An econometric analysis of Shanghai office rents

The modern commercial office market in Shanghai emerged with China’s economic reform and open door policy in the 1980s and grew rapidly at the beginning of 1990s,with increasing demand for office space from foreign and domestic occupiers. Though total real estate investment is skewed towards residential property, office investment has grown by 23% per annual in terms of value and by 24% per annum in terms of completed floor space from 1995 to 2007. The Shanghai office market is of importance for a number of reasons. First, it is one of the largest office markets in China in terms of square footage and in investment terms. Second, the office market is one of most established ones in China and attracts most attention from policy makers, investors, practitioners and academia. However, so far there is little empirical research on the Shanghai office market. This paper will use econometric modelling techniques to investigate office rent determination of the CBD in the central Puxi area, Shanghai, over the period 1991 –2007. Using a reduced form modelling specification in an error correction framework based on demand and supply interactions, GDP and office stock are found to significantly affect office rental performance in the Shanghai market in the long run. The model also shows that the office market adjusts to equilibrium. This model is then extended to test the impact of foreign direct investment, real interest rates, and vacancy rates on rental determination