estate funds broadening
their geographic search for opportunities. Investors of all types keen on attaining
higher returns while increasing their portfolio diversification have been driving the
globalisation of commercial real estate investment to unprecedented levels in recent
years. Diversification in both geography and property sectors has become a vital
strategy for global investors seeking to spread their risks while growing their
portfolios.
China has become one of the major recipients of foreign direct investment (FDI). By
2007, more than 100 foreign countries and regions had investments in some 30,000
local projects in China. International investors are eager to exploit the potential of
The current issue and full text archive of this journal is available at
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JPIF
27,2
120
Received September 2008
Accepted October 2008
Journal of Property Investment &
Finance
Vol. 27 No. 2, 2009
pp. 120-139
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780910937836
investing in China, particularly in Shanghai, the finance, commerce and economic
centre of China.
Sustained economic growth in Shanghai continues to spur office demand. Financial
and professional services firms are expanding swiftly. For example, in 2007 there were
another 30 regional head offices of multinational companies, 15 investment companies
and 34 foreign research and development centres being located in Shanghai, creating
demand for high-grade office space. As early as 1995, 38 per cent of total foreign
investment in Shanghai was property related (Li et al., 1999). The strong demand for
office space and the positive outlook for the Shanghai office market have drawn a
massive inflow of foreign investment into the Shanghai real estate market rising from
US$0.52 billion in 2005 to US$1.01 billion in 2007. This occurred despite the fact that
Central Government departments jointly issued two documents in 2006 to strengthen
control over foreign investment in real estate acquisition and development. It stated
that for total investment of more than US$10 million, the registered capital of a real
estate foreign investment enterprise should not be lower than 50 per cent of the total
investment (previously 40 per cent) and if the registered capital of a foreign investment
enterprise is less than 35 per cent of the total investment, loans are not allowed to be
taken out. The regulations raised the threshold for foreign investors who entered the
Chinese property market. However, the Central Government’s ongoing macro-control
measures did not dampen investor optimism. The China Property Law passed in the
first quarter of 2006 boosted investor confidence in long-term property investment
since the law clarified the status of property rights on the expiration of the initial term
of land leases.
Shanghai’s property market has expanded rapidly since the 1990s. However, there
is no empirical study on office rental movements in the city. This new research is
undertaken against such a background and is therefore particularly important for
investors, practitioners, and policy makers domestically and internationally.
This paper is structured as follows: section 2 provides an overview of the rent
modelling literature. This is followed, in section 3, by a description of the evolution of
Shanghai office market. Section 4 outlines the methodology and describes the data. The
empirical findings are discussed in section 5 and conclusions are drawn for future
research in section 6.
2. Literature review
The analysis of commercial office market rental movements itself has undergone
significant developments in the last two decades. Unlike other areas of economics and
even in comparison to housing economics, analysis of commercial real estate rents has
been constrained by insufficient data. These data constraints manifest themselves in a
number of ways. The first, and most obvious, has been the shortness of time series. In
the UK and USA, annual data rarely go back beyond 1970 and thus it has only been
relatively recently that it has been possible to identify long-run relationships
(Hendershott et al., 2002a, b; Farrelly and Sanderson, 2005; Mouzakis and Richards,
2007). In China, time series are significantly shorter, since the property market
virtually did not exist before 1980s, the pre-reform era.
The second aspect relates to supply side data. Unbroken time series are usually
unavailable and this is also true of the markets in Chinese cities. Researchers are thus
limited in how to deal with supply. Either they can restrict their study to cover only the
Analysis of
Shanghai office
rents
121
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