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News Release

Beijing

Jones Lang LaSalle: Demand for prime retail, office and logistic facility sectors rebounded


As the second quarter of 2010 came to a close, demand in the prime retail, office and logistics facility sectors rebounded significantly, driving an increase in rents.

• Office – Grade A office rents rose in 2Q10, increasing 3% q-o-q to RMB 249 per sqm per month (net effective rent based on NFA).
• Retail – Retail demand became increasingly active, showing steady growth. Amongst those driving this growth were international luxury brands expanding in the Beijing market.
• Residential – The leasing market for high end residential became very active in the second quarter. Demand increased significantly, resulting in higher occupancy rates for most projects and giving landlords more bargaining power when asking for higher rents.
• Industrial – Third party logistics providers, retailers, B2C e-commerce consumer service groups and car makers played active roles in the market, expanding aggressively and taking up warehouse space. This quarter saw a net take-up of 60,900 sqm, indicating that the market is moving beyond recovery and into solid growth.
• Investment – A “wait-and-see” atmosphere dominated the investment market, with few notable transactions recorded this quarter.
• Hotel – Occupancy rates increased as international tourism arrivals grew
 
Office - Demand was robust, rents increased steadily
 
Pangu Plaza, located in the Olympic Green Area, was the only office building completed this quarter, adding 60,000 sqm to Beijing’s office stock. Overall, 492,080 sqm of new supply came into the market in 1H10.  Because of the active leasing market and the limited supply, vacancy rates were driven downward 3% q-o-q to 22.8%. Vacancy rates in the CBD declined sharply, decreasing 8.1% to 37.5% in 2Q10. Zhongguancun and Finance Street vacancy rates reached 7.2% and 12.2% respectively.
 
The leasing market remained active with net absorption growing from 59,008 sqm in 1Q10 to 158,702 sqm in 2Q10. This quarter, the most active areas were the CBD and the Finance Street area, where net absorption totalled 111,915 sqm and 28,353 sqm, respectively. From a market leasing perspective, both domestic and foreign companies preferred the CBD and the Finance Street area to other submarkets. For example, Fangzheng Securities signed a 1,400 sqm lease in Fortune Resource International Center, and a European financial consulting company leased 600 sqm in Winland International Financial Centre. Some institutions were setting up and expanding into the CBD area because of limited space in the Finance Street area. For instance, China Power Investment Corporation leased 3,000 sqm in China World Trade Tower 3.
 
Domestic companies still dominate the market, occupying 60% of the whole leasing market. Financial institutions and law firms continue to lease large amounts of space, for instance, Bank of Beijing leased 10,000 sqm in the Suhuang Building located in Zhongguancun, and Fangda Law Firm signed a lease for about 3,000 sqm in China World Tower. Tianjin Hanbo Investment Cooperation and the Nuoding Fund both leased 1,000 sqm in Yintai Centre. Aimeishi Market Research leased 1,600 sqm in China Overseas Plaza. Foreign companies completed several leasing transaction this quarter as well. For instance, Pacific Alliance and Aecom leased space in China Central Place and Office Park. Grade A office rentals rose in 2Q10, increasing 3% q-o-q to RMB 249 per sqm per month (net effective rent based on NFA). CBD area rents increased moderately by 1.2% q-o-q to RMB 247 per sqm per month (net effective rent based on NFA). Since leasing space is limited in the Finance Street area, rentals in the area have grown faster than any other submarket in Beijing, growing 7% q-o-q to RMB 380 per month per sqm. In the Second Ring Road area, most of the buildings are for self use. With few established prime office buildings, and no new supply coming this quarter, rents will be pushed up. Julien Zhang, Managing Director of Jones Lang LaSalle Beijing, noted, “In the first half alone, rentals grew 6%, in line with the steady increases in demand. We anticipate rents will continue to go up in the second half of this year.”
 
At the beginning of 2010, it was forecasted that 1,000,000 sqm of new space will come online at the end of the year; to date, new supply has reached 492,080 sqm. Pre-leasing activity was strong this quarter, for instance, the pre-commitment rate for CWTC Tower 3 reached 38%. However, more projects are expected to enter the market in 2H10, therefore, we predict vacancy rates will stabilize around 26%.
 
Retail –Steady growth in demand, moderate increase in rentals

In 2Q10, two shopping malls, Chaoyang Joycity located on Chaoyang North Road and Cuiwei Plaza (phase II) near the Gongzhufen area, were launched in Beijing with GFAs of 230,000 sqm and 37,600 sqm, respectively, increasing the total stock of the overall market to 3,689,000 sqm. Attracted by the operator’s reputation from COFCO Joycity, the lease pre-commitment rate in Chaoyang Joycity reached 90%, which serves as an example of a new neighborhood shopping mall which has enjoyed high demand.
 
As the economy recovered in Beijing, retail demand became increasingly active, showing steady growth. Amongst those driving this growth were international luxury brands expanding in the Beijing market. These include the Italian brand Emporio Armani, which will soon open a 1,600 sqm (GFA) flagship store in Sanlitun North Village, and Burberry, which opened a store in Ping’an IFC Mall during its soft opening. Gucci, another luxury brand, is currently completing fit-out in Ping’an IFC. Supermarkets and F&B have contributed greatly to the steady growth in retail. BLT supermarket will open a store in Fortune Mall, after signing contracts with China World Trade Mall (phase III) and Huaxi Le Mall in 1Q10. In Chaoyang Joycity, approximately 70 F&B restaurants are expected to open, such as Golden Triopod, Herbal Café, Wish and Golden Jaguar Group. High-end restaurants grew especially fast this quarter. Shanghai Xiao Nan Guo, for instance, will soon open restaurants in Ping’an IFC Mall and Chaoyang Joycity. The strong growth in F&B can be attributed to further improvements in living standards and cross cultural interactions. Chain cosmetics and personal care stores, which are prized by landlords, maintained rapid expansion. Sephora and Manning opened stores in Chaoyang Joycity and Yintai Mall, respectively. Although retail demand continues to pickup, this year's new supply influx and the large amount of existing stock continues to put pressure on rentals, ensuring continued favorable conditions for retailers during rental negotiations. The average rentals for the overall market have increased at a moderate rate of 5% q-o-q.
 
Retail demand will continue its steady growth in the second half of 2010 with a total supply of GFA 391,500 sqm expected to enter the market; 70% of which will be completed in 3Q10, the peak season for Beijing retail sales. “Rentals will continue to see steady growth with vacancy rates stabilizing over the latter half of 2010,” said Jason Chang, Head of Retail for Jones Lang LaSalle North China.
 
Residential – Leasing demand increased significantly, along with rents, while sales transaction volumes decreased, and the price remained stable

Following the recovery of the first quarter, the leasing market for high end residential became very active in the second quarter. Demand increased significantly, resulting in higher occupancy rates for most projects and giving landlords more bargaining power when asking for higher rents. Traditionally, the second quarter is the most active for the leasing market, and this quarter was very robust as home buyer demand turned to leasing demand, a result of new government policies restricting the purchase of second and third homes. Helping to bolster leasing demand in the serviced apartment, luxury apartment and luxury villa market, was the arrival of new employees from abroad to multinational corporations.

Only one serviced apartment entered into the leasing market, Oakwood Residence Beijing, located in the Dongzhimen area with 406 apartment units. The vacancy rates for serviced apartments, luxury apartments and luxury villas dropped 3.8, 3.5 and 2.1 percentage points to 16.8%, 16.4% and 15.3%, respectively. In the second quarter, the net effective rents for serviced apartments, luxury apartments and luxury villas increased 7.8%, 4.6% and 2.8% q-o-q to RMB 164.6, 90.9 and 109.4 per sqm per month. Zhang Hong, Head of Residential Services at Jones Lang LaSalle Beijing indicated that “the high end residential leasing market will continue its current trend in the second half of the year. Transaction volumes will remain robust and rents will steadily increase.”

The State Council announced a series of property-sector tightening measures on April 15 which were intended to curb investment demand for housing by restricting lending on properties purchased for investment. The second quarter of 2010 showed a strong drop-off in investment demand, along with a lower transaction volume. However, with the majority of developers maintaining healthy cash flows, pressure to lower prices remains moderate as developers continue a wait-and-see approach. As a result, transaction prices for luxury apartments have increased 6.1% q-o-q to RMB 39,983 per sqm, and transaction prices for luxury villas increased 2.5% q-o-q to RMB 40,619 per sqm. Jones Lang LaSalle expects the tightening measures to persist in the second half of the year, with potential buyers continuing to adopt a wait-and-see approach. To this end, transaction volumes will remain low, with some developers offering more price discounts to promote project sales.
 
Industrial - Demand in the logistics market continued to rise rapidly, while rents increased steadily

As the macro-economy continued to rebound in 2Q10, third party logistics providers, retailers, B2C e-commerce consumer service groups and car makers played active roles in the market, expanding aggressively and taking up warehouse space. This quarter saw a net take-up of 60,900 sqm, indicating that the market is moving into a strong recovery.
 
On the supply side, due to developers’ negative expectations during the financial crisis, many proposed new projects were put on hold, resulting in no new projects being completed this quarter; however, several leasing transactions took place. The majority of the leasing transactions took place in the Beijing Airport Logistics Park (BALP) and the Tongzhou Logistics Park. In BALP, Global Logistic Properties leased out 28,000 sqm of warehouse space to DHL and Dahang International Transportation; they signed leases for 24,000 sqm and 4,000 sqm, respectively. Recent figures indicate that the number of online shoppers in China now exceeds 100 million, thus, Internet sales volumes are increasing dramatically for B2C e-commerce consumer service groups, such as 360buy.com, VANCL and dangdang.com. The increase in Internet sales volumes has caused B2C e-commerce consumer service groups to increase their warehouse requirements, resulting in competition over available warehouse space in the overall market. This quarter, the overall average vacancy rate of the logistics sector declined to 15.8%, 5.5 percentage points lower than in 1Q10. The average rents, this quarter, reached 24.3 RMB per sqm per month, a 2.5% q-o-q increase. The limited new supply and strong demand was behind the average market rent increase.
 
Boustead warehouse will enter the leasing market with 25,000 sqm of space in 4Q 2010. However, the average area for a single warehouse is around 5,000 sqm, leaving limited options for tenants with larger leasing area needs. Jones Lang LaSalle estimates that rents will continue to recover steadily, while vacancy rates continue to decline.
 
Investment - “wait-and-see” atmosphere has dominated the investment market, with few notable transactions recorded

Only one en-bloc transaction was recorded in 2Q10. Financial Street No. 1, an office complex with a total GFA of 96,000 sqm, was purchased by Beijing Huarong Investment Company Ltd. for a total consideration of approximately RMB 3 billion. The limited activity in en-bloc transactions can be attributed to two factors: a drop in gross yields and the unwillingness of cash rich developers to provide discounts. In the past two years, capital values increased sharply, while rents fell, causing gross yields to drop to the levels of mature markets abroad. Although this quarter has seen a steady rise in rents as well as capital values, gross yields still remain around 6.5-7.0%. As a result of these lower gross yields, foreign institutional investors have been reluctant to make new investments. With the market still not in line with institutional investors’ required yields and local developers unwilling to provide discounts, few transactions have taken place, as buyers and sellers cannot reach agreements.
 
As mentioned in our projections last quarter, the rapid increase in land prices remains unsustainable. At the end of April, the municipal government revised its public land bidding policy, abolishing the highest price as its only criteria for choosing winning bids. According to the new policy revisions, the municipal government will take into consideration the master plan and the developer’s record. Policy revisions and the current uncertainty in the real estate market, coupled with the tightening of bank lending and a substantial drop-off in residential transactions volumes has resulted in developers adopting a “wait-and-see” approach towards purchasing more land. This is reflected by the decrease in land transaction volumes and the moderate rise in accommodation values. “At the beginning of May, 12 commercial plots located in the core CBD area opened to public bidding, and a large number of reputable institutions and/or developers are expected to participate in the tendering process,” said Eric Pang, Head of Beijing Investment at Jones Lang LaSalle. “To us, this therefore indicates a strong rebound in sentiment of the Beijing commercial investment market. ”
 
Hotel - Solid recovery of tourism demand drives RevPAR growth in Beijing’s hotel sector

After two difficult years for Beijing hotels, the first five months of 2010 have shown clear signs of recovery. According to Jones Lang LaSalle Hotels research, during 2009, Beijing’s four and five-star hotel market faced the twofold challenge of new hotel supply that had entered the market in the lead up to and around the Olympic Games as well as reduced travel activity and tighter budgets amongst international corporate and leisure travellers in the weak global economic climate. However, over the first five months of 2010, occupancy rates in a sample of Beijing five-star hotels (11,701 guest rooms) increased a solid 14.4 percentage points, as international tourism arrivals grew 23.7% over the same period and no significant additions to new supply were recorded. Revenue per available room in the sample increased 31.0% over the same period in 2009.

Hans Galland, Vice President at Jones Lang LaSalle Hotels based in Beijing commented that “With higher occupancy levels and overall positive sentiment in the market, we expect five-star hotel ADRs to be poised for growth in 2011, as some of the new hotel rate agreements take effect.” Supply of internationally branded four and five-star hotels is expected to increase by a further 24.4% over the years following 2010. “Yet, as the global economy moves towards recovery and Beijing maintains its appeal as a business and leisure destination, and more importantly as the capital of China with its political presence, we are confident that the Beijing’s hotel market performance will continue to improve,” said Mr. Galland.