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News Release

Beijing

Office rents fell for the third successive quarter; Demand for prime retail space remained strong

According to Jones Lang LaSalle Beijing Third Quarter Property Review


Grade A office rents fell for the third successive quarter; Demand for prime retail space remained strong; Residential transaction volume fell due to insufficient supply although capital values continue growing; Logistics rental growth decelerated despite high net absorption; Two major investment deals closed in 3Q13.

Grade A Office

Automobile manufacturers and IT firms continued to actively seek out space in Beijing and a number of landmark leasing deals were reportedly in the pipeline. Demand from international professional services and financial firms remained thin in 3Q13 on the back of continued uncertainty in the global and domestic economies. However, as in the previous quarters, automobile manufacturers and IT firms continued to actively seek out space in Beijing and a number of landmark leasing deals were reportedly in the pipeline. Confirmed pre-commitment in the upcoming Fortune Financial Centre (FFC) in the CBD totaled around 4,000 sqm by end-3Q13. However, a small number of international financial firms are said to be considering leasing large chunks of space in this project, which will represent the first new completion in the CBD since early 2011. Net absorption in the private leasing market was relatively stable q-o-q (43,000 sqm in 3Q13).

Overall rents fell in 3Q13. In the continuation of a trend witnessed throughout 2013, landlords continued to prudently balance rents and occupancy levels in the third quarter. Eyeing the large number of lease expiries that are expected in the remainder of the year and into 2014, landlords are eager to lock-in tenants to maintain or improve current occupancy levels. Some lowered headline rentals while others offered increased rent free periods or other incentives and as such, overall rents fell marginally in 3Q13 (-0.2% q-o-q). However, the low vacancy rates across Beijing mean that landlords are able to retain some bargaining power in an otherwise tenant-friendly market and a stable scenario in the fourth quarter is expected to be followed by a marginal recovery in 2014.

Low vacancy rates are likely to support a minor rebound in 2014. Eric Hirsch, Head of Markets at Jones Lang LaSalle in Beijing points out that “Despite the continued caution from some landlords and tenants, creating relatively thin demand; we do not expect negative rental growth to be a pervasive trend in Beijing. Low vacancy rates are likely to support a minor rebound in 2014 although some landlords, particularly those in the CBD, may continue to show a degree of flexibility.”

Retail

The retail market vacancy rate dropped to the lowest level in five years. Demand for prime retail space remained strong and no new projects were completed in the urban market for the second consecutive quarter. As such, the retail market vacancy rate dropped to the lowest level since 3Q08.

Fast fashion brands continued to take up new space in both urban and suburban areas while mid-high end brands continued to expand in core areas. Louis Vuitton’s opening of a new store represented the first expansion by a top luxury brand this year following several quarters of inactivity. F&B brands continued to look for expansion opportunities in Beijing’s prime shopping malls, and small-scale dessert and beverage brands were more active than large restaurants due to limited vacant space in the market. In addition, several electronics and cosmetics stores opened in 3Q13.

Performance polarisation among malls of varying quality deepened. The scarcity of prime retail space available for lease pushed the average rental higher. Several mature malls were able to increase average rents through adjusting tenant mixes. However, some underperforming malls lowered rents or repositioned, as performance polarisation among malls of varying quality deepened.

Effective marketing and asset management are the main drivers of rental growth. “Most high profile retailers prefer to lease space in high quality malls that draw a much wider range of shoppers with higher purchasing power.” says Alice Law, Head of Retail at Jones Lang LaSalle, Beijing. “Experienced landlords carefully choose tenants that are aligned with their malls’ positioning and organise promotions and manage assets much more effectively than management teams in underperforming malls. This leads to increased customer loyalty and, thus, higher spending by consumers. Leasing strategy, effective marketing and asset management are the main drivers of rental growth in the top performing malls.”

Residential

Price control policies remained in place in the residential market. The Beijing government further refined existing measures in 3Q13. In the sales market, some developers planned to raise prices but chose to delay their launch plans due to the price control policies. Despite the challenging environment, demand in the sales market remained generally solid.

Like-for-like capital values increased. Two high-end apartment projects, Zhen Yuan and XANADU, launched a total of 309 units in 3Q13. All the 252 units at Zhen Yuan were under contract within a day of launching, with 224 units officially sold by the end of September. XANADU, which was located in the CBD and originally slated to enter the leasing market, sold 33 out of 57 approved units in 3Q13. The limited new supply meant that just 934 high-end apartment units were sold in 3Q13, down 38.1% q-o-q. The average sales price in the primary high-end apartment market edged down by 0.5% q-o-q due to the lack of transaction recorded in several high-priced projects. However, like-for-like capital values increased by 7.2% q-o-q.

Leasing demand for high-end serviced apartments dropped modestly. “Leasing demand for high-end serviced apartments from senior executives at MNCs dropped modestly due to the prevailing weak economic environment and the perception of poor air quality in Beijing,” says Marcos Chan, Head of Research for North China at Jones Lang LaSalle. “The overall vacancy rate in the serviced apartment market edged up to 9.5% in 3Q13, a marginal increase of 0.1 percentage point q-o-q. The thin demand from MNCs and rising vacancy rates in some projects meant that landlords tended to be more flexible on rents to maintain or improve current occupancy levels.” added Chan.

Logistics

Retail sales growth across China has been trending upward while Beijing retail sales growth has been trending downward. Although September HSBC PMI (50.2) and official China PMI (51.1) readings point toward a relative recovery in external demand, the mild improvement indicates that the recent modest recovery in China’s economic growth is still on shaky ground. Retail sales growth across China over the first three quarters of 2013 (12.9% y-o-y) is down slightly from a year earlier (14.1% y-o-y), but has been trending upward since January. In contrast to the national trend, year-to-date Beijing retail sales growth has been trending downward and stood at 8.7% y-o-y in August.

The demand for non-bonded warehouse space was robust. Despite the slowdown, the demand for non-bonded warehouse space was robust and the market recorded the most net absorption since 2Q12 (83,400 sqm). However, rather than an increase in demand, the sizeable uptick reflects the primarily supply driven nature of net absorption in the Beijing market as the majority of net absorption was accounted for by the recently completed Global Logistics Properties Airport Capital Logistics Park in Shunyi District. Active occupiers hailed from a broad range of industries including e-commerce, electronics, pharmaceuticals and courier services. In the year-to-date, the total new supply increased to 156,300 sqm exceeding the total supply in 2012. Demand has largely kept pace with supply perpetuating the low vacancy environment characteristic of the non-bonded warehouse market and the vacancy rate, which now stands at 2.0%, down 30 basis points from 2Q13.

Logistics rental growth decelerated. Since most high-quality spaces are fully leased, rental growth was largely supply driven in 3Q13, and therefore rental growth decelerated sharply to 0.8% q-o-q, down 200 basis points from 2Q13. Rents have grown 4.0% YTD with the bulk of growth recorded in 2Q13. The Beijing Airport Logistics Park has recorded 4.5% rental growth YTD while 4.2% rental growth was recorded over the same period in Tongzhou Logistics Park. Non-traditional areas such as Liangxiang and Jinma Industrial Park have also recorded strong rental growth, 5.9% YTD combined.

Non-bonded warehouses rents are likely to continue growing at a moderate pace. Linda Chan, Head of Industrial at Jones Lang LaSalle in Beijing stated “Leasing demand from a wide range of sectors for prime non-bonded warehouses should remain strong despite the slowdown in economic activity. The undersupplied nature of the Beijing market should continue to favour landlords and rents are likely to continue growing at a moderate pace.”

Investment

Insurance capital allocated to real estate continues to grow. The en-bloc sale of The Exchange marked the first asset level transaction of a Grade A office building in the CBD in 2013. This 41,000 sqm project was sold by Bank of China Group Investment Limited to Taiping Life Insurance for RMB 1.6 billion, which implied a relatively low entry yield of 4.4%. The purchaser is expected to hold this project for investment purposes. Domestic insurance companies are likely to play an increasingly important role in Beijing and other first tier cities as the weight of insurance capital allocated to real estate continues to grow.

Capita Retail China Trust acquired Grand Canyon Mall. In the retail market, Capita Retail China Trust acquired Grand Canyon Mall (also known as Care City Shopping Centre) for RMB 1.74 billion from Capital Airport Real Estate Group. This project was valued at RMB 1.83 billion with an annualised net property income (NPI) yield of around 3.5%. An official announcement indicated that the long-term target NPI yield is in the 7-8% range.

The lack of sales market supply has meant that investment market activity has been relatively subdued in Beijing in recent quarters. With largely positive outlooks in both the Grade A office and prime retail markets, many landlords across Beijing are currently unwilling to part with their assets. As such, despite sustained interest in Beijing, many sophisticated investors are unable to source core assets fitting typical investment criteria. Eric Pang, Head of Capital Markets at Jones Lang LaSalle Beijing points out that “Institutional investors remained keen in securing investment opportunities in Beijing despite the fact that suitable assets in core locations have always been limited. However, investors are increasingly active in studying the potential of some fringe areas, particularly those with a blueprint for future business district developments.”