Space premium in new order

Reading the market seems to be key to success of global office provider

Belgium-based Oleon NV, a leading producer of oleochemicals - chemicals derived from plant and animal fats - has the largest market share in Europe but it was only last year that it launched its first brand in China, with a team of just three people.

Locating their office in a Regus business center in Lujiazui, Shanghai is part of a growing trend in China, where flexibility is essential in today's business climate.

"The period of reckless expansion for foreign companies in China is coming to an end," says Jason Ye, China general manager for Oleon NV.

"Nowadays, the expansion to new markets such as China is mainly to compensate for the effects of economic turmoil."

Ye's team shares the floor with dozens of other small IT and trading companies, all clients of Regus holding different leases. They share meeting rooms, a central reception, a business lounge and a tea room.

Despite the small size of the team, Ye says he is looking to expand Oleon's annual sales in China to $30 million within the next three to five years, cashing in on the huge market potential for high-end industrial products in the wake of an increasing national income.

Surging office rentals in China's largest cities and a greater focus on costs amid a sluggish economy are reshaping companies' demands for their workplace, with efficiency and flexibility becoming keywords.

"Office rentals in Beijing are now among the most expensive in the world," says Hans Leijten, East Asian regional vice-president for Regus, the world's largest provider of outsourced office space.

Beijing Financial Street and Jianguomen Central Business District in China's capital ranked third and fourth as the world's most expensive office areas in the first half of 2013, after Hong Kong Central and London's West End, according to a semi-annual costs survey by CBRE Global Research and Consulting.

Pudong and Puxi, two prime downtown business districts in Shanghai, were among the top 20 in the league.

According to Leijten, rental costs for prime office space in first-tier cities are still on the rise. In Beijing, the rent for one square meter per month has increased from 200 yuan ($33) to 350 yuan, up 75 percent, over the past two years.

With robust demand and low supply in downtown areas, he says the high-end office leasing market will remain stable and there is no likelihood of rent prices falling in the CBDs.

On the other hand, with the US and European economies remaining weak and the Chinese economy experiencing a mild slowdown, "companies tend to be more cautious with big and long-term fixed rents and investments", says Leijten.

Most multinationals set up their first office in China with only three to five people, but the minimum space of a conventional office in a grade-A office building is normally 200 square meters, bonded to a three-year lease contract, Leijten says.

"The moment you sign up for a lease for three years, it means your business is committed in size and location for three years. That's obviously not an option for companies entering new markets or uncertain about their future, that want more flexibility and control over their costs."

Working in a business center also saves companies from handling other costs such as property management, electricity, airconditioning, cleaning, maintenance and reception services, he says, adding that using Regus can save up to 65 percent of costs compared with a conventional office.

"For foreign companies entering China or Chinese companies going overseas, Regus can significantly lower the entry barriers, especially for companies that start small and don't know exactly how the expansion will develop," claims Leijten.

The caution by multinationals has helped Regus take some bold steps in China over the past years. Regus' portfolio in China has been growing at 60 to 80 percent a year over the past few years, with a growing share coming from Chinese clients.

A small but efficient office at a business center has also become a more popular choice among Chinese companies, which used to regard their workplace very seriously.

"Twenty years ago Chinese companies used to buy their offices and say: 'Look, this is my office' as evidence of their success to clients. But it's becoming more and more impractical, especially with rocketing prices in the commercial property and the changing needs for the size and location of office space," says Leijten.

"Clients are not impressed just by big desks any more. They attach more importance to real performance."

As a result, business centers with small units in good locations have become more popular among service providers, such as Bie Junlin, who runs Shanghai Qiu Duan Trading Co, a service provider for high-end construction projects.

"We are a small enterprise. Being able to focus on our business is essential to us," Bie says.

"Business centers suit our needs and budget perfectly. It's also convenient to be situated in a central location, especially with access to some of the largest trading and exhibition centers in the city."

The new attitude also applies to Chinese companies going overseas.

With a changing economic landscape and bigger focus on efficiency, extravagant spending in setting up an overseas presence is being replaced by limited investment and a flexible setup.

"In this way, the decision to go overseas can be made more quickly because the cost is much lower," Leijten says, adding that Regus business centers are also the choice of Chinese companies such as Baidu Inc when expanding abroad.

According to Leijten, who has more than 20 years' experience in the service industry and who before joining Regus worked at Air France and KLM Royal Dutch Airlines, 70 to 80 percent of Regus' clients in China were foreign companies. "But we're tipping over to the Chinese side. Now it's 50-50 between foreign and Chinese companies.

"Most global fortune 500 companies use Regus across the world, including many locations in China. The share of internationally operating Chinese companies using Regus worldwide is still behind those from developed countries. I expect this to change in the near future."

The Chinese economy is experiencing its lowest expansion rate in years, but Leijten views the slowdown as a result of less infrastructure investment and construction. However, domestic consumption and the service sector are on the rise, so business expansion is still on the cards for many companies.

Regus currently operates in 1,500 locations in 600 cities worldwide, but has a presence in just 60 locations in 17 cities in China.

"That's not a lot for the world's second-largest economy. We need to grow," Leijten says.

Regus' expansion will be in line with the decentralization strategy adopted by domestic and foreign companies.

"In first-tier cities, multinational companies are retreating from the CBD to areas further out where there is an increasing supply and more reasonable prices. This will become a bigger trend in the years to come," he says.

In Shanghai, where Regus set up its first business center in the 420-meter landmark Jinmao Plaza, the company is distributing more services across wider areas of the city, such as in Yangpu, Putuo, Minghang and Hongqiao districts, where Leijten says there is an increasing demand.

Second and third-tier cities are also the focus for future expansion, as startup companies grow fast and foreign companies send more of their people around the country, he says, adding that he was in Ningbo recently to cut the ribbon for the opening of his company's latest branch.

"The domestic market is developing quickly and Chinese companies are also expanding to more cities to stay close to their customers," Leijten says. "There are 132 cities in China with a population of more than 1 million so the potential is huge."

Wang Wen contributed to this story.

weitian@chinadaily.com.cn

(China Daily Africa Weekly 09/06/2013 page23)