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News Release

Beijing

Jones Lang LaSalle: High demand prevails in 4Q10, leading to a sharp drop in vacancy across most market sectors


Current momentum in the Beijing property market shows few signs of slowing in 2011 after demand remained strong and rental prices further increased in 4Q10.

• Office – Rents increased rapidly in the second half of 2010 as vacancy rates reach six year low.
• Retail – Retail market sentiment has remained bullish as a wide-range of retailers penetrate the local market. 
• Residential – Demand for serviced apartments unusually high in 4Q10 with rental prices of luxury apartments still rising. In the sales market, price of luxury apartments realise first decrease in two years.
• Industrial – Both limited supply and high demand pushes vacancy rates to a historical low and rental prices to an all-time high.
• Investment – Active market with several en-bloc transactions.
• Hotel – International arrivals at a new peak, driving occupancy and revenue growth in 2010.
 
Office – 2010 was a record year for net absorption; rents exploded on the back of strong demand

One building, which was previously purchased by the Bank of Communications for self-use, was completed during the quarter, making the total new supply for 2010 at 710,000 sqm and increasing total stock to 5.4 million sqm. Of the eight new buildings completed in 2010, half are located in Finance Street and five were purchased for self-use. 
While MNC’s became more active in 2010, Domestic State Owned Enterprises (SOEs) continued to be the main demand drivers in 2010, purchasing entire buildings for self-use and leasing copious amounts of space throughout the city. As a result, 2010 was a record year for net absorption, which hit a high of 1.3 million sqm. In 4Q10 alone, approximately 375,000 sqm was absorbed, with the majority of the take-up coming from firms involved in the IT, finance, insurance, law, automotive and pharmaceutical sectors. The areas with the strongest demand were the CBD and Finance Street, which had net absorption of 145,000 sqm and 112,000 sqm for the quarter and 394,000 sqm and 333,000 for the year, respectively; these two sub-markets have been the most sought after for the last two years.
 
Vacancy rates fell in each of the city’s sub-markets as leasing activity was robust and no new leasable buildings entered the market in 4Q10. The CBD had the biggest improvement with vacancy decreasing 9.6 percentage points q-o-q; however, at 25.9%, it is still the sub-market with the highest rate. Zhongguancun continues to have the lowest rate in the market at 2.5%. At the end of 2010, the overall market vacancy rate fell 5.4 percentage points q-o-q and 15.7 percentage points y-o-y to 12.4%, Beijing’s lowest level in six years. With vacancy rates reaching a six year low, rents have surged market wide. Overall rents increased 8.1% q-o-q and 25.2% y-o-y. In 4Q10, the CBD experienced the largest increase, growing 9.0% q-o-q and 27.0% y-o-y, while Finance Street realized the largest year-on-year increase at 31.3% y-o-y and 5.9% q-o-q. According to Julien Zhang, Managing Director of Jones Lang LaSalle, “landlords are increasingly bullish as vacancy rates head below 10% in most sub-markets; large blocks of available space are becoming hard to find and rents are quickly reaching their pre-2008 financial crisis highs."
 
In 2011, new supply is anticipated to be around 880,000 sqm, with the majority of new supply concentrated in the CBD, Finance Street and East 2nd Ring Road area. As new supply enters the market, vacancy rates will begin to fluctuate, causing rental growth to decelerate, however, rents will continue trending upward.  
 
Retail – Strong demand from retailers looking to expand and establish a presence in Beijing before the traditional shopping season

Two shopping malls, namely The Village (North) and Zhongkun Plaza, were launched during the final quarter of 2010, adding an additional 284,000 sqm to total retail property stock. Retail market sentiment continued on a high note in 4Q10 with a wide-range of retailer brands actively expanding in the local market. Emporio Armani opened its new flagship store in The Village (North), occupying a five-story building with an area of about 1,600 sqm; Burberry set up its largest Asian flagship store, inclusive of three stories and over 1,200 sqm, in Sparkle Roll Plaza on Dawang Road; Tiffany is in the final stage of completing its 500 sqm flagship in China World Mall (Phase III); ZARA expanded with a new 1,000 sqm location in Viva Plaza; GAP debuted with two stores in Beijing, a 1,100-plus sqm store in Beijing APM and a 1,800 sqm store in Chaoyang Joy City; Suning opened a massive 15,000 sqm store in East CBD; Carrefour added a new hypermarket in Zhongkun Plaza; and lastly, BHG expanded its reach in Shuangjing with a 5,000-plus sqm store in Landgent Center.
 
Apart from expansion of luxury and fashion brands and supermarket chains, other tenants such as department store operators and jewellery & art shop retailers have entered, or are planning to enter the Beijing retail market. Galeries Lafayette has officially announced the future opening of its first Asian store in Xidan; Wangfujing Department Store unveiled a new brand, Fashion Headquarters, in Zhongkun Plaza; Versace launched its first watch and jewellery store in China in Beijing’s CBD; and Chinese Arts and Crafts is currently about to open two stores in China World Mall (Phase III) and Seasons Place.
 
On behalf of rampant retailer expansion as noted above, net absorption of retail space remained strong in 4Q10 with 230,000 sqm having been absorbed by tenants. The average net effective rent (based on NLA) grew by 3.1% q-o-q, arriving at RMB 616 per sqm per month. The market average vacancy rate increased to 13.9%, up by 1.7 percentage points q-o-q, and attributable to large quarterly new supply.
Jones Lang LaSalle predicts that demand for retail space will maintain its recent momentum in 2011. Several projects in the pipeline, such as China World Mall (Phase III), Wangfu International Shopping Centre, Le Mall and Parkview Green, are expected to be completed in 2011 and will add about 580,000 sqm of new supply to the market. Driven by strong demand, rental prices will continue to increase throughout this year, while vacancy rates may shift slightly upward in mid-2011 due to large influx of supply.
 
Residential – Demand for serviced apartments still at a high level, while in the sales market, prices decreased for the first time in two years

The last quarter of each year is traditionally the low season in the serviced apartment leasing market as lower demand is attributed to the holiday season. However in 4Q10, the leasing market remained active with demand closely matching that of the previous quarter. Leasing demand for three-bedroom apartments was notably high, effectively decreasing the already limited supply of these units in the market. Demand for one and two-bedroom apartments was mostly driven by relocations, as a result of the planned renovation or conversion to for-sale apartments by several projects during 1H11. These renovations are effectively decreasing total supply in most commercial areas and supporting a growing number of relocations across the market.
 
This increase pushed up the average occupancy rate to 86.9%, an increase of 2.1% percentage points q-o-q and 8.9% percentage points y-o-y. The Head of Residential Services, Zhang Hong at Jones Lang LaSalle Beijing indicated that “the serviced apartment leasing market will be more active in the first half of 2011, with steadily increasing rents.” This quarter marked a low season for luxury apartment leasing, but overall inflation and higher residential prices have helped push up rents, which increased 1.6% q-o-q and 10.1% y-o-y to RMB 94.8 per sqm per month. In 4Q10, three projects were completed, namely Palm Springs Platinum Apartment, Sanlitun SOHO and No.9 Gongyuan. Leasing of luxury villas was not very active in 4Q10, with rental prices remaining virtually the same q-o-q at RMB 110.3 per sqm per month, an increase of 4.3% y-o-y.
 
Policies to increase residential supply began to have a greater impact on the market in 4Q10 as many new projects were launched in the quarter to provide sufficient supply for housing upgrades among prospective purchasers. Consequently, after a decrease in luxury residential transaction area in 3Q10, transacted area of luxury apartments and luxury villas both increased in 4Q10; however; the average transaction price moved in the opposite direction. Average transaction price of luxury apartments decreased for the first time in two years, dropping 5.4% q-o-q to RMB 41,034 per sqm, but still ended the year with a robust annual increase of 18.6%. The decrease in average price was mainly attributable to a larger proportion of new projects on the market with average sales prices between RMB 30,000 to 35,000 per sqm, and the decrease in the number of top luxury projects for sale. As a result of lacking new supply, the average luxury villa price increased 3.0% q-o-q and 34.8% y-o-y to 45,931 per sqm. Jones Lang LaSalle expects the current tightening measures to persist in 2011, which will constrain the pace of transaction price growth in the high-end residential market.
 
Industrial – One new project in 4Q10 followed by large supply pipeline in 2011 to satisfy high market demand, which has pushed rental prices to a new peak and vacancy to an all-time low

In late December, one new project reached completion, Boustead located in Tongzhou Logistics Park (TLP). Demand for logistics space rounded out the year at a persistent high level, driven primarily by e-commerce, 3PL, and manufacturing based tenants. As 2010 progressed and available space became increasingly limited, a larger proportion of new leases were for smaller areas by smaller sized firms. The supply constrained market had lower net absorption, but more importantly, a historically low vacancy rate. As at end 4Q10, the market average vacancy rate decreased to 5.1%, a decline of 3.3 percentage points q-o-q.
Rents maintained their upward trend in 4Q10, rising by 5.3% q-o-q to an average net effective price of RMB 0.88 per sqm per day. Rental prices have increased by 15.8% y-o-y with growth due to high demand driven by strong economic development and extremely limited available supply in the market. Increasingly there has been a trend for e-commerce and large manufacturing firms, including auto manufacturers, to seek build-to-suit options to meet their warehouse requirements. In terms of logistics property investment, more e-commerce firms are joining logistics services providers and developers in the quest to acquire land for development in the tightly controlled land market. In 2011, we expect more of these firms will purchase land and establish operations in outlying areas of the city.
 
Currently there are eight projects with a GFA totalling 349,000 sqm in the supply pipeline for 2011. We expect high absorption of new supply throughout 2011 due to pent-up demand and overall development of the local economy and its logistics sector. Vacancy rates will escalate slightly throughout the year, while rental prices are projected to maintain a moderate growth trend.  
 
Investment – An active market with several en-bloc transactions

Underpinned by sound economic development of the country, coupled with a strong rebound in the rental prices of both prime office and retail property this year, institutional investors intensified the expansion of their portfolios by acquiring prime office and retail projects in Beijing, as witnessed by several notable en-bloc transactions completed this quarter. Charter Group, which owns luxury shopping centers Charter Mall in Shenyang and Changchun, took over Le Mall, a large-scale shopping centre located along west Chang’an Avenue, from Huaxi Real Estate Investment Company. People's Insurance Company (Group) of China Limited (PICC) is planning to move its company headquarters to Capital Times Square in Xidan after purchasing the project from Huarong Capital for about RMB 3.744 billion.
 
Furthermore, the Singapore based investment firm AEW purchased Metropolis Tower, an office project located in the Zhongguancun West Zone Area. Owing to the fundamental increase in demand for office space, both those investors who purchase for self-use and for investment purposes are focusing their attention on investment grade projects in the market. Moreover, driven by the rampant increase of retail sales this year, both local and foreign retail operators expedited expansion by opening more outlets, accompanied by the acquisition of prime retail space and purchasing of equity stakes in prime projects in Beijing.
 
Hotel – With the number of international arrivals reaching a new peak in 2010, hoteliers see a drastic improvement in both occupancy and revenues

After two years of performance decline, the Beijing hotel market finally saw an upswing in performance in 2010. Unlike many Olympic host cities that benefited from an increase of hotel demand following the event, Beijing’s hotel demand declined in 2009 largely driven by the world-wide economic downturn. Despite a one year time lag, Beijing saw an impressive improvement in tourist arrivals and hotel performance in 2010.
 
With a moderate amount of hotel openings and impressive growth in international tourism arrivals (+19.9% YTD November), the occupancy rate for the Beijing five-star hotel market witnessed a pronounced increase that started in January of 2010 and reached 63.0% by year-to-date November. Continuous improvement in occupancy has provided hoteliers much confidence in more aggressive pricing strategies, which translated into room rate increases in the last two quarters of the year. With the benefit of occupancy and rate growth of 10.9 percentage points and 5.2% respectively, Revenue per Available Room (RevPAR) for Beijing’s five-star hotels increased a solid 27.2% for the eleven month period ending November 2010.
 
“Before the 2008 Olympics, it was a popular belief that Beijing’s hotel market would be over-supplied, however, we held onto the belief that the market would only suffer from a “timing impact,” and that the influx of new hotels opened around the Games would be supported by the strong demand fundamentals of the city,” notes Hans Galland, Vice President of Jones Lang LaSalle Hotels. “Hotel performance in 2010 has demonstrated the strength and resilience of the Beijing market and, on the back of an optimistic demand outlook and limited new supply in 2011, the Beijing five-star hotel market is poised for a continued upward trend in occupancies back to pre-Olympic levels and even more pronounced room rate growth.”