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News Release

Beijing

Jones Lang LaSalle: Beijing Grade A Office Vacancy Rate Drops to Its Lowest Level in 20 Years


In the first half of 2011, an increase in leasing demand supported a sharp drop in vacancy rates across all prime property sectors in Beijing: 
• Office – In 2Q11, the Grade A office vacancy rate dropped to its lowest level in 20 years.
• Retail – Despite the refurbishment of some prime shopping malls with high vacancy, strong demand is continuing to drive down vacancy rates across the market.
• Residential – The occupancy rate of serviced apartments reached a historic high, and landlords increased rents; in the sales market, the transacted area continued to slip, along with a slight decrease in prices.
• Industrial – Rents continue to increase in both the logistics and business park markets as leasable supply diminishes due to strong demand.
• Investment – Capital values of prime commercial property increased, with very few owners willing to place projects on the en bloc market.
•  Hotel – Beijing’s hotel market performance recovery gaining momentum.

Office – As the overall market vacancy rate hits a 20-year low, rents are approaching unprecedented levels
In 1H11, total Grade A stock grew to approximately 5.8 million sqm, increasing by more than 400,000 sqm. All of the new supply was completed in 1Q11, with no new stock launched in 2Q11. Five buildings were released into the market, with Zhongguancun and the CBD experiencing the largest increases in new supply as each submarket gained two new buildings. Of the five newly completed buildings, two were for self-use.

Even with five new developments completed in the first half of the year, supply has not been able to keep pace with demand. The expansion of the MNCs’ operations, along with domestic firms’ leasing of multiple floors, was the key driver for demand. In addition, demand for self-use space has remained strong as it accounts for nearly 40% of all net absorption in 1H11, which particularly came from domestic firms and increasingly from MNCs. Propelling leasing demand were companies from the pharmaceutical, financial, IT, and manufacturing sectors, with the demand equally distributed between domestic and foreign firms in both 1Q11 and 2Q11. With such strong demand, the total net take-up in 1H11 was nearly 600,000 sqm, only about 5.2% less than in 1H10. The CBD continued to lead all submarkets in terms of net absorption, accounting for over 50% of the figure in 1H11. The overall market vacancy rate hit a 20-year low in 2Q11, declining 2.6 percentage points q-o-q and 4.1 percentage points year-to-date to 8.3%. The CBD experienced the largest decline in vacancy rate.

Rentals are approaching unprecedented levels as vacant space has become very limited and demand continues to be strong. Overall net effective rents grew 11.7% q-o-q and 17.3% year-to-date to RMB 243 per sqm per month as all submarkets experienced growth in rents. Across the market, landlords are raising headline rents and providing fewer incentives. According to Eric Hirsch, Head of the Markets team for Jones Lang LaSalle Beijing, “With space becoming increasingly limited, tenants will need to work with knowledgeable agents and will have to be prepared to act quickly to secure office space before another tenant steps in to take it.”

By the end of 2011, approximately another half-a-million sqm is expected to be released to the market. The increase in new supply should have minimal pressure on rents; and is not enough to keep them from continuing their substantial increases. According to Julien Zhang, Managing Director of Jones Lang LaSalle Beijing, “Beijing’s overall rents are on pace to surpass Shanghai’s within the next four years. In addition, we are seeing companies taking a serious look at preleasing significant blocks of space for the first time in Beijing.”     
 
Retail – Strong demand seen from fast fashion and children’s brands

Retail sales of consumer goods reached RMB 299.9 billion in Beijing from January to May 2011, an 11% y-o-y increase. Posting strong growth in terms of sales has been witnessed in jewelry industry, which increased by 76% during the same period. It is forecasted that retail sales of consumer goods in China will equal the level achieved in Europe by 2020, thus retailers are actively expanding in the local market.
China World Mall (phase III) was officially launched in 1Q11, adding 57,000 sqm to total retail property stock. In 1H11, several shopping centers, such as Beijing APM, Solana and Shin Kong Place, were busy adjusting their tenant mix or updating their shopping environment in order to maximize performance and further attract premier retail brands.
In 1H11, department store operators along with cinema and supermarket brands expanded aggressively. NOVO, positioned as a youth fashion department store, opened in Wangjing District; Rainbow Department Store leased 37,000 sqm of space in XinAo Shopping Center; and Paris’ Galleries Lafayette Department Store secured space in Xidan Maxon Center. In the same period, Lane Crawford and Marks & Spencer were seeking spaces for lease, while Jinyi Cinema, Poly Film, AEON, and Tesco were busy opening new stores in Beijing’s suburban areas.

Moreover, fast fashion brands are still maintaining their rapid expansion pace. Pull&Bear, Bershka and Stradivarius of the INDITEX Group are opening new branches in Full Link Plaza and other shopping centers. British fashion brand DIVA has opened six stores in Beijing within just six months, while Roca Wear, a brand from the USA, opened in Xidan Joy City and Solana. Local brands Lachapellle, Ochirly, and JNBY also remained active.

An optimistic market outlook has also led many famous children’s brands to enter the Chinese market. For example, Boshiwa has opened more than 50 shops in Beijing; Shelcore will soon open in Xizhimen Mall; Bonpoint has opened in China World Shopping Mall; and Modern Plaza has attracted many luxury children’s brands, including Hugo Boss, Kenzo, Chloe, and Stoke.

F&B and wellness brands also continue to perform well and are expanding. Honeymoon Dessert, Beard Papa, Bread Talk, and Starbucks either have branches in nearly every shopping mall or are planning to open stores soon. Ah Yat Abalone opened in Village North, while Shanghai Spring plans to open a new 1,000-sqm outlet in Huayu and another store in Indigo. Furthermore, SaSa, Mannings, and Watsons are negotiating with PVG, Lotte, and other shopping malls.

In 1H11, average net effective retail rent reached RMB 668 per sqm per month (based on NLA), a 7.0% year-to-date growth and a 14.7% y-o-y increase. Due to strong demand, the market average vacancy rate decreased by 3.1 percentage points year-to-date to 10.8%.

Jones Lang LaSalle predicts that demand for retail space will maintain its momentum in the second half of 2011. Wangfu International Shopping Centre, Guoson, and Phoenix Shopping Center will open before the year’s end, comprising a portion of the expected 450,000 sqm of new supply that will enter the market in 2H11. Strong demand will allow landlords to continue to raise rental price in 2H11.
 
Residential – Occupancy rate of serviced apartments reached a historic high and landlords increased rents; in the sales market, the transacted area continued to slip, along with a slight decrease in prices

In 2Q11, the leasing market was very active, with demand increasing steadily and coming from mostly MNCs in the automobile, IT, and energy sectors. Different from those long-term family tenants, more business clients chose to lease modern serviced apartments or non-serviced luxury apartments. Due to the flexibility of lease terms and the comprehensive provision of services and facilities, serviced apartments have become increasingly popular. Tenants began to move out from CBD Ascott and East Gate Plaza, which will be sold as strata-title buildings after they are refurbished. With supply falling and demand rising, the overall occupancy rate reached a historical high of 90.3%, an increase of 2.3 percentage points q-o-q, 3.4 percentage points in 1H11, and 7.1 percentage points y-o-y. The current trend in the leasing market was favorable to landlords, allowing them to increase rents in March and April. As a consequence, average rents rose to RMB 178.8 per sqm per month, registering growth of 5.2% q-o-q, 6.0% in 1H11, and  8.6% y-o-y. The landlords and developers of some apartment buildings sold as strata-title properties noted the shortage of serviced apartments in Beijing and have required value-added services from asset or property management operators to retain long-term clients and to sustain higher-asking rentals. Head of Residential Services at Jones Lang LaSalle Beijing, Zhang Hong, indicated “the serviced apartment leasing market will remain active in the second half of the year, although rents will increase at a lower rate.”
Influenced by the strict housing purchase restriction policies, the transacted area in the high-end residential property market was low in the first half of the year. In 2Q11, the number of transacted units continued to drop, declining 13% q-o-q and 43% y-o-y. The number of transacted units in the first half of the year decreased 41% y-o-y. Of the eight newly launched high-end apartments, five projects had transaction prices between RMB 30,000 and 40,000 per sqm, which helped to lower the average sales price to RMB 41,503 per sqm, a drop of 1.9% q-o-q and an increase of 3.8% y-o-y. In the first half of the year, the average sales price increased 1.1%. The proportion of high-end projects priced between RMB 30,000 per sqm and 40,000 per sqm, which are typically purchased by homebuyers seeking to improve their living conditions, grew to 72%, an increase of 6 percentage points q-o-q. At the same time, the transacted volume of high-end villas was very low, down 41% q-o-q. The number of transacted units in the first half of the year decreased 16% y-o-y, and no new villas were launched in 2Q11. The transaction area of former projects remained stubborn, pushing the average price up to RMB 45,990 per sqm, an increase of 8.6% q-o-q and 13.2% y-o-y but a minimal growth of 0.1% year-to-date.

Jones Lang LaSalle expects the current purchasing restrictions and tightening measures to persist due to rapid price growth over the past two years. We therefore anticipate that the transacted area will remain low, and some developers will offer more discounts to attract buyers, which will lead to lower transaction prices in the second half of 2011.
 
Industrial – Growing pent-up demand in the logistics sector due to supply constraints, while business parks are continuing to attract wide attention from MNCs and domestic firms

Logistics: In 1H11, two new logistics projects were completed, namely Xianglong Logistics No.4b warehouse in Tongzhou Logistics Park and Green Logistics in Beijing Airport Logistics Park. Comprising a total GFA of 22,000 sqm and 10,000 sqm, respectively, each of these projects has been preleased by large auto manufacturers. Rental growth slowed slightly in 1H11, whereas rents increased to an average of RMB 0.92 per sqm per day (net effective GFA) as of end-2Q11, increasing 1.4% q-o-q and 15.1% y-o-y. Slowing rental growth was attributed to the limited number of transactions of prime space due to many projects being fully occupied.

Demand for logistics space remained strong, although the current limited supply of quality space is curtailing the number of leasing transactions in the market. The most active participants in the market continued to be auto manufacturers, retailers, and logistics companies and 3pl providers. Many retailers and large e-commerce businesses, which are expanding at a rapid rate amid skyrocketing retail sales, are currently looking to relocate their facilities to higher grade logistics parks. Meanwhile, auto manufacturers have been quick to reserve spaces in order to consolidate operations and facilitate demand, which has remained strong despite current licensing restriction policies. Full preleasing of the market’s two new projects in 1H11 and further absorption of scarce available space caused market vacancy to drop several percentage points to 1.7% by the end of 2Q11. 
 Persistent strong leasing demand will continue in the second half of the year and allow for rapid absorption of new supply. We expect rental growth to pick up in 2H11 as more tenants renew leases and new projects record transactions at rents higher than the current market level.

Business Park: In 1H11, the business park market continued to see strong demand for space, which is being driven by tenants from various industries, most notably IT, electronics, pharmaceutical, and service segments. A growing trend in 2011 thus far has been the increasing number of companies drawn to business parks to establish headquarters and R&D centers due not only to the extension of favorable tax policies and potential cost savings but also since areas like Zhongguancun Software Park, and BDA are expanding to offer more specialized and integrated facilities. Sustained high absorption rates and declining vacancy over the past half-year has been attributed to large leases by both MNCs – notably from the IT, pharmaceutical and semiconductor sectors, and domestic firms – and the growth of local SMEs. Business park vacancy decreased several percentage points in 1H11 to 5.9%. Business park rents increased to an average of RMB 2.77 per sqm per day (net effective GFA) as of end-1H11, an increase of 1.4% q-o-q and 12.8% y-o-y. In 1H11, several en bloc transactions were witnessed in the market. IBM China Center in Zhongguancun Science Park was purchased by a foreign investor with an American background for a total consideration of about RMB 244 million, and Silicon Valley Bright City No. 4 building in Shangdi was bought by the same investor for a total consideration of about RMB 140 million. 

Through the remainder of the year, rents are projected to continue to post moderate quarterly growth as demand remains strong and leasable supply in most business parks limited. The market is likely to see the completion of the National Pharmaceutical Base in BDA in 2H11, which will target various pharmaceutical and biomedical firms and provide more than 100,000 sqm of supply.
 
Investment – Prime office en bloc transaction market becomes active

Supported by the soaring rents of prime office space and the business expansion of domestic companies in various industries, the purchase of prime office buildings, either for self use or as a long-term investment, has been one of the main strategies of cash-rich SOEs. Buildings located in mature commercial areas are potential targets, although few landlords are currently willing to offload their projects given the market situation.

Institutional investors with shopping center operation experience are confident about their long-term optimistic outlook for Beijing’s consumer market and are continuing to focus on community malls located near the expanding subway network or close to large residential projects. It has also been reported that one underperforming project is considering takeover offers; it is, therefore, expected that more shopping centers will be transacted in the second half of this year.

In addition to en bloc transactions closed in the first quarter, several more deals were unveiled to the public in 2Q11. These include PICC’s acquisition of one tower of Chaoyang Plaza located in the Chaoyangmen area and the Bank of China’s purchase of Xidanhui Plaza in the Xidan area for self-use. “Strong rental growth is translating into even stronger capital value increases, underpinned by the limited number of properties being offered by owners for en bloc sale”, notes David Hand, Head of China Investment at Jones Lang LaSalle. “This is causing average market yields to remain stable at best or more broadly to compress slightly - we see no let-up in this trend for the foreseeable future, making Beijing a truly compelling investment market.”

Hotel – Riding on last year’s recovery, hotel demand in Beijing has continued to post strong growth this year

International tourist arrivals increased 3.3% by May 2011 compared to the same period last year. In the meantime, due to a slowdown of new hotel openings, Beijing’s five-star hotels experienced strong growth in both room rate and occupancy, which reached averages of RMB 1,139 and 62%, respectively. Continuous improvement in occupancy since 2010 has given hoteliers much confidence in establishing more aggressive pricing strategies, resulting in strong growth in room rates. The combined increase in room rate and occupancy has resulted in an impressive growth in revenue per available room (RevPAR) at 18.7% y-o-y.   

 “Despite concerns over the large number of new hotels opened recently, the performance of Beijing hotels in the last 12 months not only reflects a growing demand, but also demonstrates the market’s strength,” added Hans Galland, Vice President at Jones Lang LaSalle Hotels. “Demand from the corporate, leisure, and MICE sectors is also increasing in healthy strides.”

With an optimistic outlook, Beijing’s five-star hotels continue to project upbeat performances for the year.