Investigating the dynamics of, and interaction effects between, Shanghai office submarkets

1. Investigating the dynamics of, and interaction effectsbetween, Shanghai office submarkets A Presentation for the European Real Estate Society Annual Conference Stockholm, 2009 Qiulin Ke* and Michael White** *Nottingham Trent University, Nottingham **Heriot-Watt University, Edinburgh

2. Motivations for the research • There is a rich body of literature on office market analysis in western developed economies such as the US and UK. • Limited empirical studies on emerging markets such as Shanghai, though they have experienced rapid growth and attracted global capital.

3. Research objectives: • Extend analysis of Shanghai office market to examine submarket behaviour • To identify Long run relationships • Short run rent adjustment and • Interaction between Shanghai office submarkets • Does disequilibrium in one submarket affect other submarkets? • Is there convergence in rental performance between submarkets?

4. Literature and methodology • Grigsby (1963 and 1987) defined sub-markets in terms of the “close substitutability” of dwellings and properties within submarkets should be more “similar” than properties across submarkets • Property market is segmented into two distinct categories, spatial and structural. • Hedonic model applied in office market research (e.g. Glascock, et al.1990 and 1993; Mills, 1992; Wheaton and Torto, 1994; Bollinger et al. 1998), with submarkets denoted by dummy variables. These studies failed to test substitutability across submarkets. • Stevenson (2007) adopted error correction modelling to examine the rental adjustment in four submarkets in central London and modelled the interactive effects among the submarkets.

5. Methods of Analysis Long-run equilibrium model Short-run dynamic adjustment model Model linking error correction terms across submarkets Testing for Convergence

6. People’s Square Shanghai Office Submarkets: Puxi and Pudong Source: DTZ Shanghai Huangpu River Nanjing Road West Lujiazui, Pudong HuaihaiRoad

7. Central Puxi submarket • Traditional CBD. • Multi-national companies regional headquarter office and large professional services companies’ location. • Representing 30% of total Grade A Shanghai office stock. Lujiazui, Pudong submarket • Emerged since 1990 and • was driven by government planning and development strategy to build it as Financial and Trade Centre of China • Over 500 financial institutions settled there. • Representing 30% of total Grade A Shanghai office stock.

10. Real Rents in Puxi and Pudong Source: DTZ, Shanghai

11. Vacancy rate in Puxi and Pudong Source: DTZ, Shanghai

12. Long Run Models

13. Short Run Models

14. Market Convergence • Is there any evidence that the submarkets are converging in terms of rental performance? • Consider relative rent as a function of a long run equilibrium differential and deviations around this. • Rents converge if the deviations are non -permanent. The test takes the following form:

15. Test for Convergence

16. Conclusions • We find no interaction between the two submarkets in Shanghai. • Cointegration tests do not support evidence of a valid long run relationship in Pudong. • We did not find convergence in rental performance between the two submarkets. • These findings may be due to the shortness of the time series available and or be due to differences in the submarkets that imply a lack of substitutability for office occupiers.