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

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.

Research objectives:Extend analysis of Shanghai office market

to examine submarket behaviourTo identify Long run relationshipsShort run rent adjustment and Interaction between Shanghai office

submarketsDoes disequilibrium in one submarket affect

other submarkets?Is there convergence in rental performance

between submarkets?

Literature and methodologyGrigsby (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.

Methods of Analysis

Long-run equilibrium model

Short-run dynamic adjustment model

Model linking error correction terms across submarkets

Testing for Convergence

tuvStockDR )1ln(lnlnlnln 22100

ttttt vStockDR )1ln(lnlnln 3210

ttttttt uuvStockDR ,11,251,14,13,12,110,1 )1ln(lnlnln

Shanghai Office Submarkets: Puxi and Pudong

Source: DTZ Shanghai

Nanjing Road West

Huaihai Road

People’s Square

Lujiazui, Pudong

Huangpu River

Central Puxi submarketTraditional CBD.Multi-national companies regional headquarter office

and large professional services companies’ location.Representing 30% of total Grade A Shanghai office stock.

Lujiazui, Pudong submarketEmerged since 1990 and was driven by government planning and development

strategy to build it as Financial and Trade Centre of ChinaOver 500 financial institutions settled there.Representing 30% of total Grade A Shanghai office stock.

GDP Growth Rate (1993-2008)

-10.0020.0030.0040.0050.0060.0070.0080.0090.00

%

Shanghai

Pudong

Pudong Real Estate Investment

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Inve

stm

ent (

RMB

billi

on)

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Offi

ce s

tock

(sq.

m)

Real estate investment

Office stock

Real Rents in Puxi and Pudong

Source: DTZ, Shanghai

Vacancy rate in Puxi and Pudong

Source: DTZ, Shanghai

Long Run Models Puxi Pudong Constant 9.842

(13.387) 6.284

(18.281) Gross Value Added 1.053

(5.683) 0.453

(6.705) Stock -0.793

(-7.959) -0.220

(-5.765) FDI 0.431

(2.829) 0.146

(3.252) Adjusted R2 0.723 0.738 DW 0.908 0.538 Prob of F-statistic 0.000 0.000 Note: t-statistics are in parentheses.

Short Run Models Puxi Pudong Constant 0.011

(0.678) 0.003

(0.289) ∆Gross Value Added 0.082

(0.662) 0.209

(1.683) ∆Stock -0.228

(-1.486) -0.077

(-1.807) ∆FDI 0.004

(0.055) 0.029

(0.952) Error Correction Term – Puxi -0.205

(-2.217) 0.006

(0.119) Error Correction Term - Pudong -0.004

(-0.029) -0.185

(-2.132) Adjusted R2 0.153 0.119 DW 2.082 1.763 Prob of F-statistic 0.028 0.046 Note: t-statistics are in parentheses.

Market ConvergenceIs 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:

tmt

k

mmtt rrrrtrr

11

Test for Convergence

Variable Coefficient Std. Error t-Statistic Prob.

Constant -0.071372 0.032080 -2.224858 0.0307

Time Trend 0.001902 0.000931 2.042764 0.0465

Lagged relative rent (-1) -0.073207 0.047801 -1.531491 0.1321

Δ Lagged relative rent (-1) -0.393032 0.138112 -2.845757 0.0065

Δ Lagged relative rent (-2) -0.167641 0.136801 -1.225433 0.2263

R-squared 0.252174 Mean dependent var -0.010982

Adjusted R-squared 0.191127 S.D. dependent var 0.090154

S.E. of regression 0.081082 Akaike info criterion -2.098689

Sum squared resid 0.322141 Schwarz criterion -1.914524

Log likelihood 61.66461 F-statistic 4.130814

Durbin-Watson stat 1.994650 Prob(F-statistic) 0.005809

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.