The Evolution of Chinese Office Markets: A Comparison of Beijing and Shanghai *Qiulin Ke and **Michael White *Nottingham Trent University, Nottingham **Heriot-Watt University, Edinburgh

Motivation for Research Global investors have been searching for higher returns beyond their local markets. Emerging markets in Chinese cities have been increasingly targeted for investment opportunities. Beijing and Shanghai (Tier 1 cities (JLL, 2008)) have the largest investable real estate assets in China and are the most transparent markets in China. Due to the emergent status of these markets, empirical studies on Chinese office markets are rare.

Compare and contrast rental adjustment in the Beijing and Shanghai; Research Objectives Compare and contrast rental adjustment in the Beijing and Shanghai; Examining the amplitude of fluctuation in rents and vacancy rates in the process of market adjustment; Testing the role played by foreign direct investment.

Methodology Demand is a function of rent and economic activity Demand equals non vacant space in equilibrium

Stages of Chinese Commercial Property Market

GDP of Beijing and Shanghai to National GDP

FDI: China, Beijing, and Shanghai in ($ billions)

Office Property Investment and growth rate in Beijing and Shanghai (in billion RMB)

Real Rent and Vacancy Rates: Shanghai Source: DTZ, China

Real Rent and Vacancy Rates: Beijing Source: DTZ, China

Comparison of Office Rents in Beijing and Shanghai

Comparison of Vacancy Rates in Beijing and Shanghai

Estimated Models Long Run Model Short Run Adjustment Also tested with FDI as an additional explanatory variable and with employment to represent demand instead of GDP

Long Run Model: Beijing

Short Run Adjustment Model: Beijing

Long Run Model: Shanghai

Short Run Adjustment Model: Shanghai

Demand as Measured by Employment

FDI

Elasticities

Market Structure and Vacancy Rates Following Voith and Crone (1988), and Grenadier (1995) The final model permits testing hypotheses of city specific (α), time specific (β) and market specific shocks (ρ) to the vacancy rate.

Impact of City, Time, and Market City Component Time Component Market Component Beijing 10.74749** 0.00104 0.79947*** Shanghai 7.32099** 0.01142 0.73091*** The time component is insignificant in both cities. City and market components are significant The market component suggests slow adjustment to shocks

Conclusions Cointegration tests support evidence of a valid long run relationship in Beijing and Shanghai office markets. The error correction coefficient implies adjustment to market imbalance in both markets. Shocks show evidence of persistence Quite large difference in price elasticity of demand for space. Unlike previous study of Shanghai office market, FDI is insignificant for both Beijing or Shanghai in both the long and short run.