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News Release

Beijing

Jones Lang LaSalle: Beijing Real Estate Demand on the Rise, Evidenced by Rental Increases in 1Q10


As the first quarter of 2010 came to a close, Jones Lang LaSalle saw a rebound in demand led by rental increases in the Beijing property market. Some market highlights include:
• Office – The Grade A office market showed a significant rebound in leasing activity, as rents increased for the first time since the recession and domestic firms continued to be dominant players.
• Retail – In line with the economic recovery, retail demand was warmer in 1Q10 with the highest demand drivers being super markets expanding aggressively, in particular high-end super markets.
• Residential – As MNCs (multinational corporations) actively develop business in Mainland China, the rising demand for foreign employees caused an increase in demand for luxury apartment leasing.
• Industrial – Logistics demand remained positive as the market continued to recover.
• Investment – Property transactions witnessed high activity as land prices increased beyond expectations.
 
Office - Demand rebounded significantly as rents increased for first time since recession
As the global economy gradually recovered and the domestic market steadily grew during the first quarter of 2010, the Grade A office market also showed a significant rebound in leasing activity. 59,008 sqm of Grade A office space were absorbed (excluding self-use), a 30% increase q-o-q (even though the Spring Festival period is traditionally a low leasing season.) Leasing transactions were quite active in the CBD and 3rd Embassy Area, with net absorptions (excluding self-use space) reaching 31,605 sqm and 10,500 sqm, respectively. Due to limited available space in Finance Street, leasing activity was relatively low in this area. The demand from MNCs and foreign companies also rebounded this quarter in the following sectors: finance, bio-pharmaceutical and high-technology, with companies actively looking for office space. With the current over supply of Grade A space and the emergence of new office areas, such as the Olympic area, companies are no longer limited to one location when looking for new office space. With domestic firms remaining cash rich, they continue to be dominant players in the leasing market. Around 52% of new leasing transactions this quarter were from domestic companies, with a large majority choosing the CBD as office locations. Notable transactions this quarter include: IBM signed a lease in Pangu Plaza for 9,000 sqm, moving from the 3rd Embassy Area to the Olympic area; and Kaisa Travel signed a lease in Office Park for 5,000 sqm. With the market rebounding and vacancy rates decreasing, Grade A office rents this quarter increased for the first time after six consecutive quarters of decline. Rents increased by 3.6% q-o-q to RMB 242 per sqm per month, and in Finance Street, they continued to increase by 5.9% q-o-q to RMB 355 per sqm per month. Grade A office rents in the CBD increased by 3.8% q-o-q to RMB 244 per sqm per month.
 
In 1Q10, only 62,820 sqm of Grade A office space entered the leasing market, the lowest amount since 2008. New completions this quarter were Beifeng C2 building located in Finance Street and Bao Steel Building in East Chang’An Street; however, the Bao Steel Building is leasing only 15,000 sqm of space while the rest is for self-use. The MCC building, completed in 4Q09, is completely for self-use due to a change in the landlord’s strategy. Fewer new completions eased market pressure on rents in 1Q10 and strong demand supported the rebound in rent. In 1Q10, the Grade A office vacancy rate was 25.8%, decreasing by 2.4 percentage points. Although vacancy rates in the CBD decreased somewhat this quarter due to a lack of new supply, vacancy rates still remain the highest among all submarkets at 45.6%. In the self-use sector, there were four new completions this quarter, namely China Petrol Building, F1 China Life Building, Beifeng C1 Tower and Bao Steel Building.
 
Starting in 1Q10, a large amount of Grade A office space will enter the market and supply will boom in 2H10. A total 1.09 million sqm of Grade A office space will enter the market within the year; among those, around 480,000 sqm will be for self-use with most leasing properties located in the CBD. In Finance Street, although there are several new buildings this year, the majority will also be for self-use. Leasing space will remain very limited, while demand for office space from SOEs (State Owned Enterprises) will be substantially high. “As the economy continues to pick up, depressed demand from MNCs in 2009 will certainly improve in 2010,” noted Julien Zhang, Managing Director of Jones Lang LaSalle Beijing. “Financial institutions, the energy sector and domestic firms will continue to play an important role, as average rents grow steadily this year - albeit at a moderate pace.”
 
Retail – Rents increased slightly as demand warmed
In the first two months of 2010, Beijing’s retail market was off to a good start. Retail sales increased by 15.1% y-o-y to RMB 96.8 billion, a 2 percentage point increase y-o-y. The Spring Festival holiday was largely responsible for pushing up F&B and clothing sector sales by 30.0% y-o-y in February.
 
In 1Q10, One Mall shopping center was the only project launched in Beijing. It contributed 110,000 sqm of new supply to existing market stock - nearly half of 2009’s entire new supply. Because of tardy pre-leasing activities among some projects, opening schedules were postponed repeatedly. Such projects include The Village (North), Ping’an IFC Mall, China World Trade Center Mall Phase III and Paseo Mall. Despite market demand warming up and absorbing existing supply, the retail market vacancy rate nonetheless remained high. The vacancy rate in 1Q10 was the same as last quarter at 17.1%, a 1.4 percentage point increase y-o-y.
 
Along with the economic recovery, retail demand was positive in 1Q10. The largest demand drivers have been super markets expanding aggressively, especially high-end super markets. BHG market place, for instance, opened three stores simultaneously in The Village (South), Global Trade Centre and Landgent Center Mall. Chic and up market wine shops were also popular this quarter with Top Cellar Wine Shop, for instance, opening in the China World Shopping Mall. Cosmetic and skin care chain stores, such as Mannings, Watsons and Sephora, expanded operations in 1Q10, opening new stores in One Mall. H&M and Oasis have continued expansion, recently signing new contracts again with One Mall. MNG and Calvin Klein also released new expansion plans, while Urban Renewal sourced new store locations in Beijing. Additionally, the jewelry sector was active in 1Q10 and many brands were looking for new sites. King Fook, for example, signed a contract with The Village (North), Zhaoyicuiwu opened its first flagship store at China Central Business Walk, and Van Cleef and Arpels were actively looking to expand. Although retail demand was recovering, the influx of new supply in 1Q10 put pressure on rents. Average rents therefore increased only moderately this quarter; ground floor rent increased by 1.7% q-o-q to RMB 560 per sqm per month. A new “core” area was created this quarter to monitor prime retail locations including Wangfujing, Xidan and the CBD. This “core” area will serve to form better comparisons with Shanghai’s retail figures. Core mall rents increased 2.0% q-o-q, reaching RMB 841 per sqm per month
 
“Although we expect retail demand to recover further in 2010, vacancy rates will still remain high as 750,000 sqm of new supply is due to come into the market later this year,” said Jason Chang, Head of Retail for Jones Lang LaSalle North China. “This will add pressure to existing rental rates, but we remain optimistic all the same as confidence returns to the local market”
 
Residential – Leasing market more active, sales prices increased
In 2009, luxury residential sales were active with inflated transaction prices and high transaction volumes leading to bullish growth rates. Based on this situation, the Beijing Municipal Government cancelled some preferential policies and issued a series of tax, land and loan policies to control the growth of housing prices. These policies did not have a significant influence on the luxury residential market in 1Q10, though luxury apartment transaction volumes dropped in 1Q10 compared to 4Q09, demonstrating declining demand this quarter. Three factors explain the decline: firstly, because of uncertainty due to governmental policy changes for an overheated market, buyers are confused and hesitant in their outlooks; secondly, developers are slowing the supply of new units to wait to sell them at what they expect to be higher prices in the future; thirdly, the long holiday this quarter, like every year, slowed sales. In 1Q10, transaction prices of luxury apartments and luxury villas increased by 8.9% to RMB 37,676 per sqm and by 16.4% to RMB 39,638 per sqm, respectively.
 
In 2009, leasing was inactive and rents dropped continuously. However, there were warming trends in the first quarter of 2010. Some MNCs that have been actively developing business in Mainland China increased their numbers of foreign employees, who are the primary leasing group for luxury apartments. Facing growing demand in the first quarter, there were no new leasing projects launched in 1Q10, while the owners of two serviced apartment projects ended leasing operations to sell the units individually in the sales market, leading to a decrease in the total stock of serviced apartments. Therefore, the average vacancy rate decreased 1.4 percentage points to 20.6% as the market readjusted. The lowered vacancy rate, as a result, encouraged some landlords to augment rents. Rents of serviced apartments, luxury villas and luxury apartments increased by 0.7%, 0.6% and 0.8% to RMB 153, 106 and 87 per sqm per month, respectively. For the next 12 months, Jones Lang LaSalle is cautiously optimistic about the luxury apartment sector. Some MNCs have implemented expansion plans in Mainland China, which will help support leasing demand from foreign employees. “We expect prices to continually increase in 2010,” added Zhang Hong, Head of Residential Services at Jones Lang LaSalle Beijing. “High land costs and inflation forecasts by the government will encourage more people to look into buying luxury apartments as good investment vehicles, causing prices to increase.”
 
Industrial - Logistics market continued to pick up
Import and export volumes in January and February saw a 70% y-o-y increase to USD 42.22 billion, and as previously mentioned retail sales increased by 15.1% y-o-y. Driven by increased sales volumes, demand continued to pick up in the logistics market. This quarter saw a net take-up of 97,396  sqm, a large increase over the level of net take-up in 4Q09. Online retailers New Egg and Amazon.com leased 8,000 sqm and 15,000 sqm in the newly completed first phase of China Resources Land Logistics. Xianglong No.4 also attracted tenants such as Schneider Electronics.
 
On the supply side, three projects were completed this quarter. Linji phase II, at 18,000 sqm, is located in the Beijing Airport Logistics Park, while Xianglong No.4, at 22,526 sqm, and China Resources Land Logistics Phase I, at 47,000 sqm, are both located in Tongzhou Logistics Park. The total logistic market stock increased this quarter to 1.1 million sqm. Since demand increased this quarter, vacancy rates declined and average market rents increased. Unlike the end of 2009, when landlords significantly reduced rentals in order to attract tenants, rents slowly picked-up this quarter, with a 2.0% q-o-q increase to RMB 23.7 per sqm per month. The average market vacancy rate fell to 21.3%, 2.8 percentage points down from its peak in 4Q09. As the economy continues to recover, the demand outlook in the logistics market is positive. From the supply side, Boustead will enter the leasing market with 25,000 sqm of space within the next 12 months. We estimate that rents will continue to recover steadily, while vacancy rates continue to decline.
 
Investment - Property transactions witnessed high activity as land prices increased beyond expectations
En-bloc property transactions were extremely active in 1Q10. In line with the global economic recovery and increasing property prices, overseas institutional investors have adopted different strategies to increase yields. In the past few years, attractive yields generated by long-term professionally run properties owned by overseas institutional capital created high investment margins, allowing some investors to exit on a good note this quarter. Other investors, holding an optimistic attitude towards Beijing’s property market, have taken advantage of the growing economy, and purchased several projects in 1Q10. For example, Mapletree, a Singaporean MNC, acquired Gateway Plaza near Sanyuanqiao for around RMB 2.9 billion. Meanwhile, given stronger demand, capital values continued to increase at a rapid pace. As previously mentioned, some landlords decided to sell their serviced apartments as individual units as a short-term strategy.
 
Pushed by record land price transactions after the CPPCC meeting, the central government released new measures to control incoming land supply. This has led to the halting of one commercial land bid in the core CBD area. “As a majority of state-owned enterprises were requested to withdraw from the real-estate development sector recently, we believe that the purchasing of ‘hot land’ will cool somewhat during the second half of this year,” said Eric Pang, Head of Beijing Investment at Jones Lang LaSalle.