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In the third quarter of this year, Jones Lang LaSalle saw a slight increase in real estate demand in Beijing, fuelled by a steady recovery of the office market and mid-range retailers’ continued aggressive expansion. Other Beijing market highlights are as follows:
Office – As the regional and global economy began to show signs of recovering, in 3Q09 the Beijing office market began to recover steadily following the slight rebound seen in the previous quarter. Although high vacancy rates maintained downward pressure on rents, and landlords in newly completed buildings continued to offer competitive leasing rentals to attract tenants, the rate of decrease has slowed. At the same time, several large leasing transactions have supported confidence in the market.
Retail – The rapid expansion of mid-range brands has prevented sharp drops in retail rents, although international luxury brands are still largely inactive. One good effect of the contraction in demand is that Beijing retail landlords have gained experience operating amid a market downturn, increasing the maturity of the market and leading developers to think more about project positioning and future profitability.
Residential – With a sharp increase in capital values and more projects targeting the top-end market at prices beyond RMB 20,000 per sqm, the current trend has alarmed some in the government and has caused some potential buyers to once again adopt a “wait-and-see” attitude. As a result, the increase in capital values will likely be constrained in the next quarter, with transaction volumes slowing by the end of the year.
Industrial – With the economy continuing to show robust activity, Beijing’s industrial sector also began to stabilize in 3Q09, although high vacancies and new supply will continue to weigh on rentals.
Investment – Loosening monetary policy and remarkable pre-sales revenue both helped moderate the tight cash flow of developers, leading to fierce competition in the Beijing public land bidding market—similar to what was seen in 2007. Due largely to the rapidly improving infrastructure in Beijing, areas such as BDA, Daxing, Fangshan and Mentougou Districts will be receiving new subway lines and increasing development activity, making them the new emerging residential areas of the city.
OfficeOffice market begins steady recoverySince 3Q08, landlords have been aggressively seeking tenants by lowering face rentals and by offering incentives as large amounts of high-quality space are available due to continued new completions. In this period of time, around 1.47 million sqm of space has entered the market, of which 56% is Grade A quality. At the same time, the loosening of bank loan requirements and the government's policies supporting domestic firms have helped ease the otherwise depressed leasing demand, leading to expansions and some, largely domestic, companies taking the opportunity to upgrade and relocate to high-quality but more affordable spaces. In 3Q09, the total net absorption amounted to 139,100 sqm, which is the largest absorption recorded since the economic downturn in 3Q08 and almost double the amount seen in each of the previous three quarters. Absorption was once again largely driven by the continued demand from SOEs, especially from domestic financial companies, which were aggressively expanding their presence in the capital city. Within the total net absorption, 60% was taken by domestic financial companies, much higher than the 30% level seen at the beginning of the crisis in 3Q08. Although the demand from MNCs was still much less than those from domestic firms because of the financial crisis, we still consider demand from this tenant segment as gradually rebounding. In the overall market, rents decreased by 2.9% q-o-q, much slower than previous quarters, to RMB 208 per sqm per month. Newly completed Grade A buildings contributed most to the decrease, with a 3.9% drop q-o-q in the Grade A market to RMB 228 per sqm per month.
Among the submarkets, net absorption in the Finance Street area surpassed that in the CBD for the first time this quarter, totalling 60,800 sqm, mostly from domestic financial companies. The most noteworthy transactions in this area are Beijing Rural Commercial Bank's leasing of the whole 29,000 sqm block of the north tower of Finance Street Center and Pudong Development Bank's securing of 30,000 sqm in Fortune Resources International Building. As these tenants are less sensitive to rentals and generally backed by the government, their transaction rentals were much higher than in other buildings on the eastern side of the city. Demand in the CBD continued to be stable with net absorption totalling 41,300 sqm. Although less than that in Finance Street, we still consider this area as the most preferred destination for companies to settle in due to the more diversified tenant mix in this area and the higher availability of high quality office space leading to much lower rentals. Four new projects, totalling 257,000 sqm of new supply, were completed this quarter. This pushed the total stock of the overall market to 9 million sqm, and that in the Grade A market to 3.8 million sqm. The overall vacancy rate increased by 0.5 percentage points to 27.8%, and the vacancy rate in the CBD area decreased for the first time since 3Q08 to 36.7% because there was no new supply this quarter.
The rebounding of demand proved to be much quicker than originally expected. However, as the demand from MNCs is still slowly returning, and the overall economy remains uncertain, whether the net absorption in 4Q09 can surpass that in 3Q09 is still in doubt. “Rents in the fourth quarter are still expected to decrease, but the rebounding confidence of the market will prevent them from dropping significantly. Opportunities remain for companies to upgrade and relocate to better working environments as landlords will still offer rental discounts to attract tenants,” suggested Julien Zhang, Managing Director of Jones Lang LaSalle Beijing.
RetailMid-range brands continue aggressive expansionIn 3Q09, the most positive trend of the Beijing retail market was mid-range fashion brands continuing their rapid expansion. For instance, Asobio opened its first store in Raffles City in Beijing, while H&M opened two more stores in Glory Mall and Raffles City. Well-known international brands Zara, Uniqlo, and Bershka each opened stores in the Huayu Shopping Mall, within the Zhongguancun submarket. In 3Q09, many cinemas and supermarkets were starting to look for space. Due to fierce market competition, more developers have begun directing their efforts toward the new market entrants. Among these, some new international brands, such as Gap and River Island, have indicated their interest in exploring the China market, although they have yet to announce any formal plans. Following the withdrawal of leasing activity from international brands in 1H09, more companies have increased their inquiries into the market in 3Q09. In 3Q09, two new projects opened to the public. One is Qianmen Street, totalling 56,491 sqm of GFA, opening with 103 stores leased. Among these retailers, international brands such as Zara, Swatch, Uniqlo, and New Balance established their presence in this historical shopping destination. The other new property is Beijing SCITECH Premium Outlet Mall phase I, located in Shunyi District with a total GFA over 40,000 sqm. There were several projects originally scheduled for completion in 3Q09 that delayed their opening dates to 2010 due to poor preleasing commitment, including the retail component of CWTC Phase III, Paseo Mall, and Chang’an Mall. Furthermore, outlets and mid-range projects have continued to be popular among retailers in the market during the global economic downturn period, shown by the newly opened SCITECH Premium Outlet Mall and the repositioning of the Sunlight Department Store in Viva Mall into an outlet store.
In 3Q09, the average retail rent in the Beijing market decreased to RMB 500 per sqm per month, a q-o-q decrease of 5.4%. During the same time, the vacancy rate remained stable at 16.1% with the small amount of new supply entering the market. In 4Q09, we expect that there will be 195,371 sqm of new supply coming onto the market, further pushing up the market vacancy rate. Given that retailers will have more space to negotiate with landlords, we anticipate rents to decrease further.
Residential Leasing demand is picking up, along with a sharp increase in capital valueIn line with the resilient economic growth of China and signs that the global recession was coming to an end, a number of Japanese and European MNCs began to strengthen their focus on their China business. This has naturally led to the arrival of many foreign senior managers with compensation packages, thus driving demand for serviced and luxury residences. In the competitive serviced apartments market, many operators, especially those with small unit sizes, continued to offer enticing seasonal packages; and to compete with hotels, they also began offering discounts for short-term stays. In the third quarter, rentals dropped slightly for luxury apartments and villas, declining by 3.7% q-o-q to RMB 82 per sqm per month and by 0.3% q-o-q to RMB 109 per sqm per month, respectively. Serviced apartment rentals dropped 2.2% compared to last quarter, falling to RMB 172 per sqm per month. “While the leasing market has been picking up from the global economic recession, the cold off-season of the Beijing residential leasing market will approach in the next half year, and coupled with the new supply, it is forecasted that the average vacancy rate will rise above 20%, putting downward pressure on rentals,” commented Zhang Hong, Head of Corporate Residential Service, Beijing.
Strong demand and a substantial amount of new luxury supply launched into the market in the third quarter caused capital values to increase significantly in Beijing. However, due to the limited number of prime development sites within the Fourth Ring Road, luxury apartments with scenic environments, mature amenities and a close proximity to schools were favored by most wealthy buyers, recording very high pre-sales rates. In line with the recovery of the transaction volume and influx of high quality luxury supply, the average capital value climbed sharply, up 9.7% q-o-q, hitting RMB 24,510 per sqm. Moreover, rebounding demand was also witnessed in the luxury villa sector. For both self-use and investment purposes, individual buyers were keen to purchase their houses in these major villa areas, boosting the average sale price to RMB 20,594 per sqm, up 6.2% q-o-q. In terms of transaction volume and the average sales price, the luxury residential market has bottomed out, ending a market correction that began in early 2008.
IndustrialHigh vacancies and new supply will continue to weigh on rentalsPositive trade numbers continued into the second half of the year with the total value of imports and exports increasing compared to the previous quarter. In the logistics market, a substantial rise in take-up was driven by a wave of upgrades as companies relocated to higher quality facilities found in either the Tongzhou Logistics Park (TLP) or the Beijing Airport Logistics Park (BALP). Despite the up-tick in leasing activity, the constant flow of new supply into the market continued to push vacancy rates to record levels, climbing 5.5 percentage points q-o-q to 32.7% in 3Q09. On the manufacturing side, net take-up this quarter was positive for the first time this year with fewer companies downsizing their leased space. Vacancy rates at Beijing’s largely export-oriented factories have finally stabilized at 24.5%, a slight drop of 0.2 percentage points q-o-q.
As demand showed signs of reviving, landlords were steadfast to make competitive offers, often through incentives such as rent-free periods and subsidized fit-outs in lease negotiations, thereby lowering effective rentals. Average rental for logistics space in Beijing therefore fell by 2.8% q-o-q to RMB 24.8 per sqm per month. The average rental for manufacturing space remained steady at RMB 27.9 per sqm per month. Although we foresee a sustainable increase in demand for logistics space, approximately 120,000 sqm of new supply will be injected into the market during the next 12–18 months, keeping vacancies high. Although economic activity and leasing demand are beginning to churn once again, the considerable amount of new supply in the pipeline will continue to put downward pressure on rents. In the logistics market, for example, we expect one-third of all prime logistics space in Beijing will lay vacant by end-2009.
InvestmentBeijing's investment market was active this quarter with several property deals closed and a warming up of land transactionsSupported by the unexpected rebound of the property market, institutional investors with solid balance sheets reinforced their investment activities in Beijing. Acquisitions included distressed projects located in prime locations and targeting the high-end market, while some such projects received fresh capital injections from new investors. Because these types of projects tend to be laden with debt from loans already received during their long dormant periods, and are therefore quite risky investments, new owners usually not only must have rich cash flows but must also be able to deal with relationships with multiple former investors, and develop the project after market repositioning. Meanwhile, several notable transactions in the office sector were seen in the market, with a majority of the buyers from IT and energy resources background purchasing properties for self-use.
The land transaction price in some areas reached record highs, with the price based on the planned GFA hitting nearly 50% of the current capital values in these areas, reflecting the positive sentiment held by local developers toward the next 2–3 years. Nevertheless, the potential risk of soaring property prices pushed by increasing land costs has already caught the eyes of the central government. We therefore expect that going forward the government may not actually grant some sites to the highest bidder, but may instead consider other factors such as the final housing sales prices in awarding land sales.
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