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News Release

BEIJING

Jones Lang LaSalle: Grade A Office Rental Growth Slows; The Average Transaction Price of High-end Apartments Rebounds


Demand for Beijing property remains stable.
• Office – Rental growth slows in the third quarter.
• Retail – High-quality shopping malls improve rental revenues through tenant adjustments.
• Residential – The average transaction price of high-end apartments rebounds in 3Q12.
• Industrial – Relatively few transactions limit rental growth.
• Investment – Few en-bloc transactions are recorded due to limited available assets and soaring asset prices.

Office – Rental growth slows in the third quarter.

No new grade A supply entered the market for the third consecutive quarter in 3Q12 and, as such, total stock remained unmoved at 6.2 million sqm. Limited new supply in the final quarter means that 23,000 sqm is scheduled to be launched in the year as a whole. This will represent the lowest annual supply figure on record and will be more than 730,000 sqm lower than the 2011 total.
Net absorption was up q-o-q as pre-committed tenants moved into relatively recently completed projects such as Parkview Green and Indigo. However, accumulated net take up for the year-to-date was just over 25% of the corresponding figure for the first three quarters of 2011. Both the slowdown in the domestic economy and continued global economic uncertainty meant that many tenants remained cautious in the third quarter. In addition, some resistance from price-sensitive tenants to the high rents in Beijing is now being felt and with limited space across the city, viable Grade A options are increasingly limited. Eric Hirsch, Head of Markets at Jones Lang LaSalle in Beijing, points out that “low vacancy rates and rising rents, albeit at a slower pace, mean that some tenants are enhancing space efficiencies and exploring alternative options in order to meet their space and budget requirements. This is a trend that we expect to continue into 2013.”

Nevertheless, a number of firms from the financial, automobile manufacturing and energy sectors were actively leasing space this quarter and international firms were responsible for the bulk of the leasing activity. Despite the slowdown in demand in the first three quarters of the year, with no new supply, the overall vacancy rate continued trending downwards, reaching 5.7%, a twelve year low, by the end of 3Q12.

Rents continued to increase in 3Q12, hitting RMB 341 per sqm per month (based on GFA) by the end of the quarter. However, a number of tenants, struggling in the current economic climate, handed back space to the market this quarter and this may be a recurring theme over the coming quarters as companies’ growth plans are impacted by the slowing economy.  As such, despite low vacancy rates, with an uncertain economic outlook, some landlords were willing to compromise on their rental rates in the hope of attracting high-quality tenants. The 4.7% q-o-q growth rate represented slower rental growth than was seen both last quarter as well as in each quarter of 2011 and year-to-date rental growth of 16.4% was down significantly from the corresponding figure of last year. Nevertheless, rental growth in Beijing has been stronger in comparison to that in some other major cities in Greater China. In the year to date, rents in Beijing’s CBD increased by 20.4% and over the same time frame, rental growth of 2.8% was realized in Shanghai, and Hong Kong experienced negative growth .

Demand is expected to be largely stable in the fourth quarter as some MNCs continue to expand although whole-year net take-up is set to be only around one third of the end-2011 figure. With limited supply in 2012, the overall vacancy rate will dip below 5% for the first time in over ten years and rents will continue to grow on the back of limited space. However, rental growth will continue to slow and stabilize as the domestic economic slowdown and global economic uncertainty continue to impact the Beijing Grade A office market.
Retail – High-quality shopping malls improve rental revenues through tenant adjustments.

Three shopping malls above subway stations opened in 3Q12. CapitaRetail Taiyanggong Mall with a total GFA of 84,000 sqm is the eighth project developed by CapitaRetail in Beijing, and serves as a community shopping centre for Taiyanggong District. It achieved 90% occupancy only one month after opening with tenants which included BHG, Toys R Us, Haidilao, Mr Bean, Guess and GAP. Seasons Place Phase II is the extension of Seasons Place in Finance Street, which continued its high-end positioning and introduced tenants including Bottega Veneta and Zegna. Gemdale Plaza, the refurbished Maison Mode Department Store, lies above the Dawang Road Station on subway line 1 in the CBD. To differentiate itself from neighbouring projects, Shin-Kong Place and New World Caixuan Department Store, Gemdale Plaza introduced several fashion and F&B tenants, including Mango, Zara, ochirly and Food Republic.
Expansions by children’s retailers were accompanied by the development of malls with the aims of better serving local communities. Toys R Us and local children’s photo studio Xiaoguidangjia opened in CapitaRetail Taiyanggong Mall and Chaoyang Joy City, and the latter of these tenants also opened in The Place. It is hoped that new tenants such as these will help to boost foot traffic and consumption from families.

Fast fashion brands continued to expand. Forever 21 opened its first store in Mainland China in Beijing APM, UNIQLO opened stores in both Ginza Plaza and CapitaRetail Xizhimen Mall and CapitaRetail Taiyanggong Mall introduced GAP and WE. Diversified international high-end fashion brands, categorised as light luxury, overtook top luxury brands as the most active retailers in high-end shopping malls in 3Q12. Common brands, such as Guess, Miu Miu and Marc by Marc Jacobs settled in CapitaRetail Taiyanggong Mall, the Village North and China World Shopping Mall, respectively, and provided white-collar consumers with more fashionable, personalised and good value options.

Tenant upgrades and renovations in several malls led to the vacancy in the urban market increasing by 0.7 percentage points to 12.7%. However, most adjustments helped to improve rental revenues. For example, Chaoyang Joy City dismissed Aeon Department Store and introduced dozens of new retailers in order to increase the average rent and enhance the attractiveness of its tenant mix. Also in the third quarter, Oriental Plaza was seeking tenants to occupy the space vacated by Ole Supermarket. Meanwhile, stores selling multiple brands in order to increase area efficiency gained in popularity in 3Q12. After introducing Paul Frank and Gold Resource New Yansha Mall introduced another store, which contains luxury brands including GUCCI, BURBERRY, DOLCE&GABANNA and FENDI. Aimer Select Shop, and MAP by BELLE entered Viva Mall and Glory Mall, respectively and Lane Crawford will open its new store in Yintai Park Life.

As shopping malls managed to improve rental revenues through tenant adjustments the average rent in the urban market increased by 8.2% y-o-y to RMB 735 per sqm per month. Landlords with prime locations and the proper capacity for managing operations experienced the strongest rental growth.
Jones Lang LaSalle predicts that vacancy will decrease and average rents will continue to increase in 4Q12. Two new core malls, Parkview Green and Beijing Hotel Phase II, will bring 136,000 sqm to the market.
Residential – The average transaction price of high-end apartments rebounds in 3Q12.

Following a recovery in the number of transactions in 2Q12, high-end apartments continued to perform well in 3Q12. Six projects, with sales prices greater than RMB 30,000, sold more than 200 units in the third quarter, boosting total transactions to 3,398 units, up 9.9% q-o-q. In an effort to boost whole year revenues, in the third quarter, the traditional peak season, most developers launched new projects. Twelve new projects, and a total of 2,973 units, were released to the market, a large increase compared to last quarter. While not located in traditional prime locations, most high-end apartments attracted potential clients by offering luxury fit outs, beautiful community scenery or reputable educational  amenities to stand out in the market. Examples such as Jin Mao Palace, Xinjing Garden and CITIC Town were all warmly welcomed by the market during the reviewed quarter.

Due to the housing purchase restriction policies in Beijing, most buyers purchased properties for self-use in order to upgrade their long-term living conditions.

The continued rebound in transactions, together with the high price of new projects launched to the market pushed up the average price of high-end apartments by 7.4% q-o-q and 2.3% y-o-y to RMB 40,994 per sqm in 3Q12. Inspired by the gradual recovery in demand from the second quarter, a number of projects decreased or stopped providing discounts. Evidence of this was seen in the fact that 47.7% of the total transacted units or 53.3% of the total transacted area recorded transaction prices greater than RMB 40,000 per sqm. At the same time, some developers increased the prices of the latter phases of projects launched this quarter in an effort to build up confidence in potential purchasers and achieve higher profits. Over 60% of projects which recorded transactions this quarter increased prices marginally q-o-q.

The fourth quarter is the traditional low season for housing sales, and new supply is expected to decrease compared with the second and third quarters. Thus, we expect that the fourth quarter will not follow the robust trend in transaction volume seen in the past six months. However, in view of the large number of transactions in the first three quarters of this year, it is likely that the high-end apartment transaction volume in 2012 as a whole will outperform that of 2011. In terms of transaction price, after the decrease in 1H12 and the rebound in 3Q12, it is expected that the average transaction price in 4Q12 will remain largely stable, with year-end prices slightly lower than the corresponding end-2011 figures.
Industrial – Relatively few transactions limit rental growth.

The Beijing Airport Logistics Park (BALP) received 30,000 sqm of new supply this quarter when the Goodman BALP Park Phase II launched on 1 September. Three other projects were launched earlier this year including China Merchants Logistics Phase III (1Q12) in Tongzhou, Beijing Bailiwei Logistics Phase II (2Q12) in Daxing and Treasury Beijing International Logistics Center (2Q12) in BALP. New supply in the first three quarters of 2012 totalled 142,000 sqm, down 9.5% from 157,000 sqm over the same period in 2011. Total stock now stands at 1.45 million sqm in the Beijing prime logistics market.

Demand softened in 3Q12 as leasing managers reported fewer enquiries due to the slowdown in the Chinese economy but a small number of leasing transactions closed because of tight space in the market. Growth in Beijing’s retail sales continues to be a key driver of demand for logistics space. Consistent with the recent trend, the new BALP project was fully pre-leased whereas take-up was more gradual at a Daxing project which was launched in 2Q12. Pre-lease agreements were inked in BALP by international 3PL companies and an international retailer. Active occupiers in other projects and submarkets were from the pharmaceuticals, manufacturing and retailer industries. Take-up dropped to 40,000 sqm in 3Q12 from 96,000 in 2Q12, but as take-up continues to outpace the launch of new supply, vacancy dropped to 0.8%, a drop of 0.7 percentage points from 2Q12.

The landlord friendly market has prospective tenants faced with few choices and as a result, transactions closed at significantly higher levels; however the small number of transactions limited average rental to RMB 1.04 per sqm per day (1% q-o-q growth).

In 4Q12, Lianxiang Phase III is expected to enter the market with 20,000 sqm. Phase two was fully occupied when it launched one year ago, thus Jones Lang LaSalle expects to see similar take-up in the coming quarter. Although the source of demand will shift over the next year, continued rental growth is expected as new projects launch in prime submarkets.
Investment – Few en-bloc transactions are recorded due to limited available assets and soaring asset prices; local and self-use investors are still dominating the market.

The strong rental performance of the Beijing Grade A office market in 2011 is boosting the confidence of both domestic and overseas institutional investors. Double digit yearly rental growth continues to be recorded this year despite the downturn in the domestic economy and limited new Grade A office supply in the next four years has enabled landlords to ask for higher prices. Given the sustained favourable outlook, more asset owners are opting to hold on to their projects for the longer term. With less assets becoming available for trade, the market remained subdued and no en-bloc transactions were recorded in the Grade A office market in the third quarter although several transactions are still pending. Additionally, rents in prime shopping centres have been increasing at an unprecedented pace and for several consecutive several years, Beijing has seen total sales surpass those in all other cities in China; both of these factors are key drivers in attracting the attention of the investors. Similar to the Grade A office sector, owners of well managed and top performing retail projects are not motivated to sell unless the landlords need to replenish cash flows. Though investors maintain an interest in underperforming projects in prime locations, complicated legal issues and bid-ask spreads pose some challenges to closing such transactions smoothly.

While foreign investor sentiments might have been dampened by external uncertainties and the moderation in China’s headline economic growth, local investors have been demonstrating strong confidence in the market’s long term prospects. Taking advantage of friendly policies and good connections in Beijing, domestic buyers have dominated the en bloc transaction market in 2012 and Ping’an Trust successfully purchased Tower B of China Electronic Plaza in the third quarter. Qihoo 360 Technology Co. Ltd. announced that its subsidiaries recently entered into definitive agreements with a subsidiary of Beijing Electronic Zone Investment and Development Co., Ltd to purchase new office premises with an area of approximately 69,205 square meters in Chaoyang District, for a total cash consideration of RMB1,384 million.

Against a background of continued asset appreciation, local and self-use buyers will be the key drivers in the office investment market and overseas investors with strong financial backgrounds and advanced operational experiences will be more focused on the retail market going forward. Most transactions in recent quarters have occurred in non-prime locations as investors cast their nets wider beyond the traditional business districts for good investment opportunities. David Hand, China Investment Head at Jones Lang LaSalle pointed out that “…global economic uncertainty and a lack of assets fitting the typical foreign investor criteria mean that international investors have been inactive in recent quarters. Domestic investors, however, still see good value in the market and remain in active acquisition mode and, as such, the majority of recent purchases have either been by domestic investors or for owner occupation.”