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News Release

Beijing

Jones Lang LaSalle: Grade A Office Leasing Demand Subdued in 1H12; High-end Apartment Sales Rebound


The rent of prime office and retail properties continued increasing in the first half of 2012.

• Office – Absorption continues to slow down given the tightening market.
• Retail – The entry of new luxury brands into the Beijing market combined with the active expansion of fashion brands drove demand growth; the openings of two new malls caused a significant increase in supply; several shopping malls were being renovated to become more competitive.
• Residential – With the continued decrease in average price, the sales area of high-end apartments rebounded.
• Industrial – Strong take-up had vacancies edging downwards and rents growing.
• Investment – Several sites were acquired in the first half of 2012 and assets were mostly purchased by end-users.
• Hotel – Demand continued growth momentum, and hotel performance achieved significant increase.
 
Office – Compared to 2011, demand was subdued in the first half of 2012

With no new Grade A office supply launched in Beijing in the year-to-date, total stock held steady at 6.2 million sqm in 2Q12. Around 23,000 sqm of new supply is expected to be completed in 2012 and, thus, leasable space is likely to remain at a premium for the remainder of the year.

Factors such as higher rents than ever seen before in Beijing, increasingly limited vacant space in the market, reduced growth forecasts for the Chinese economy and uncertainty in the global economy, contributed to the subdued demand that was witnessed in the first two quarters of 2012. Because most well established Grade A buildings in Beijing are almost fully occupied, the vast majority of the 146,065 sqm of net absorption recorded in the first two quarters was in recently completed buildings. In terms of total area leased, expansions accounted the bulk of the leasing demand in the year-to-date with domestic and international firms being active in the leasing market. 

The supply shortage meant that vacancy rates continued falling in 2Q12 and with limited leasable space in the market, some landlords were able to be increasingly selective in accepting potential tenants, with some reporting that they would only accept what they deemed to be high-quality tenants. Vacancy rates dropped to 6.8% by the end of the quarter; down 0.9 %q-o-q and 1.5% y-o-y. Vacancy rates in most submarkets city-wide fell or remained stable at levels well below 10% and are expected to continue falling as available space remains limited.  This is leading to firms exploring the possibility of leasing space in decentralized areas or in the Grade B office market.

Low vacancy rates continued to support rental growth in 2Q12, with rental growth significantly higher for new setups and relocations than for renewals. As Eric Hirsch, Head of Markets at Jones Lang LaSalle in Beijing points out “Overall rent increases continue to be impacted by many renewals taking place which have rental caps.” Overall rents increased by 6.8% q-o-q and 34% y-o-y to RMB 326 per sqm per month based on GFA and by submarket, with the CBD and the Third Embassy Area leading the way in terms of rental growth.

Similar to other global markets, Beijing is seeing several on-going developments being delayed and, thus, only one new Grade A project will be launched in Beijing in 2H12 adding 23,000 sqm to the market. This, however, will do little to alleviate the supply constraints which are currently evident across the city. Steady demand is expected to continue throughout the remainder of the year, pushing vacancy rates even lower and supporting moderate rental increases in each of the final two quarters of 2012.
 
Retail – The entry of new luxury brands into the Beijing market combined with the active expansion of fashion brands drove demand growth; the openings of two new malls caused a significant increase in supply; several shopping malls were being renovated to become more competitive.

In 1H12, following the opening of Capita Crystal in West Chang’an Avenue and Macau Centre in Wangfujing in 1Q12, two new shopping centres were launched in 2Q12. INDIGO is located in Jiuxianqiao with a total GFA of 86,000 sqm and its current tenants include CGV Cineplex, Costa Coffee, Sephora, H&M and VERA MODA. Located in the centre of Olympic Park, Xin’ao Shopping Centre has a total GFA of 150,000 sqm; anchor tenants include Rainbow Department Store and Supermarket and CGV Cineplex. Existing projects continued to contribute in reducing the vacancy rate.

In 1H12, demand for core malls increased further, as a number of jewellery, watch and luxury brands entered the China market in Beijing. Italian luxury brand TOMBOLINI opened a store in Modern Plaza, and high-end footwear brand J.M.Weston opened a store in Yintai Park Life. Beijing has become a cornerstone of China expansion strategies for many international luxury brands due to the city’s local and international standing. Accordingly, core shopping malls with advantageous locations and luxury brand focuses were prioritized, thus causing the rents in these malls to increase.

Fast fashion brands sped up expansions in 1H12. UNIQLO opened four new stores in Capita Crystal, Yintai Department Store, Solana and Shijingshan Wanda Plaza. H&M opened three new stores in INDIGO, Tiantongyuan Hualian Shopping Centre and Galleria. Local fast fashion brands such as iROO and MC Jeans opened new stores in Capita Crystal and Fortune Mall. To attract younger consumers, most newly opened malls introduced fast fashion brand tenants.

Amongst other retailer formats, cinemas and jewellery stores significantly contributed in reducing the vacancy rate. CGV Cineplex entered both newly opened malls, INDIGO and Xin’ao Shopping Centre. Yihe Gold flagship and Shandong Gold flagship stores opened in Capita Crystal and Zhongkun Plaza, respectively. Jewellery tycoon Beijing Gongmei Group opened a jewellery themed mall in Deshengmen in 1Q12 and purchased 50,000 sqm GFA from Xin’ao Shopping Centre prior to Xin’ao’s opening of another store.

In 1H12, net effective rents in urban malls were generally stable due to the lower rents of the two newly opened projects. The 2Q12 average rent rose by 0.1% q-o-q and 6.2% y-o-y to 710 RMB per sqm. Despite the occupancy rates of most existing malls increasing marginally, the high volume of new supply in two successive quarters caused the vacancy rate to increase from 10% at end-2011 to 12% in 2Q12.

Jones Lang LaSalle predicts that demand for retail space will maintain its momentum through 2H12. Seven projects, including Seasons Place Phase II, CapitaRetail Taiyanggong Mall and Parkview Green, are scheduled to open in 2H12, adding over 360,000 sqm of new space to the market and increasing the total supply to approximately 540,000 sqm in 2012, thus ensuring that the vacancy rate will continue to rise.
 
Residential – Leasing demand for serviced apartments remained strong and rent continued to increase. With the continued decrease in average price, the sales area of high-end apartments rebounded.

In 1H12, leasing demand for serviced apartments remained strong. Due to the recessions of overseas economies, many MNCs increased their presence in China to become more competitive in this significant market. As a result, more foreign expatriates were assigned to work in Beijing. The robust leasing demand pushed up overall rents of serviced apartments, and fewer relocations were recorded when contracts were renewed. Most tenants’ employers accepted a 10% increase in rent and preferred to sign longer contracts, of more than one year, to save costs. No new serviced apartments entered the market in the first two quarters of 2012. Meanwhile, the renovation of Jing Guang Center led to a decrease in available housing in the market. The combination of strong demand and limited supply caused the vacancy rate to fall to a record low of 5.2%. Since February of this year, some serviced apartments have raised their rents and other projects have followed. In 2Q12, the average rent of serviced apartments reached RMB 199.7 per sqm per month (based on GFA), a q-o-q growth of 2.7% and a y-o-y increase of 11.7%; the overall rent of serviced apartments was up by 5.2% in 1H12. Four projects are expected to be launched in 2H12, bringing 748 new units to the market. The influx of new projects will ease the current shortage of supply of serviced apartments, which will also end the past three consecutive years’ decrease in the vacancy rate. Strong demand will help maintain rental growth momentum, resulting in the year's overall rent growth rate of approximately 10% by end-2012.

Twelve new supplies with a total of 4,216 units were launched in the high-end apartment market in 1H12. The supply volume has been mostly restored to the level of 1H11, demonstrating the fulfillment of developers’ aspirations for launching more projects. Out of all new projects, only three had sales prices over RMB 40,000 per sqm. Due to the launching of new projects at relatively low prices and price discount offers in some existing projects, the transaction price of high-end apartments dropped to RMB 38,163 per sqm in 2Q12, declining 2.7% q-o-q and 8.0% y-o-y, a decrease of 4.9%   in 1H12. The increase in supply combined with developers’ strategies of exchanging lower prices for larger sales volume provided more choices for purchasers buying houses to improve their living conditions. The main demand drivers for high-end apartments, these customers were cash-rich qualified purchasers, who took advantage of buying better quality products at a time when the market was under adjustment. Despite the low transaction volume in 1Q12, the overall transaction area of high-end apartments in 1H12 reached 620,000 sqm, a y-o-y increase of 3.8%, which can be attributed to the dramatic rebound in sales volume in 2Q12, up 270.9% q-o-q and 67% y-o-y. Given that house purchasing restriction policies will not expire in the short term, some projects will continue to attract consumers by offering discount prices to enlarge transaction volume under fierce competition. As a result, high-end apartment prices will decrease slightly while the sales area will further increase in 2H12.
 
Industrial – Rents increased 4.2% on the back of strong take-up in 1H12; logistics vacancy will edge down to 1.3% from 1.5% by 4Q12.

Logistics: In 1H12, three new projects were completed bringing 112,000 sqm of new supply to the Beijing market. The 20,000 sqm China Merchants Logistics Park, which was launched in1Q12, had slow take-up and high vacancy at end-1H12. Launched in Daxing in2Q12, Beijing Bailiwei Logistics Phase II has fared better and is on schedule to fully lease all 20,000 sqm by end- 3Q12. Demand for projects in BALP remains strong as all 72,000 sqm of the Treasury Beijing International Logistics Center were fully pre-leased prior to its launch in 2Q12, pulling vacancy rates down 0.4% from 1Q12 to 1.5%.

Restructuring of the e-commerce sector continues as smaller companies with capital shortages are absorbed by bigger players or forced out of the market. Third-party logistics companies and automakers wishing to better tap the Beijing automotive market are also competing with retail and e-commerce players for the limited available prime warehouse space, which has driven up rents by 4.2% from end-2011 and 12.1% y-o-y. Average net effective rent is 1.03 psm per day, up from 0.99 at end-4Q11.

Two new projects are slated to enter the market before end-2012 and a pre-lease agreement has already been signed for the Goodman BALP Park Phase II in the high-rent Shunyi District. The Liangxiang District is scheduled to receive 20,000 sqm from the Beijing Baiweili Logistics Phase III in 4Q12. In 2H12, Jones Lang LaSalle expects to see rental growth and vacancy rates maintain pace on the back of strong absorption.

Business Parks: The en-bloc transaction market was active in the reviewed quarter. Three projects were completed in the Beijing business park market in 1H12, namely Sunshine 878 in Jiuxianqiao area, Art Beneficial Park District A and C in Zhongguancun, and part of Dongyi International Media Park in Tongzhou District. To date, the total stock of quality business parks in Beijing has exceeded 3 million sqm. The launch of the new supply drove up the average vacancy of business parks by 3.6% q-o-q to 10.2%. Favourable tax policies, improved service facilities and cost savings have attracted increasing numbers of MNCs, high-tech and innovative enterprises to business parks. On the back of strong renewal and expansion demand, net effective rents of business parks have increased to an average of RMB 3.31 per sqm per day as of end 1H11, an increase of 7.4% q-o-q; the accumulated increase in 1H12 amounted to 10.5%.
Looking forward to the remainder of 2012, potential tenants will have more choices, as plenty of quality space will be launched into the market. Jones Lang LaSalle predicts that business park vacancy will trend up as a result of the large new supply whilst rents are also still on an upward trajectory.
 
Investment – Several sites were acquired in the first half of 2012 and assets were mostly purchased by end-users.

Facing challenges from both the stringent credit situation and strong restrictive purchase measures, some developers who had replenished their land banks in the recent past started to make land disposals to free up cash for future stable and long-term development under the uncertain economic situation. At the same time, some overseas institutional investors and developers with ample cash flow took advantage of the property market downturn to acquire commercial and residential properties in prime locations. Meanwhile, state-owned enterprises, supported by strong business performance, were still looking for quality projects for self-use purposes. In 2Q12, a notable en-bloc transaction was announced, which comprised the Sinotrans purchase of an 80,000 sqm build-to-suit office space in New Times Square located in the Olympic area for a total consideration of RMB 4.1 billion. In April, CapitaMall Asia Ltd announced that it had obtained the development rights for a 39,500 sqm Tiangongyuan retail plot which will be developed as a community mall with a GFA of 122,000 sqm., Aoyuan Real Estate, a local developer, sold 51% of Chang’an No.8, aluxury apartment to Hong Kong based Kingston Financial Group Ltd for a consideration of RMB 1.48 billion.
Moreover, several notable deals are reportedly in the negotiation process and are expected to close in 2H12. With the active participation of experienced overseas developers and investors in the China commercial property market, their advanced concepts, project designs and operating procedures will force the market to mature quickly.

David Hand, China Investment Head at Jones Lang LaSalle pointed out, “Underpinned by steadily rising rental levels and a maturing economic profile, investor demand for well-located, income-producing assets in Beijing remains very strong.  The longer-term capital value appreciation trend in China’s property market remains true and is not expected to wane, despite some short term economic challenges. Core office and retail space in the capital continues to represent excellent long-term value, especially when considered alongside its peer group cities across Asia.”
 
Hotel – Demand continued growth momentum, and hotel performance achieved significant increase.

Beijing tourism market continues the growth momentum. International tourist arrivals increased 5.9% by May 2012 when compared to the same period last year. While data of domestic tourist arrivals in 2012 has not been published, by the end of 2011, domestic arrivals hit a new record high at 208.8 million, or a one-year increase of 16.7%.

With no new hotel openings in the first half of the year, performance of Beijing five-star hotels benefited from an occupancy and average rate growth of 5.1 percentage points and 7.8% respectively.  Revenue per Available Room (RevPAR) for five star hotels increased a solid 17.0% for the first five months of 2012.

Several high-end and upper-end internationally-branded hotels, such as Four Seasons, Conrad and East Hotel are planning to open in the second half of the year. While new supply is expected to increase market competition, the strength of the Beijing hotel market should mitigate some of the impact. 
Hotel owners should continue to exercise prudent asset management to improve on hotel performance and competitive positioning.