Office rental supply in China expected to surge in 2016

Office rental supply is expected to surge in China as completions peak in a number of gateway cities and emerging markets, according to a report by property services provider DTZ.

Total supply of new office space will amount to about 13% of current inventory in 2016, while Beijing and Shanghai will account for the lion's share of Grade A office completions among AsiaPac core gateways cities, it said.

While emerging markets account for about 60% of completions, a number of gateway cities will also see substantial office rental supply being delivered.

"In most of the region, developers generally build ahead of anticipated demand," said Sigrid Zialcita, Managing Director, Research, Asia Pacific.

While this may raise some concerns about the strength of underlying demand, Zialcita said it should be viewed in a balanced way.

"Overall, we continue to see this as the continued growth and evolution of the region's cities," she said.

Addressing the question of whether this speculative surge in development can be supported by underlying demand, Andrew Ness, Head of Research, Greater China believed the high substantial level of absorption witnessed in 2015 provides a great level of comfort to the market.

" The substantial level of absorption witnessed in 2015, in China’s core and emerging cities, where new supply met with substantial level of pre-commitment and absorption, is mostly from the IT sector and financial services sector," he said.

According to the company, in a number of the region's cities, this wave of rental supply will be targeted at new submarkets and expanded business districts.

In Shanghai, for instance, about 60 percent of the new supply will be located in the city's emerging sub-markets, which will intensify competition for tenants in these areas but make the city more cost competitive for corporate occupiers.

In Beijing, new supply in core sub-markets will be greater, but 45 percent of supply will come on stream in emerging new sub-areas, leading to an anticipated easing in CBD rents.

Across the APAC region, expansion of office supply will also add to the amount of investable stock in the region, which will expand the scope of real estate investments with a much greater range of opportunities across the risk spectrum.

New subsectors and thematic strategies could also emerge as existing cities rapidly develop in scale, it said.