Alibaba leads local tenants at China’s tallest tower

SHANGHAI, Sept 10 — As China’s tallest skyscraper prepares to open, its mix of tenants illustrates a business and regulatory climate that has put foreign companies on the back foot.

Led by Alibaba Group Holding Ltd’s Alipay, Chinese companies will initially occupy most of the more than half of the office space in the 632-metre (2,074-foot) building that has been pre-leased, according to developer Shanghai Tower Construction & Development Co. The company has also signed agreements for leases with Allianz Insurance Plc and local firm All Bright Law Offices.

The share of foreign tenants in grade-A office buildings in China’s financial centre has been steadily declining, falling by about a quarter in the past decade, according to broker CBRE Group Inc. International firms such as Citigroup Inc and Nike Inc leased offices in Shanghai as the government outlined a plan to make it a global financial, economic and shipping hub by 2020. Now, a weakening economy, slow progress on yuan convertibility and regulatory obstacles have seen some companies curb their expansion plans.

“Until a clearer picture emerges of how and when certain sectors of this market will open, foreign financial firms remain cautious regarding their occupancy needs,” said Michael Stacy, Shanghai-based head of tenant advisory for China at Cushman & Wakefield Inc. “Many foreign financial firms are still carrying excess space in anticipation of growth needs or to accommodate increased hiring that may not have taken place.”

Increased operating costs, the risk of an economic slowdown, and perceptions of regulatory bias against international companies are tempering the optimism of US firms in China, the American Chamber of Commerce in Shanghai said in a report this year.

Convertible currency

Foreign financial-services companies face particular road blocks, such as being limited to minority stakes in securities joint ventures with Chinese firms. They’ve been largely excluded from lucrative businesses such as secondary-market trading in Chinese debt and equities, as well as from managing money for wealthy clients.

While China has been reducing restrictions on the use of yuan as part of efforts to win the status of a reserve currency, the stock-market rout and capital outflows earlier this year have exposed the dangers of a full dismantling of cross-border capital controls, potentially increasing resistance to reform.

“Many foreign investment banks already have offices in China and until China makes the renminbi a convertible currency, their business will remain limited,’’ said Shanghai-based Albert Lau, chief executive officer of Savills Plc’s China unit.

Shanghai skyline

Shanghai Tower in the Lujiazui financial district is the latest addition to the city’s skyline that already boasts some of the world’s tallest skyscrapers. Cushman & Wakefield estimates that it will take at least another 18 to 24 months for Shanghai Tower, which was almost seven years under construction, to reach full occupancy. In contrast, the 492-metre Shanghai World Financial Centre, which opened in late 2008, took more than three years from completion to achieve an occupancy rate of over 90 per cent.

Average achievable rents at Shanghai Tower range from 10 yuan (RM6.81) a day per square metre to as high as 18 yuan for top floors, according to Cushman & Wakefield. Average rents for grade-A offices in the city rose 0.8 per cent to 10.7 yuan a day per square meter in the second quarter, according to the broker.

To attract more multinational tenants, the building will need to cut leases and offer prospective tenants concessions such as free rent periods as new premium buildings are going up, said Cushman & Wakefield’s Stacy.

Local interest

Interest from local entrepreneurs for high-quality premises is picking up the slack left by international clients dialing back their expansion, underpinning rental growth amid surging new supply, said Michael Wu, the Shanghai-based head of the office services department at Colliers International Group Inc’s China unit.

Shanghai will see 1.6 million square metres (17 million square feet) of grade-A office space come on to the market in 2016, more than double the supply this year, according to Cushman & Wakefield.

Major leases at Shanghai Tower include Alibaba’s Ant Financial, owner of Alipay, which has committed to about 17,000 square metres, the most so far, according to Colliers. Local law firm All Bright has taken up about 10,000 square metres, while British insurer Allianz Insurance has committed to 2,000 square metres and Jiangnan Rural Commercial Bank to about 1,500 square metres, the broker said. The tenants couldn’t be immediately reached for comment.

Although foreign businesses still dominate grade-A office buildings in Shanghai, occupying 63 per cent of space last year, Chinese tenants have more than doubled since 2005, largely driven by financial companies, according to a July 27 report by CBRE based on a yearlong survey.

Shanghai Tower’s 2.37 million square feet of office space compares to the three million square feet at 1 World Trade Centre in New York. It is China’s tallest tower and the second-tallest in the world, after the 828-metre Burj Khalifa in Dubai. — Bloomberg