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Jones Lang LaSalle: Grade A Office Rental Flat; High-end Apartments Sales Remains Robust

Demand for Beijing property remains stable

Beijing saw a two-tail property market in 4Q12, with the Grade A office leasing market experiencing a relative slowdown in demand while the residential sales market continued with the upbeat sentiment that has developed since 2Q12, says Jones Lang LaSalle in its 2012 Annual Property Market Review event today.

Office – Rents flat in the final quarter

One new project, the 23,000 sqm Jinyi Tower, was launched in 4Q12 in Finance Street. This was the only new Grade A office building to be completed in Beijing in 2012, meaning that total annual supply was recorded at a historical low and total stock now stands at just over 6.2 million sqm. Jinyi Tower was fully leased upon its launch, meaning no space will enter the leasing market.
Net absorption was down q-o-q and whole-year net take-up was equal to just 31% of the corresponding 2011 figure. Uncertainty in the domestic and global economies, limited vacant space and record high rents all contributed to the relatively sluggish demand witnessed in 2012. It was reported last quarter that a number of tenants handed space back to the market and in response, several landlords were willing to offer discounted rents or other incentives in order to attract what they deemed to be high-quality tenants. This strategy of favouring long-term stability over short-term gain is expected to be a recurring theme in 2013.

Rents have now been increasing in the Beijing Grade A office market for twelve consecutive quarters. Annual rental growth in 2012 was recorded at 17.1%, significantly down on the 41.4% growth seen in 2011 but relatively robust when compared to Hong Kong where rents decreased by 3.6% and Shanghai, which saw rental growth of 2.2%. Nevertheless, the 0.7% q-o-q growth in 4Q12 represented the slowest quarterly rental growth seen in Beijing for the past three years and is reflective of the caution now being exercised by both tenants and landlords in Beijing. Many leases which were signed in 2010, a record year for net-absorption in Beijing, are approaching expiry. Although rents are already at a record high of RMB 343.5 per sqm per month (based on GFA), some tenants have agreed to rental increases of between 30-70%, as they find it preferable to relocating to similar quality buildings elsewhere, while some cost-sensitive tenants look for cost-reduction opportunities by exploring lower grade buildings or decentralized options. Eric Hirsch, Head of Markets at Jones Lang LaSalle in Beijing, points out that “There is a chance that the Beijing office market will run into a crossroad. While some sectors are still expanding, others are contracting and we have been seeing increased flexibility from landlords in recent quarters as a result.  As vacancy levels are still low, we do not expect the broader leasing market to see rent dropping in 2013.  We will, however, likely experience a relative slowdown in rental growth from previous years.”

Four new projects, comprising 403,000 sqm (GFA), are expected to be completed in 2013, and around 85% of this space is expected to enter the leasing market. Demand is not expected to  rebound too soon until the economy shows solid signs of recovery and net absorption for 2013 is likely to edge down marginally from the 2012-level. About half of the forecast take-up will be coming from new projects as pre-committed tenants continue to move into recently completed projects and as new projects go some way to easing the space constraints currently evident in Beijing. Despite caution in the global economy at present, macroeconomic forecasts for the coming year are largely more positive than 2012 and Jones Lang LaSalle expects office rents in Beijing to continue increase, albeit at a slower pace than seen in recent years.  
Retail – F&B and entertainment became larger contributors to take-up. Several shopping malls completed renovations, leading to vacancy decreases and rental increases
The year of 2012 continued to see retailers broadening their footprints, encouraged by the fact that Beijing shoppers continued to expand consumption. As such, landlords remained aggressive in commanding higher rentals. In addition, experienced shopping centre landlords took a proactive approach by continuously improving and upgrading their tenant mixes to differentiate from competitors. Shopping mall rents in the urban areas increased by 8.7% y-o-y in 2012 to RMB 762 per sqm per month.

New renovations were undertaken in various malls including Chaoyang Joy City, U-town, Solana, The Gate and Yintai Park Life, while new brands committed to Beijing APM and China World Phase III during 4Q12. New projects launched earlier in 2012 such as Indigo and Macao Centre are now close to full occupancy. As of end-2012, shopping mall vacancy in the urban area was at 10.6%.

In an era when lifestyle shopping becomes increasingly popular, F&B and entertainment have become important demand drivers in 2012. For instance, café and dessert restaurants were active in leasing space in 4Q12. Starbucks, Costa, Pacific, Godiva, Hui Lau Shan and some local operators all expanded their footprints in Beijing. On the other hand, e-commerce retailers such as 360buy and 51buy also opened physical stores to provide product experience for consumers.

Fast fashion brands such as UNIQLO, Zara, GAP and H&M, continued to expand in Beijing and played a more critical role in attracting consumers to shopping malls. In addition, fashion retailers were keen to introduce more secondary lines to broaden their business opportunities. In the luxury goods segment, LV, Dior, IWC and GP all opened new watch stores in 4Q12.

The quarter also saw some household product retailers opening new operations in Beijing, despite the slower expansion pace from some traditional big-box retailers. In a few examples, HOLA, Scent Library, Sun Dan, Apple and Page One all expanded and helped create new faces for individual shopping malls.

A total of eight shopping malls were opened in 2012, providing 519,565 sqm (GFA) of space to the urban market. The majority of these projects are above subway stations. Parkview Green, a high-end, artistic-themed shopping mall in the CBD, was opened in 4Q12, featuring global brands like GAP, COS, U-BOAT, American Apparel, Karen Millen, Camille Fournet, while IWC opened its largest flagship store in Asia in the mall.

The government’s agenda to boost domestic demand and transforming the country into a high-income nation through raising household income makes us optimistic about China’s retail market in the long run. Although the Chinese and global economies are not without uncertainties, the gradual pick-up in growth momentum from mid-2012 together with  the recent opening of various subway lines that help to improve accessibility of some malls will likely provide support for Beijing’s retail property market. Jones Lang LaSalle remains optimistic on Beijing’s retail rental performance.  A total of six projects are scheduled for opening in 2013 spanning across the urban markets with a combined GFA of about 335,325 sqm. These projects, mostly in prime locations and targeting the mid-tier market segment, are expected to attract retailers’ attention.
Residential – High-end apartment sales volume in 2012 reported significant y-o-y growth

In 4Q12, the high-end apartment sales market continued with the rebound trend that stemmed from 2Q12. Sales volume grew by 2.9% q-o-q to reach 3,498 units and bringing the full-year number to 10,797 units. This is about 45% higher than the level recorded for 2011 and broadly on par with that in 2010. Sales of flats in the RMB 30,000-40,000 per sqm range accounted for 65% of the overall transacted volume, suggesting the relatively stronger demand in mid-high-tier properties in the prevailing market.  For instance, Jin Mao Yue sold 400 units this quarter after their debut launch, and over 300 units in Residence Nine and Runze Mansion were reportedly sold in 4Q12.

In terms of supply, a total of six high-end apartment projects were launched in 4Q12, including Jin Mao Yue, Honor Town and Sheng Gu Yu Yuan, combined to supply the Chaoyang and Haidian markets with 2,006 units.  For 2012 as a whole, total supply reached 9,003 units.

The sustained upbeat sentiment continued to pull high-end apartment prices up, growing by 1.2% q-o-q in 4Q12 to reach an average of RMB 41,476 per sqm. In general, developers have ceased offering discounts and started to raise asking prices gradually. Of those projects being launched for sale, about 60% of them have seen q-o-q growth in average transacted prices. The heat-up in the mid-to-high tier market also brought some stimulus to high-end apartment sales with 149 luxury apartments of over RMB 60,000 per sqm being sold in 4Q12.

Looking into 2013, as MOHURD has announced that the restrictive measures on home purchase and mortgage borrowing will remain in place in the key Chinese cities in 2013, we do not expect there will be a sharp hike in sales volume and prices. The market will likely continue to be supported by end-users and investment demand will likely remain relatively thin under the current policy environment.  However, properties are expected to stay as a preferred asset backed by relatively low interest rates and the relatively thin returns from finance sector investment vehicles. In view of a potential pick-up in China’s economic growth in 2013 and assuming there will be no further radical change to property market policies, we expect market sentiment to remain generally positive while high-end apartment prices will continue to be moderately on the rise.
Industrial – Supply and demand imbalance limits available space and curbs rental growth

No new supply launched in 4Q12 as one 20,000 sqm project, which was scheduled for the quarter was pushed back to 1Q13. Developers were much more active during the first three quarters of the year and a total of 141,800 sqm launched in each of Beijing’s three main submarkets. Total stock now stands at 1,454,000 sqm, a 10.8% increase from end-2011.

The Beijing market witnessed strong demand for prime logistics space for the third consecutive year. Net absorption eclipsed new supply in 2012. While the net absorption for 2012 is 38% lower than that in 2011, however, low vacancy has been one of the leading factors behind this change. A better indicator is the strong pre-leasing seen at projects which launched in the more sought after BALP and TLP submarkets earlier this year. High levels of take-up were seen at all of the four projects launched this year. Only one had space available for lease at year-end. As a result of tightening land use allocation rights for logistics facilities in Beijing, developers are increasingly turning their attention to both Langfang and Tianjin. Negotiations are underway for international logistics developers to acquire land use rights.

Rental growth rates in 3Q12 and 4Q12 slowed from 1H12 and were the lowest recorded in the past two years. However, new transactions are closing well above the market average indicating that rental growth in the secondary market was perhaps lagged by the running out of available space in the market. The quarter continued to see a relief in yield compression and capital values grew 1.2% q-o-q, but climbed 13.6% on a y-o-y basis. This figure is down from the 19.9% growth seen in 2011. While the market yield was stable over the second half of 2012, strong yield compression over the first half of the year led to compression of 50 basis points y-o-y.

The outlook of the trade sector will remain tough for 2013 as global demand and hence, China’s exports, is not expected to experience a sharp rebound anytime soon. In addition, higher production costs, which mainly stemmed from the rise in wages, are forcing China to losing some opportunities to other emerging markets in Asia. As excess capacity remains a fact in many manufacturing sectors, production related investment is also expected to remain limited. However, momentum in private consumption is set to remain upbeat and therefore shall help to offset some of the drawbacks from the trade sector.

As imports plays a more important role in Beijing’s trade industry, the shaky outlook in external demand is not expected to bring along a big shock to Beijing’s logistics sector. The continuous development of e-commerce and with sustained domestic consumption growth, we believe Beijing is in a less vulnerable position compared with other manufacturing cities.  This combined with a low vacancy environment, will continue to benefit warehouse landlords in 2013.

Several new projects are under construction and scheduled to complete in 2013, some of which will feature multi-storey formats, providing relief to prospective tenants. However, the market will continue to favour landlords and is thus poised for more rental growth over the next twelve months. Yields are expected to maintain a downward trend but compression will be much more moderate.
Investment – No Grade A en-bloc transactions for three consecutive quarters

Beijing’s investment market was highlighted by two sales transactions in 4Q12. The 10,912 sqm Zhonghe Science Park in Fengtai District in the south-west of Beijng was purchased by Sky China Petroleum Services Limited for RMB 150 million. In the CBD, 22,187 sqm of office space in The Place (out of a total of 210,000 sqm) was sold to Sino Media Holding Limited for RMB 666 million. In a continuation of a trend which was prevalent throughout 2012, both of these projects were purchased for self-occupation. No en-bloc transactions have now been recorded in the Beijing Grade A office market for three consecutive quarters and no retail properties were sold in 4Q12. A total of 12 investment transactions were recorded in 2012, fetching RMB 9.29 billion. This is significantly lower than the RMB 22.79 billion registered for 2011. The bulk of the transactions in 2012 were for projects located in non-prime locations such as Zhongguancun, Olympic Park and Wangjing. Domestic investors and end-users have displayed greater flexibility and sought out such assets
The dearth of transactions in Grade A office and retail sectors is primarily due to a lack of such assets coming to the market. Despite a slowing rental growth trajectory, fundamentals supporting these sectors remain robust and firmly intact. Asset owners are opting to hold on to their assets, reflecting their long-term optimism and confidence in the Beijing property market. A lacklustre global economy in 2012 had weighed on the investment market to some extent. In view of the deteriorating external environment in western economies, the Chinese government had been proactive in stimulating the local economy throughout 2012 as evidenced by the cuts in both the lending rates and the reserve ratio requirement, as well as ramping up of investments. By 4Q12, signs of a turnaround in the Chinese economy were apparent as the impact from stimulus measures started to gain traction.

The outlook for 2013 is more upbeat but not without risks. The nascent recovery in the US housing market is expected to gather momentum, providing support for US consumer spending and the global economy. However, the crisis in the Eurozone remains a burden for the global economy. While the US has escaped from falling off the fiscal cliff, recovery is expected to be slow. The banking and finance sector is expected to remain subdued in the immediate future, though quantitative easing should continue to be a key policy theme for most of the major economies. The last 12 months have already seen increased capital flows into Asia and this trend is expected to remain in place in 2013, a positive spin for key real estate markets like China. The strong housing sales in 2H12 amid a tight policy environment locally and a shaky external economic outlook have sent a message to investors that underlying demand in China remains strong.

Eric Pang, Beijing Investment Head at Jones Lang LaSalle points out that “We continue to see healthy investment appetite from both domestic and foreign institutional investors. They remain keen in investment opportunities in China and Beijing, as one of its key business cities, is always on their radar. The local economic outlook depends not only on the external environment, but more importantly, on how the new government shapes the economic platform for the following years. At present, investors generally hold a positive view towards this and therefore remain upbeat in China’s investment opportunities.”
Hotel – Beijing hotel supply has shown sign of slowing growth, while many planned hotels delayed their openings

The total number of added rooms in 2012 is less than one thousand. On the other hand, performances of high-end hotels continued to rise, but were not able to level with the increase in 2008 when Beijing Olympic took place. Massive supply increase in 2008 made it difficult for the market to absorb. Meanwhile, the global economic downturn has adversely pressured the overall hotel performance compare to 2008, but still shows sign of modest growth on a yearly basis.

By the end of November 2012, inbound tourism has decreased by 3.2% compared to 2011. However, increase in lodging demand due to the 18th National Congress of the CPC and strong domestic tourism, together with limited new supply, has created an environment conducive for hotel performance to improve, reached 67.9% in the first 11 months. Consecutive growth in occupancy rate has increased market confidence, reflected by hotels taking a more aggressive pricing strategy that results in higher Average Daily Rate (ADR). According to year-to-date November 2012 information, the market Average Daily Rate (ADR) showed an increase of RMB 100 Yuan, reaching RMB 1,100.7 Yuan, while occupancy rate and average daily rate (ADR) of five-star hotels increased by 2.2 percentage points and 5.5%, respectively. Revenue Per Available Room (RevPAR) showed an increase of 9.0%. Four-star hotels’ occupancy level remained stable as of last year with an 8.3% increase in average daily rate (ADR), reflecting a positive growth of overall room revenue.

The strong development of domestic tourism and the supply of Grade A office buildings in Beijing would provide hotels with a new customer base. Meanwhile, the limited new supply of high-end hotel, which are mainly located on the outskirts of the city area, hotel performance, especially the average daily room price will continue to improve. Charles He, senior vice president of Jones Lang LaSalle Hotels and Hospitality Group, said that in the context of optimistic demand outlook and 2012 limited new supply, the occupancy rate of Beijing's five-star hotel market will maintain steady growth and is expected to gradually restore the level before the Olympic Games.