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News Release

BEIJING

Jones Lang LaSalle:  Demand for Grade A office space in Beijing remained stable, while rents lose strong growth momentum


Demand for office space and prime retail in Beijing remained stable and healthy rental growth was seen in 1Q12.

• Office – Rents lose strong growth momentum, increasing by 4.0% q-o-q in 1Q12.
• Retail – Taking advantage of active expansions by retailers, some shopping malls started to adjust their tenant mixes.
• Residential – Leasing demand increased steadily along with continued rental growth. The sales volume of high-end apartments decreased significantly and the average price marginally decreased.
• Industrial – Activity in the logistics market slowed due to limited leasable space.
• Investment – Overseas institutional investors and domestic end-users are more confident about the commercial market, as evidenced by the active investment activity seen in the quarter under review.
 
Office – Rents lose strong growth momentum, increasing by just 4.0% q-o-q in 1Q12

Beijing Grade A office market stock remained steady at approximately 6.2 million sqm in 1Q12 as no new projects were completed in the quarter. As such, the shortage of available space in the market was more deeply felt, given that most existing buildings are almost all fully occupied or committed to.

Demand for office space in Beijing remained stable and saw healthy growth in 1Q12 as several domestic and international economic indicators improved to some extent after the Chinese New Year period. However, leasing demand in the Beijing office market did not experience the strong growth it showed in 1Q11 due to a number of factors, including higher rents than ever before, more time required to find suitable space and a lower GDP growth target in the country’s 12th Five-Year Plan. All of these factors weakened the abilities of some corporations’ management teams to make firm decisions.

The majority of the net take-up was in recently completed buildings as most existing Grade A buildings are almost all fully occupied. By sector, leasing demand was driven mainly by the high-tech, manufacturing and financial sectors. Although financial services companies were less active in the
quarter, several were still considering expansion. In terms of demand sources, expansion and renewal were the two leading drivers.

Overall vacancy rates continued to drop due to no new supply and stable demand. In 1Q12, the vacancy rate reached 7.7%, a decrease of 1.4 percentage points q-o-q. Among all of the sub-markets, Finance Street, Zhongguancun and East Second Ring Road have the lowest vacancy rates; all of which are below 5.0%.  As companies were prudent about expanding their business, rents lost growth momentum in 1Q12, with overall net effective rents increasing to RMB 305 per sqm per month (based on GFA), up by just 4.0% q-o-q.

Seven office projects are expected to be launched in the market this year, of which, the four lease-only projects will add about 270,000 sqm of office space. Overall demand in the Beijing office market is expected to experience stable growth in the early part of 2012 and pick up later this year. While the overall vacancy rate should continue to remain low, rental growth is projected to increase, albeit at a slower pace than in 2011.

Eric Hirsch, Head of Markets at Jones Lang LaSalle in Beijing points out that “…while we are still seeing significant interest from companies expanding in Beijing, it is at a less rapid pace than in 2011. This is evidenced by the slower rate of rental increases despite vacancy rates dropping.”
 
Retail – Taking advantage of active expansions by retailers, some shopping malls started to adjust their tenant mixes

In 1Q12, two new shopping centres, Capita Crystal and the Macau Center, were launched to the market. Capita Crystal opened in the West Chang’an catchment area with a total GFA of 75,000 sqm; its anchor tenants include UNIQLO, i.t, BONA Cineplex and BHG. Located in Wangfujing and occupied mainly by high-end jewellery and watch retailers, as well as restaurants, the Macau Center attracted Time City, an agent of luxury watches, as its anchor tenant. Following refurbishments and adjustments of tenant mixes in several projects in 2011, projects such as the Kerry Center, Glory Mall and Chaoyang Joy City, started or planned to start refurbishment or repositioning to comply with the demands of retailers and remain competitive, causing an increase in vacancy rates in some projects.

In 1Q12, retailers of jewellery, watches and luxury clothing continued to expand. Vacheron Constantin, Cartier, Piaget and Rolex were unveiled in the Macau Center; the first Beijing store of high-end footwear brand J.M.Weston opened in Yintai Park Life, which also attracted Jaeger LeCoultre; Montblanc’s first global conception store, covering an area of more than 2,000 sqm over four floors, held its grand opening in The Village North; high-end eyewear brand glasstique opened stores in Shin-Kong Place and Beijing APM; and luxury jewellery brand Van Cleef&Arpels will open soon in Parkview Green.
 

Fashionable designs and favourable pricing policies have ensured that fast fashion has become increasingly popular among domestic consumers, encouraging fast fashion brands to accelerate their expansions in order to secure prime space. UNIQLO and WE opened new stores in Capita Crystal; GAP will soon open a store in Parkview Green; and H&M will open in Galleria. Domestic fast fashion brands are also expanding, with Urban Renewal and MC Jeans opening new stores in Capita Crystal and Fortune Mall, respectively. In addition, importing new fashion brands has become a good way for shopping malls to attract consumers. Thus, US fast fashion brand Forever 21 will open its first store in Beijing in Beijing APM, a four-storey duplex covering an area of 2,500 sqm, and Galleria has attracted the fashion brand Hollister to the city for the first time.

Supermarket and cinema tenants were also active in the reviewed quarter. BHG opened in Capita Crystal; Yonghui high-end supermarket was unveiled in New World Department Store in Shunyi District; Tesco opened a new branch in Greenland Central Plaza; and high-end supermarket City Shop is going to open in Parkview Green. New cinemas include Bona, CGV and the first Lumiere Pavilions in Beijing, which are anchored in Capita Crystal, One Indigo and Parkview Green, respectively.

In 1Q12, despite robust demand, the average net effective rent did not significantly increase, rising by just 1.1% q-o-q to RMB 709 per sqm per month, due mainly to the relatively low rents and rent-free periods offered in new projects. The addition of two new shopping centres, as well as the refurbishment and adjustment of tenant mixes in some existing projects, caused the vacancy rate to increase slightly, up by 0.7 percentage points q-o-q to 10.7%.

Jones Lang LaSalle predicts that demand for retail space will maintain its momentum over the remainder of 2012. Ten projects, including Seasons Place Phase II, One Indigo and Parkview Green, are scheduled to open in the remaining quarters of the year, adding about 730,000 sqm of new space to the market and taking the total supply in 2012 to around 830,000 sqm, ensuring that the vacancy rate will rise.
Residential – Leasing demand increased steadily along with continued rental growth. The sales volume of high-end apartments decreased significantly and the average price marginally decreased.

Rental increases in Beijing’s residential market have significantly affected multinational companies, which still regard China as their key market. In most cases, despite no increase in firms’ leasing budgets, rental increases of less than 10% are approved case by case when renewing contracts. Firms also often prefer to sign long term contracts for more than one year in order to protect against further rental increases. In the serviced apartment leasing market, tenants from small to medium sized companies had an advantage over larger companies because of more flexible budgets.  Local companies based outside of Beijing with strong business links in the city began to lease serviced
apartments in major business areas with long term commitments. In 1Q12, no new serviced apartment projects were completed and in addition, several existing projects were affected by a number of factors. Stable, increasing demand and limited supply have resulted in a new historical low vacancy rate of 6.2%. Several landlords of serviced apartments increased their rents from February levels by, in general, more than 8%. In 1Q12, rents increased 14.5% y-o-y to RMB 194.5 per sqm per month (based on GFA). Looking forward the remaining three quarters of 2012, four serviced apartment projects are expected to be completed, offering 748 units in total, which will alleviate the shortage of available housing. At the same time, the booming leasing demand will be beneficial to the newly opening serviced apartment projects, while the average rent will experience an increase similar to that of 2011.

In 1Q12, the number of newly launched high-end apartments increased from the previous quarter, reflecting developers’ aspirations to launch projects quickly. In the new housing sales market, the total sales volume of high-end apartments decreased 41.5% q-o-q and 56.8% y-o-y; the lowest sales volume seen in the last three years. However, some real demand remained in the market; several buyers sold small or old residences in order to buy bigger houses and a number of cash rich buyers bought large houses through their companies or parents to evade the purchase restrictions. Influenced by the decreasing sales volume, the average sales price of high-end apartments dropped 2.3% q-o-q and 7.4% y-o-y to RMB 39,216 per sqm. The high-end villa market has been the sector most influenced by the purchase restriction policies, as most potential buyers already own at least two houses in Beijing. As a result,the sales area dropped 70.3% q-o-q and 74.7% y-o-y. With a historical low sales area, the average price of high-end villas dropped 5.4% q-o-q and 6.7% y-o-y to RMB 39,546 per sqm. In the next quarter, developers will continue to offer incentives to potential purchasers in the high-end apartment market, which will help to increase the sales volume.
 
Industrial – Activity in the logistics market slowed due to limited leasable space; continued strong demand was seen in the business park market

Logistics: In 1Q12, one project, China Merchants Logistics Park Phase III, entered the market adding 20,000 sqm of new supply. Some potential clients are interested in this project but, with no agreements inked to date, tenants will not move into the property until next quarter.

In 1Q12, almost all quality warehouses remained fully leased, with rents recording new highs. By end-1Q12, average net effective rents reached RMB 1.00 per sqm per day, up by 10.7% y-o-y. The overall market vacancy rate remained at a low level, up only 1.3 percentage points to 1.9%. The main drivers of market demand continue to be retailers, e-commerce firms and third party logistics (3PL) companies. After a year of explosive growth, many e-commerce firms are now facing capital constraints and it is likely that several SMEs will be forced out of the market. By contrast, some e-
commerce giants that value refinement and differentiation of operations are expected to merge with their smaller competitors in this round of industry restructuring.

Over the remainder of 2012, five projects are projected to enter the market in accordance with their schedules. Offering more than 200,000 sqm of new supply, they will provide potential clients with more choices, while high-quality logistics projects in the pipeline will continue to push market rents up.
Business Parks: In 1Q12, Sunshine 878, located in the Beijing Electronics Zone (BEZ) east, was completed, adding 64,000 sqm of new supply to the market. To date, the total stock of quality business park space in Beijing has reached approximately 3 million sqm.

In 1Q12, strengthening demand for large, quality space led to high absorption and the vacancy rate continued to decrease. By the end of the quarter, the average market vacancy rate had fallen to 6.6%, down by 1.4 percentage points. Due to robust demand and relatively limited new supply, average net effective rents in the quarter hit RMB 3.08 per sqm per day, up 2.9% q-o-q and 13.0% y-o-y.

Jones Lang LaSalle predicts that the business park market will continue to see strong demand; the overall vacancy rate is expected to grow at a moderate pace as rents increase further. Meanwhile, self-built and built-to-suit business parks will be favoured by MNCs and domestic firms with strong financial capabilities.
 
Investment – While the majority of local developers are facing depressed cash flows, overseas institutional investors and domestic end-users are more confident about the commercial market, as evidenced by the active investment activity seen in the quarter under review.

Compared with the sluggish residential sales market, the en bloc property transaction market was active in 1Q12. Two deals were unveiled to the public and some projects are under negotiation. In the first of these deals, in January, the Keppel Corporation, a Singapore based developer, acquired 51% equity of a composite site with three office buildings and a prime retail podium located in the CBD via an equity purchase; the project is expected to be completed by end-2014. The other deal was disclosed in March when the New Oriental Group, a renowned English education firm, purchased Metropolis Plaza in Zhongguancun for RMB 1 billion; the building is expected to be used by the Group for its own purposes. Given the restrictions covering the residential property market, foreign institutional investors with good cash flows and significant experience in commercial property operations have been investing aggressively in commercial property and in sites in Beijing. As asset prices continue to grow steadily, sites and projects currently under construction are attracting the attention of these investors, demonstrating their mid- to long-term strategy in China. This is also a good time for some landlords to sell their property in order to replenish their capital flows or to exit the market for a profit, locking-in some of the recent capital value gains.  That there are more and more investors clamouring for investment opportunities in China’s capital is evidence that investors believe not just in the obvious cyclical opportunities but also in the long-term value that Beijing’s prime real estate market represents. 
David Hand, Investment Head at Jones Lang LaSalle, points out: “Beijing is now considered a core office investment market on a global scale.  More and more investment capital, both domestic and increasingly international, is seeking out opportunities to gain exposure to the Chinese economy via its capital city’s real estate market.”