As China’s economy undergoes reform and expands, the country’s two key financial cities �" Hong Kong and Shanghai �" have gained global prominence but their real estate sectors are charting different paths.

Shanghai is home to China’s largest container port while service industries in the city, including retail, wholesale, finance and real estate comprise over 64 percent of Shanghai’s GDP. Manufacturing and agriculture account for the rest.

Hong Kong’s “pillar industries” are finance, logistics, trade, tourism and professional services, and service industries make up 93 percent of Hong Kong’s GDP.

Finding their place in a modern world

In the 1920s, Shanghai was known as the “Paris of the East,” but following World War II, many foreign firms moved their offices from Shanghai to Hong Kong, then under British rule. After Shanghai fell under communist control in 1949, Hong Kong flourished.

Fast forward a few decades and the return of Hong Kong to Chinese rule in 1997 created uncertainty around the territory’s future. Meanwhile Shanghai has grown from an industrial center to become China’s key financial hub. Its role as the economic center of the mainland expanded as government reforms gathered pace in the last decade. With the rise in the number of international businesses setting up shop in Shanghai, the city’s real estate industry grew by leaps and bounds.

In the last two years Shanghai is second only to Tokyo in attracting the most direct commercial real estate investment in the Asia Pacific region. It’s an increasingly popular destination for both domestic Chinese companies and multinationals expanding their presence in the country.

James Allan, JLL’s Regional Director and Head of Markets in Shanghai, says that by the end of 2015 there was around 1.5 million sqm (16 million sqf) more gross floor area (GFA) occupied in the city than at the start of the year �" a record high.

In Lujiazui �" the central business district of Shanghai, the vacancy rate is currently less than 3 percent. JLL research indicates that the Shanghai market will see more than 1.6 million square meters of new office space in 2016, in both the CBD and decentralized areas. Despite this fresh supply, rents will continue to increase, Allan says, although growth will be “more moderate compared to last year due to larger supply volume.”

“The Chinese government’s initiatives for financial reform and Free Trade Zone (FTZ) development have led to strong growth in the financial and related sectors, which is positively linked with office demand,” Allan says. “When the FTZ was expanded in April 2015, rental rates in the Lujiazui financial district went up 6 percent.” In Pudong’s Zhuyuan business zone, vacancy rates dropped dramatically by 11.9 percentage points to reach 5.6 percentage points,” he adds.

Hong Kong looks outwards

As Shanghai became the place to be for companies looking to make their mark in China, Hong Kong became the go-to city for mainland Chinese companies with international ambitions. Today, it has carved a niche as a key hub for investment in and out of China.

Hong Kong has also provided Chinese companies with access to global capital markets for bond and loan financing. For overseas businesses, Hong Kong continues to have an edge over Shanghai because foreign investors use it as a Special Purpose Vehicle (SPV) to invest in mainland China.

Denis Ma, JLL’s Head of Research in Hong Kong, agrees that Shanghai has “made great strides” in the past decade, progress which is reflected in how much companies are willing to pay to have a presence in the city. Hong Kong’s rental rates are currently the highest in the world, but Shanghai is catching up and is now in the fifth spot.

“However, it will not be able to reach full global financial center status until the Renminbi becomes fully convertible,” he says. “Hong Kong continues to benefit from favorable government policies which have accorded it first-mover status as China embarks on greater financial reforms.”

Tackling challenges

Shanghai is also lagging behind Hong Kong in major indicators such as financial infrastructure and tax transparency. According to JLL’s Global Real Estate Transparency Index, Hong Kong ranked 15 while Shanghai came in at 33.

However, steps to improve transparency are paying off. Shanghai is seeing a structural uplift in real estate investment, development and corporate activity with a threefold increase in real estate investment since 2010. And, as the world’s most important financial center after London and Tokyo, Hong Kong is well positioned to retain its position into the future.

“China is a huge country and as long as it continues to progress at its current rate, it is more than likely that it will require both Shanghai and Hong Kong to be twin global financial powerhouses,” says Allan.

The relationship between these two financial powerhouses is increasingly one of cooperation rather than rivalry as China looks outwards to a global audience as well as catering for domestic demand.

This article was originally published on JLL Real Views, JLL’s news site exploring the big trends shaping the real estate industry’, with ‘Real Views’. www.jllrealviews.com. Reprinted with permission.