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News Release

Beijing

Beijing Grade A office rents continued to slip downwards; Logistics kept strong growth momentum

According to Jones Lang LaSalle Second Quarter Property Review


Beijing Grade A office leasing demand slowed down while rental decline narrowed in Q2. Logistics accelerated rental growth on the back of a lower vacancy environment. Luxury brands continued to hold back their expansion plans and posed very limited leasing demand on Beijing’s retail property market. Purchase demand is softened in residential market but no pressure on property prices.  Domestic end-users continue to dominate the investment market.

Grade A Office: No significant pick-up in leasing demand, but rental decline narrowed in Q2

Mixed signals continued to come from the Grade A office leasing market in 2Q13; the automobile manufacturing and IT sectors remained relatively active as compared with international financial and professional services firms which continued to display a degree of caution. Net take-up totalled around 84,000 sqm in 2Q13 although around half of this occurred in the newly completed Raycom Tower D in Zhongguancun. This building will be owner occupied by domestic IT firm SOHU. Net take-up in pre-existing buildings was up marginally q-o-q but relatively thin compared to the historical average.

A large number of lease expiries are expected in 2013 meaning that some landlords are facing potential vacancy pressure. Although it remains unlikely that a large number of tenants will choose to exit the Beijing market, the risk, as perceived by landlords is that some tenants will rethink their space utilization strategies, which includes the possibility of downsizing. As such, landlords continued to be flexible in rental negotiations and rents edged down by 0.5% q-o-q in 2Q13 after falling by 2.0% q-o-q in 1Q13. For the first half of 2013, overall Grade A office rents were down 2.4%, whereas those in the CBD fell by 5.3% in the year-to-date.

Eric Hirsch, Head of Markets at Jones Lang LaSalle Beijing, points out that “With low vacancy rates across the city, rental compression is not likely to be a long term trend. However, given that many recent economic forecasts for China have been revised downwards, we expect some landlords to continue to display a degree of flexibility in order to maintain current occupancy levels.”

Two new projects added 81,000 sqm to the market in 2Q13 and a further 150,000 sqm in the remainder of the year is expected to mean whole-year supply will total approximately 310,000 sqm. We expect low vacancy rates to prevent rents from falling much further in 2H13, although negative whole-year growth remains likely.
 
Logistics: Accelerated rental growth on the back of a lower vacancy environment

In spite of a subdued external environment which curbed trade activity for China, the first half of 2013 witnessed sustained demand for non-bonded warehouses in Beijing. Active occupiers came from a broad range of industries including pharmaceuticals, brick and mortar traders, online retailers, automotive as well as third party logistics. Pre-leasing activity remains strong within Beijing proper with emerging submarkets, such as Yongledian, recording strong pre-leasing activity. The overall vacancy rate trended down from 3.1% as at end-1Q and now stands at 2.3%. Demand has spilled over into neighbouring Langfang where occupiers find it easier to lease larger spaces as well as take advantage of lower rents.

In the year-to-date, three new projects were completed adding 75,000 sqm to the total stock. Shoufa Logistics Phase 2 and Beijing ACL Phase 1 both completed in 1Q13 while Green Logistics handed over space in 2Q13. All three projects are now fully leased, indicating demand on the back of a supply-constrained environment in Beijing. In addition, several projects nearing completion have also recorded significant pre-leasing activity. There is another 233,000 sqm of space scheduled for completion in the remainder of the year but a big portion of the space has already been pre-leased, and it is unlikely to provide much relief to prospective tenants in the immediate future.

The market recorded a 3.2% rental growth over the first half of 2013, much of it coming in the second quarter. In 2Q13, warehouse rents in Beijing increased by 2.8% q-o-q, accelerating from the 0.3% q-o-q growth recorded for 1Q13. The most noticeable growth was seen in Tongzhou Logistics Park where average rents went up 4.3% in 1H13 (0.2% in 1Q and 4.0% in 2Q), followed by Beijing Airport Logistics Park where rents rose by 3.6% over the same six months (0.3% in 1Q and 3.2% in 2Q).

Sharon Luo, Associate Director of Industrial Leasing comments: “The subdued external environment is unlikely to give a strong boost to China’s exports growth in the short-term future, but the strong domestic demand for warehouses in Beijing on the back of a tight vacancy environment combined to lead us to believe that landlords will continue to enjoy great bargaining power in the Beijing warehouse market. We expect rental growth to continue in the second half of 2013”.
 
Retail: Sales of luxury goods continued to struggle

The retail market in Beijing continued to share a similar trend as the rest of China; with sales of luxury goods remaining slow in 2Q13. Generally speaking, luxury brands continued to hold back their expansion plans and posed very limited leasing demand on Beijing’s retail property market. As a result, some high-end positioned shopping malls, particularly those in non-core locations were hit the hardest. In contrast, shopping malls targeting the mass market continued to perform well and pulled shoppers from department stores.

The more active group of retailers looking for leasing opportunities include F&B operators targeting the mass market and fast fashion retailers. However, prime malls were less willing to offer additional space for these relatively low-margin trades. In contrast, niche fashion brands from overseas were more welcomed by shopping mall landlords. In addition, various children’s stores and electronics stores also opened in 2Q13.

No new projects were completed in the urban market this quarter. The vacancy rate in urban malls continued to compress, reflecting the lowest levels since 2009. China World Mall Phase III, Parkview Green, Capita Crystal and Yintai Parklife saw significant vacancy drops this quarter.

“Global luxury brands have scaled back their expansion plans across China due to the broad trend of slowing retail sales growth, although retail market sentiment remains generally positive.” says Alice Law, Head of Retail at Jones Lang LaSalle Beijing. “Retailers remain cautious with expansion plans and have been slow in taking up spaces in 2nd tier or 3rd tier cities.  While total sales volumes stayed strong in 2Q13, average spending has declined over the period.  Buying is more for personal consumption than gifting. Niche brands are moving in on China. We expect to see more new brands opening in new shopping malls”, added Law.

Residential: Softened purchase demand but no pressure on property prices

The new round of tightening measures became effective in Beijing in April, which dragged the sales volume of high-end apartments in the primary sales market to 2,199 units in 2Q13, down 29% from that in 1Q13. In the year-to-date, however, a total of 5,302 new high-end apartments were sold in the first six months, 36% more than in 1H12. The secondary sales market also saw a big slump; average monthly sales fell to 8,800 transactions in 2Q13 compared with a monthly average of 25,700 in 1Q13 and bringing the monthly average for 1H13 to about 17,280 units versus a rounded figure of 8,550 in 1H12.

However, sales in selective high-end apartment projects still witnessed good sales performances in 2Q13 and due to the better quality of units launched for sale, average high-end apartment transacted prices in the primary sales market went up 6.7% q-o-q in 2Q13. In the year-to-date, they were up 9.2% over the same six-month period.

In an attempt to slow investment demand growth for residential plots, the Beijing government issued a provision in June, requiring all pre-sale proceeds to be deposited into a designated bank account managed by banks and paid to developers gradually as construction progresses. In addition, Beijing now requires development projects under construction with residential units of 140 sqm (GFA) or above in size or commercial units to have more construction work completed before they can apply for a pre-sale license. In the case of high-rise buildings, 50% of the superstructure works needs to be done, while low-rise buildings need to have all above-ground construction works completed before a pre-sale permit will be issued.

“In a market where many barriers to purchase exist, sales volume is unlikely to see a rebound in the near-term future and we expect overall investment demand to remain at thin levels”, says Marcos Chan, Head of Research for North China at Jones Lang LaSalle. “The leasing market for high-end apartments is also expected to continue to encounter softer demand, particularly for projects targeting the expatriate community. There is anecdotal evidence suggesting a slowdown in expatriate population growth in Beijing, due partly to more cost-cautious approach in the corporate sector and also because of the rising concerns over the city’s air quality since the beginning of this year”, added Chan.
 
Investments: Domestic end-users continue to dominate the investment market

The investment market in Beijing remained slow as investors continued to find it difficult to source available assets for sale. As a way out, some buyers took on forward purchase opportunities. In Finance Street, domestic end-users Beijing Huarong Investment Company and China Merchants Bank acquired Guang’an Centre and Yuetan Centre for RMB 2.75 billion and RMB 3.90 billion, respectively.

The recent slowdown in office leasing momentum did not prevent international investors from searching for office buying opportunities in Beijing. The lack of en bloc office buildings for sale also lured some of these sophisticated investors to consider strata-titled options. In one such deal this quarter, Grosvenor entered into a sale-and-leaseback deal with Samsung to purchase a total of nine whole-floors in China Merchants Tower in the CBD, involving a total consideration of RMB 780 million.

After being quiet for several quarters, there were some transactions in the retail property market in 2Q13. Guangyao Dongfang Group purchased Zhongguancun Plaza from Science Park Real Estate for RMB 2.2 billion while Hong Kong developer Hsin Chong acquired New Times Plaza near Beijing West Railway Station based on a valuation of RMB 1.72 billion (consideration of RMB 780 million), which includes a 38,200 sqm retail podium, SOHO units and car park spaces. Both projects are positioned as community malls.

“There is no lack of investment interest in Beijing’s commercial real estate assets. The ownership structure of many of the investment-grade properties, however, has made sales momentum very slow in recent years”, says Eric Pang, Head of Investment at Jones Lang LaSalle Beijing. “The low vacancy environment in the office market, for instance, has proved to be very effective in safeguarding rentals despite a higher caution in the leasing market and this sends a strong message to interested investors that Beijing is probably one of the safest office markets in China. The second half of 2013 will likely see China’s economic growth remaining at a relatively slow pace but we continue to hold a positive view on the demand outlook for Beijing’s investment property market”, adds Pang.