Jul 17, 2019 (China Knowledge) - A building infrastructure surplus in southern China’s tech center has driven vacancy of Grade A offices to new highs, putting a new pressure on over-ambitious developers whose inexperience have led them into the industry.
Excessive pride has caused many of these developers to dive into purchasing these office spaces without the experience or plans to adapt if the market turns for the worst. Amidst China’s trade war, it appears as though these fears have come to fruition.
Shenzhen’s vacancy amounted to 1.79 million square meters at the end of June, a new record. Half of that empty office space is found in the Nanshan district, home to tech giants such as ZTE, DJI, and Tencent. Despite this vacancy, new office space is still being built in southern China’s Silicon Valley equivalent. Of the 15 current office projects, only 4 of them are being built by already well-established companies, while the majority are small builders, investment companies, or conglomerates in logistics, health-care, or retail.
Yan Yuejin, a research director at Shanghai-based E-House China R&D Institute, sums up the proceedings in Shenzhen, remarking that “some cash-rich companies from other industries have blindly joined the real estate sector, expecting to earn big bucks, [and] these are the companies who will suffer the most when the market turns south, as they are not familiar with the products and rules of the real estate industry, and they cannot come up with solutions quickly enough.”
These vacancy issues are not limited to Shenzhen, plaguing many of China’s other major cities. Beijing’s vacancy rate of Grade A offices has spiked to an 8 year high of 11.5%, and may still grow before the end of 2019. Similarly, Shanghai's rates have also jumped 4.4 percentage points to a 10 year high of 18%.
As China’s economy is growing at the slowest pace since 1992, with GDP growth at 6.2% last quarter, and investments by venture capital and private equity investments in technology continue to decrease, only time will tell how small market developers will be able to survive amidst a questionable economic environment.
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