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News Release

Office Rents edge downwards for the first time in three years; Luxury consumption prudent while mass market malls continued to perform well

Beijing Grade A office demand slowed down and rents have started to decline after running up for over three years. Luxury consumption prudent while mass market malls continued to perform well in prime retail market, net take-up was up on a y-o-y basis.

Office – Rents edge downwards for the first time in three years

1Q13 saw a noticeable slowdown in Grade A office demand in Beijing and rents have started to decline after running up sharply over the past three years.  Net absorption, taken at face value, was up both q-o-q and y-o-y. However, around two-thirds of the newly occupied space was taken up by China Development Bank in its newly completed 79,000 square meter building in Finance Street, leaving only about 37,000 sqm of net take-up in existing buildings, the lowest quarterly level on the same basis (i.e. only counting for spaces outside of purpose-built self-use buildings) since 1Q09. This purpose-built building was the only new Grade A office completion in 1Q13, bringing total Grade A office stock in Beijing to just over 6.3 million sqm.

The CBD experienced negative net take-up for the first time since 1Q06. A number of international firms from the professional services and finance sectors downsized in 1Q13 whereas the automotive and IT industries remained strong. In addition, many leases signed in 2010, a record year for net absorption in Beijing, are set to expire in 2013. As rents more than doubled between 2010 and 2012, many tenants are expected to face dramatically higher rents upon renewals this year. Facing potential vacancy pressure, some landlords have become increasingly flexible in rental negotiations in order to maintain or improve on current occupancy levels.

Rents in the Overall market edged down 2.0% q-o-q in 1Q13 to RMB 337 per sqm per month; the first decline since 3Q09. The downtick was more pronounced in the CBD (-3.7% q-o-q) where resistance to high rents was more acute, although mild rental growth remained in place in submarkets where upcoming lease expiries are less of a concern. Eric Hirsch, Head of Markets at Jones Lang LaSalle in Beijing points out that “…while business interest in Beijing remains strong, some tenants are reviewing their office space requirements given the huge rental growth witnessed in recent years. Many landlords are recognizing this and are being more prudent as a result. We expect leasing demand will remain thin and chances of seeing further rental compression in the next one to two quarters are high.”

Retail – Luxury consumption prudent while mass market malls continued to perform well, net take-up was up on a y-o-y basis.

Partly as a result of more prudent consumption of luxury goods across China, Beijing’s total retail sales rose by 10.2% y-o-y in January and February combined, down from the 15.8% y-o-y growth registered a year earlier and rental growth in some high-end core malls was restrained. Mass market malls, in general, continued to perform well and landlords were still able to raise rents moderately. Rents in the Urban malls increased by 1.7% q-o-q.

Although net absorption decreased q-o-q on the back of a seasonally low level of leasing activity in the first quarter, net take-up was up on a y-o-y basis. F&B continued to be a key driver of demand. It was reported that some luxury brands were considering slowing their expansion plans across China and as such there was little leasing activity from luxury retailers in 1Q13. However, fast fashion brands and mid-to-high-end brands continued to expand in Beijing. 1Q13 also saw the opening of several supermarkets, and stores with high area efficiencies were favoured by landlords.

Ocean We-life, a mid-market mall near the Asian Games Village, officially opened in 1Q13, adding 61,000 sqm to urban shopping mall stock. Several projects completed last year were able to raise their profiles through the introduction of new tenants.  The vacancy rate in Urban malls decreased on a q-o-q basis.

“Demand growth for luxury goods is expected to be modest this year”, says Winky Yeung, Director of Retail Leasing at Jones Lang LaSalle, North China. “However, we remain positive on the middle-class market and expect to see particularly good growth prospects for high fashion brands. The growing competition from e-commerce should steer shopping mall landlords further away from low-end brands and therefore tenant mix repositioning will also likely remain as a key theme. The scheduled opening of three new subway lines in 2013 should access more shoppers from decentralized areas to prime locations and bring extra momentum to certain emerging retail submarkets such as South 3rd Ring Road and Olympic Square. Rents are expected to remain on the rise amid slower momentum than that seen in recent past years” adds Winky Yeung.

Residential – A new round of tightening measures boosts secondary sales
Amid rising prices, the Central Government vowed to further tightening measures on residential sector. Property market tightening guidelines, released on 1st March, merely reiterated existing policies aimed at curbing speculation, encouraging supply and promoting affordable housing.  The measures also stated that a 20% capital gains tax should be strictly implemented for secondary home sales.
The new measures immediately gave a boost to the secondary sales market. Neither buyers nor sellers were willing to bear the additional tax cost following the implementation of new policies and secondary home sales volume hit a historical high in March. Approximately 47,000 units were sold, which was around 4.2 times of that in the seasonally-slow month of February.

In the high-end apartment primary sales market, a total of 1,987 high-end apartment units were sold in the first two months of 1Q13, compared to 3,498 units in the whole of 4Q12. This figure was already nearly 2.5 times the sales volume in 1Q12. High-end apartment prices remained resilient for the first two months of 1Q13, with the average sales price growing by 1.8% q-o-q to RMB 42,228 per sqm. Nearly 70% of the projects put up for sale witnessed q-o-q growth in average selling prices.
On 30th March, Beijing released an action plan following on from the new round of tightening measures released by the State Council. Local single residents in Beijing are not allowed to buy a second home from now onwards, and a 20% capital gains tax will be levied on home sellers who own two or more homes or dispose of their properties within 5 years of purchase. “These new measures are expected to further restrain investment demand, leading to thinner sales volumes in the secondary market. We do not expect a significant deterioration in primary sales market conditions. The relatively healthy balance sheets of many individual owners are also pointing to low risks of seeing fire sales in the secondary market, providing strong support for capital values”, comments Marcos Chan, Head of Research for Beijing and North China. 

Industrial – Net absorption rebounds on the back of new supply launches
Net absorption of warehouse properties increased significantly to 23,400 sqm in 1Q13 with demand coming primarily from the retail, pharmaceuticals and third-party logistics industries expanding their operations in Beijing. A big portion of the positive take-up was contributed by Shoufa Logistics Centre phase 3 (20,000 sqm), which was handed over and fully leased to retailer Robe de Kappa this quarter. Some other sizeable leases were signed in 1Q13 but they were offset by smaller spaces handed back at other projects. The increase in space availability at several projects in conjunction with the new supply led to a rise in vacancy, hitting 3.1% as at the end of 1Q13.

Rental growth was again slowed by the lack of leasable space which led to a lack of leasing activity and hence rental evidence. Rents are flat q-o-q but are up 5.2% y-o-y. Langfang and Tianjin continue to receive attention as these areas feature lower rents and have larger spaces available for lease.

In addition to the completion of Shoufa Logistics Centre phase 3, GLP also launched phase 1 at its Airport Capital Logistics facility in Shunyi (44,000 sqm). This project is now the closest non-bonded warehouse to the Beijing Capital Airport and further bolsters GLP’s portfolio as the largest in Beijing.

A total of four projects are expected to complete before the end of 2013. It is expected that sustained demand from third-party logistics and retailers targeting the greater Beijing market will remain as a key source of demand for new warehouses in this region. Rental growth is expected to pick up as high quality projects are launched amid tight space availability.

Investments – Investment market remains subdued

No en-bloc transactions were recorded in the Beijing Grade A office and Prime Retail markets in 1Q13. Although office rents have softened marginally as landlords turn their focus towards tenant retention, the outlook beyond the near-term remains positive with sector fundamentals staying intact and limited new supply keeping vacancy at a low level. Stable rental growth is also expected in the retail sector as keen retailer interest continues to keep the market buoyant. Sweden-based retail giant, IKEA, has recently announced plans to expand their footprint in Beijing and China to meet demand.

Following the recent transition in China’s leadership, it has become increasingly clear that the new government is highly committed to forging ahead with China’s economic transformation. Continued expansion of the services sector, liberalization of the financial sector as well as policy makers’ efforts to stimulate consumption are expected to provide additional structural boosts for both the Grade A office and retail sectors. As such, landlords across Beijing continued to take holding positions, reflecting confidence in the Beijing market and few prime assets have been made available in recent quarters. Many recent office transactions have involved owner-occupiers purchasing decentralized space and unless international institutional investors are willing to explore options in non-core locations, this is a trend that may continue in 2013.

Eric Pang, Head of Investments at Jones Lang LaSalle in Beijing points out that “… a lack of assets coming to the market is the major contributing factor to the limited investment transactions in Beijing in recent quarters. Investor interest, however, remains strong as many remain under-exposed in the Beijing market”