SHANGHAI OFFICE LEASING

AUG 2021|LAST UPDATED

 

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Renting an Office in Shanghai

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OFFICE LEASING GUIDELINES

 
 

OFFICE TERMS

Lease Term

A standard lease term is two to three years. In some major cities like Beijing and Shanghai, large tenants take five- to six-year leases, subject to rent review after three years at open market rent (OMR), and within rent review cap with the option to renew for three more years, usually adjusted to OMR, but renewal rent cap is negotiable for large occupiers. In Beijing, If parties cannot agree on OMR, an arbitrator determines the new rent.

Renewals

Negotiable.

Rent Reviews

It is customary for longer leases to incorporate a ‘Rent Review’ at the expiry of the 3rd year. Rent is normally reviewed to the prevailing open market level, the definition of which will vary from lease to lease.

Escalation

Rent is generally fixed during the entire term for leases of less than five years. For longer-term leases, rent sometimes escalates at an agreed rate.


OCCUPANCY COSTS

Rent

Rent Quoted:

Rent is generally quoted as gross exclusive rent per square meter, although landlords sometimes quote gross inclusive rents. In both Shanghai and Beijing, rents are generally quoted in either RMB/sqm/day or RMB/sqm/month.

Rent Payable:

Rent is payable monthly, in advance. The tenant pays deposit, rent, and maintenance fees based on either gross area or net area in square meters.

Rent Free

Free Rent during Fit-Out Period: The amount depends on the size of leased area. The average in Shanghai and Beijing is one to three months for a 2000-square-meter tenant.

Management Fee

The tenant pays service charges (also known as management fee or management cost) to the landlord for providing specified services: air conditioning during normal office hours, elevator maintenance, power back-up, and common area cleaning, a general water charge unless the tenant installs an additional pantry, and building security.

The amount varies from building to building depending upon services provided and building quality. For a Class A building, RMB 30–40 per square meter per month on gross area is typical in Shanghai, and RMB 29-38 per square meter per month on gross area is typical in Beijing.

All tenants in a building typically pay a service charge at the same rate. Service charges are usually not auditable by tenants.

Security Deposit and Guarantees

A three-month security deposit is normally payable upon signing of the agreement. The landlord returns the security deposit with no interest at lease expiration. When the lease is extended for another three years, the amount of security deposit is usually adjusted to OMR.

In Beijing, a few large occupiers give half of the security as a bank guarantee.

Taxes

Lease taxes may vary geographically and change over time; they mainly include:

Property Tax:

Owner pays annually. Also known as urban real estate tax. Levied on 12% of the annual rental income for rental properties. Business Tax: Owner pays annually, along with its surcharges (including urban maintenance and construction tax and education tax, up to 13% of business tax), are levied on 5.5% of gross rental income for the leasing of a property. This tax has been replaced by VAT after May 2016.

Value Added Tax (VAT):

A VAT rate of 11% is applied on taxable transactions relating to real estate and construction since May 2016, including office leasing transactions. If the end-user is registered as a general VAT taxpayer, it may ordinarily claim an input VAT credit in its VAT return. The new rules also contain simplified VAT accounting method for properties where construction commenced before 1 May 2016, or for properties which are held as at 1 May 2016 and are later sold or leased. This is intended to smooth the transition to the new system. Under simplified method, the landlord imposes a 5% VAT on gross rents. Surcharges are remained, subjected to up to 13% of VAT.

Stamp Duty Tax:

Levied on 0.1% of the contract amount on both the tenant and the landlord.

Stamp Duty

Each party pays the stamp duty and other incidentals involved in lease preparation and execution. In Shanghai, Beijing and Guangzhou, the tenant pays 0.1% stamp duty for the leasing contract amount to a local district real estate exchange centre.

Utilities

Electricity, water and telecommunications are normally monitored by separate meters. Tenants usually pay for electricity and water used within the occupied area based on a meter. Expenses for utilities used in the common area of the building are shared according to the area of each tenant’s unit. Charges vary in different areas of Beijing and Shanghai. The tenant pays a utility fee directly to the landlord, which ranges from RMB 5-6 per square meter per month.

Insurance

Tenants typically insure their own property.

Car Parking

The tenant pays extra for parking, allocated by the landlord if available.

 

LEASE MECHANISMS

Option to Renew

Renewal options are negotiable and important for large tenants.

Holdover options are sometimes negotiated into the lease, depending on the level of the landlord's sophistication, and on the size and importance of the tenant. If included, landlords usually ask for three to six months’ prior notice to allow a tenant to hold over for up to three or six additional months following expiry date. In Shanghai, rental during holdover period ranges from 125%- 200% of rent.

Option to Expand & Right of First Refusal

Options to expand and right of first refusal are possible for large occupiers.

Right to Sublet

Subletting is somewhat uncommon, except when the subtenant is a subsidiary or affiliated company of the tenant. Documents verifying a subtenant's qualification must be provided and approved by the landlord.

  1. Sublease:

The new or replacement tenant takes over the property until the expiry of the existing lease. Large tenants normally find it easier to secure sublet rights than small tenants do. If a landlord agrees to grant a sublet right, the maximum size to be sublet is specified in the tenancy agreement. The norm is 20–30% of the total floor area.

  1. Assignment:

The new or replacement tenant has a lease granted by the landlord.

Termination or Break

Not very common and is subject to the clause in the contract. The tenant may have to pay a penalty if the tenant terminates early.

Reinstatement Provisions

The lease agreement usually requires tenants to restore the property to its original condition.

Signage and Naming of Building

Signage and naming rights may be available for an anchor tenant or a large property buyer, depending on negotiation with the landlord and approval from relevant government authorities.

Fit-out Subsidies

Capital contributions for fit-outs are generally not open for negotiation.


Laws & Practices

Laws

The China government promulgated the “Administration of the Leasing of Urban Premises Procedures” in 1995 and all urban leasing activities must comply with this regulation.

 

Associated Cost

Fit-out Costs

The landlord delivers premises installed for an open plan with: (1) finished ceiling, i.e., suspended ceiling using acoustic ceiling tiles and ceiling lighting; In Beijing, raised floor for prime office (2) HVAC and fire systems; and (3) finished restrooms in core.

The tenant normally pays for the fit-out, with little or no allowance from the landlord(In Shanghai, with no allowance ). The tenant usually must use contractors that the landlord appoints for mechanical and electrical systems, but can usually use its own contractors for other work. Landlords sometimes charge fees for supervision, but this is negotiable.

Fit-out costs for Class A or Prime buildings in Shanghai ranges from RMB 2,000–3,000 per square meter. including construction, furniture, wiring, design fees, etc. The costs might be higher in Beijing, ranging from RMB 4,300–5,382 per square meter.

Reinstatement

The lease agreement usually requires tenants to restore the property to its original condition.

The landlord's solicitors prepare a standard lease agreement, subject to negotiation by lawyers for each party. Each party usually pays for any legal fees it incurs.

The owner usually provides a standard lease contract supplied by the municipal government. Further terms and conditions of the lease are negotiable and can be attached to the contract.

Agency Fees

Usually the seller pays 1–1.5% to its broker. SOE (state-owned enterprise) buyers rarely pays agent fee to its broker, while overseas buyer usually pays 0.5–1% to its broker. The fee is negotiable, and influenced by market conditions and the total value of the transaction.

Agency fees differ in some locations and may be negotiable. They are typically based on the gross exclusive rent, i.e. the rent on the gross area, excluding the property management fee.

New Lease:

In Shanghai, landlords typically pay the tenant's agent 1–2 month gross exclusive rent; sometimes more for larger transactions. In Beijing, landlords typically pay the tenant's agent one month rent, excluding the property management fee. When different agents represent the landlord and tenant, landlords usually pay both agents. Tenant agents usually get 1–2 month rent in Shanghai and one month rent in Beijing, while commission for landlord agents ranges from 0.2–0.3 months in Shanghai and 0.3–0.5 months in Beijing.

Lease Renewal:

In Shanghai and Beijing, landlords rarely pay agency fees for a renewal. The tenant pays the tenant's agent ½ months' rent or an incentivized fee based on certain percentage of savings in Shanghai and 0.5–1 months' gross exclusive rent in Beijing.

Sublease:

In Shanghai, no standard fee exists. The tenant pays its agent a negotiated fee, which is typically one month's rent or a percentage of savings. In Beijing, tenants typically do not have the right to sublease to a third party. The tenant pays its agent a negotiated fee which is typically one month.


Space Planning

Building Classification

Grade A:

Services such as cleaning of common areas, air conditioning, and lobby security are required, while tenants are usually responsible for cleaning their own premises. Grade A buildings offer access and security 24 hours a day, seven days a week. Normal HVAC hours are from 8am to 7pm, with after-hours air-conditioning available at an additional charge.

Grade B:

Services such as cleaning of common areas, air conditioning, and lobby security are required. The major differences between Grades A and B buildings are the quality of the building and quality of the services.

Grade C:

Some Grade C buildings lack services outlined above. "Green" buildings: By the end of February 2015, China registered 566 commercial buildings that were certified under LEED status. By 2015, LEED-certified Grade A office buildings exceeded 4.8 million sq. m. across ten select major cities in China, an increase of 7.4% compared to the same period in 2014. This accounts for 28% of the total market, and reveals a development trend of steady growth.

Office Areas Defined

Net floor area is space that tenants can use as office space, including columns and walls, but not corridors, stairs, elevator lobbies, restrooms or plant rooms. Net floor area is measured from the center of the enclosing external and party walls. Net floor area is equivalent to carpetable area elsewhere.

Common area is space for the common use of tenants, such as lobbies, elevators, elevator hall, and restrooms. Some buildings include parking spaces as common areas and provide tenants with free parking spaces according to the space that tenants occupy.

Gross floor area equals net area plus common area. Gross floor area includes all areas contained within perimeter walls at each floor level, including service cores, elevator lobbies, passenger and service elevator wells, staircases, lavatories, pantries and mechanical and electrical rooms.

Efficiency

For Class A buildings in Shanghai, the average efficiency (i.e., the ratio of net area to gross area) is 65–76%, so that an average loss factor is 24–35%.

For a Class A building in Beijing, the average efficiency is 70–75%, so that a typical loss factor is 25–30%.

Space Measurement

In general, gross floor area is used as the space measurement for office leases in major cities in China.

Feng Shui

Some tenants consider feng shui, for their office layout and decoration, but feng shui does not affect the choice of a location or a choice of office space. Landlords usually avoid designating floors as 4th, 13th, or 14th, because some domestic or overseas tenants consider these numbers unlucky. However, the designation of a floor is not a major influence on the rental rate.

 
 
 

CHINA PROPERTY nEWS