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*Qiulin Ke and **Michael White

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1 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

2 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.

3 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.

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

5 Stages of Chinese Commercial Property Market

6 GDP of Beijing and Shanghai to National GDP

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

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

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

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

11 Comparison of Office Rents in Beijing and Shanghai

12 Comparison of Vacancy Rates in Beijing and Shanghai

13 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

14 Long Run Model: Beijing

15 Short Run Adjustment Model: Beijing

16 Long Run Model: Shanghai

17 Short Run Adjustment Model: Shanghai

18 Demand as Measured by Employment

19 FDI

20 Elasticities

21 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.

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

23 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.

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