Asian outlook: Shanghai booms as Tokyo goes bust

Real Estate Weekly, Nov 30, 1994 by Mariyon I. Robertson

Government in transition and cities in varying stages of the economic cycle have created office markets across Asia that range from very hot to luke warm to cold, in terms of levels of development and leasing activity.

Without a doubt, the market in Shanghai is booming. Located near the eastern coast of China, the city has every right to reclaim its name from many years ago - "Paris in Asia" - and may soon overshadow Hong Kong, a city with limited capacity for growth.

Currently, approximately 300 buildings are under development in Shanghai. A top-of-the-line seaport and a nearby airport make Shanghai an obvious center for industry and trade, but the main reason for the surge of development is that investors are eager to get their money into the city before Hong Kong returns to Chinese rule in 1987.

In addition to Chinese funds, there is plenty of American capital - plus capital from other countries - driving the market. Rules requiring joint ventures with Chinese firms are being relaxed, making it possible for foreign companies to do business on their own in China.

Shanghai will have an entirely new skyline. Today, s wave constitutes the first development in Shanghai since before World War II, and none of the existing buildings exceeded 30 stories. I estimate that nearly half of the new buildings have been designed by American architectural firms, as they are the leaders in skyscraper engineering.

The countries of Southeast Asia, most notably the centrally-located Singapore, have moderately active office markets. As governments in Southeast Asia gain stability, many international companies are beginning to take advantage of their inexpensive workforce.

At the opposite end of the spectrum lies Tokyo and the rest of Japan. Clearly, Japan's bubble economy burst shortly after it peaked in 1991, and the country is still trying to pick up the pieces. The Japanese are experiencing its first drop in land and building values since World War II. With banks busy disposing, of their debt, there is virtually no new development. As it fights to survive, the office market is being forced to succumb to the customs of their foreign tenants.

For the first time ever, Japanese landlords are discounting rentals and offering concessions. In Shinjuku, an area of Tokyo that was only recently developed and consists primarily of new skyscrapers (the oldest building there is less than 20 years old), the asking rents for some of these new buildings are 40 to 45 percent lower than they were just a few years ago.

The two year lease, which was once the only type of lease in Japan, is facing competition as some landlords are beginning to offer longer-term leases. The two-year security deposit is also on its way to becoming a relic of the past. throughout Japan, the story is the same.

In the next year, there will undoubtedly be an increased American presence throughout Asia. Regardless of whether one is seeking to get involved on the ground floor or simply looking for a good deal, the office markets of Asia present a variety of opportunities to investors, developers and corporations.