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News Release

Beijing

JLL: Beijing’s 4Q14 Property Review

Domestic IT and finance firms drive Office demand in Beijing; neighbouring competition hinders Industrial rental growth in the city


​Beijing, January 21, 2015 – JLL's 4Q14 property review revealed the following:

  • CBD rents are flat q-o-q, while Finance Street finishes off the year with 2.1% rental growth q-o-
  • Logistics closes out the year with a quiet leasing period
  • Four projects open in suburbs, making headway in Beijing's suburban super-regional mall boom
  • Grade A office landlords' pricing expectations continue to be influenced by special interest buyers
  • A total of 733 luxury apartment units were sold in 4Q14, up 56.2% q-o-q

Prime Office

As was the case for much of 2014, domestic investment and wealth management firms drove demand, with most leasing activity in 4Q14 concentrated in the CBD and on Finance Street. Landlords responded to the trend by further exercising discretion with such tenants, showing a preference for large, stable private equity firms. The domestic IT sector was the second-largest source of enquiry demand at year-end, though smaller firms had a tougher time leasing space due to budgetary constraints while other companies, particularly software firms, turned to Beijing's eastern sub-markets as an alternative to space-constrained Zhongguancun.

No new supply in 4Q14 marked the first calendar year since 2000 without any Grade A completions in Beijing. Though office building quality in the city has improved greatly in recent years, Grade A projects are categorised separately from Grade B office and business park projects. Meanwhile, Fortune Financial Centre, Beijing's most recent Grade A completion and a useful barometer for the CBD, continued to make steady leasing progress in the quarter and reached a commitment rate of 75%.

The Grade A office market was largely characterised by renewals, with landlords mindful of opportunities to raise rents or manage tenant-risk profiles. CBD landlords were especially willing to sacrifice higher rents in favour of securing more stable occupiers in the form of international tenants at year-end, resulting in flat rental growth q-o-q. Finance Street landlords, on the other hand, were more accepting of big, domestic financial institutions with high rental affordability, increasing rents by 2.1% q-o-q.

The sharp uptick in volume enquiries in 4Q14 is expected to transpire into a fair amount of leasing activity this year, given that five new Grade A projects are slated to open by end-2015. However, the new stock is projected to offer tenants only a short respite from the tight-vacancy environment as roughly half of the space is set aside for self-use. Furthermore, much of the new supply will be in outlying areas, beyond the city centre where demand is most concentrated. "With vacancy resting at an all-time low at end-2014, we're heading into 2015 with a strong Landlord's Market, especially in the traditional core areas," said Eric Hirsch, Head of Markets, Beijing, at JLL. "Quality projects opening this year in central locations, such as Dreamsfount 35th in Finance Street, should help alleviate some of the pressure; at the same time, high rentals in these areas are expected to continue pushing more tenants to settle for new buildings in emerging submarkets."

Strong demand drove considerable net take-up, pushing overall vacancy down 1.1 percentage points q-o-q to 2.5%. Tenants from a broad range of industries drove demand for CBD office space, consistent with the submarket's historical demand profile. For example, Guo Tai Investment took 2,500 sqm in Yintai Centre, while another local investment company leased a similar-sized space at Fortune Financial Center (FFC). The market also saw a sizeable increase in demand from the legal services industry, with international law firm Cleary Gottlieb letting 1,000 sqm at FFC. The most recent completion in the Beijing office market, FFC continues to make leasing progress, albeit at a slower pace.

Supply is expected to remain limited over the next 12 months, especially in core submarkets. Interest in emerging submarkets is growing due to the run-up in rents over the past several years. However, infrastructure and amenities in most of these areas are still developing to meet tenants' preferences. While expansion momentum may vary widely across occupier segments, net absorption should remain strong. Strong enquiries observed from the banking and professional services industries will likely result in a large number of transactions from these tenant types. Due to sustained demand and limited supply, we expect to see the low vacancy environment characteristic of core submarkets to persist. CBD landlords are likely to retain bargaining power and we expect to see continued rental growth in the CBD. "Given that rising rents in Beijing show no signs of reversing in the near future, companies are re-evaluating their situation in the city and are increasingly willing to consider cost-saving locations outside of core areas," said Eric Hirsch, Head of Markets, North China, at JLL. "It's only a matter of time before more firms start to move farther out as Beijing continues to grow and these areas become more accessible and convenient for commuters."

Prime Industrial

After a historically busy third quarter, a very quiet 4Q14 closed out a strong leasing year with just a few deals. Yupei Beijing Tongzhou Logistics Park was brought to full-occupancy; an e-commerce company focused on fresh foods leased the project's remaining space. Some tenants also consolidated multiple distribution centres into a single warehouse, opening up a small number of sizeable spaces. However, the spaces are unlikely to remain empty for long, as landlords and tenants had already started negotiations at year-end. Space remains limited in the market, and as such, several tenants continue to consider warehouses in areas surrounding Beijing. Goodman signed a second agreement with BMW Brilliance Automotive to add 12,300 sqm of space at one of its build-to-suit facilities in Yanjiao, Hebei Province.

One new project, Bailiwei Phase III, was completed in Daxing, following the recent trend of building multi-storey warehouses. Given that the three-storey, 56,000 sqm-project features a basement specially designed to maintain steady room temperatures, it is expected to be popular with e-commerce vendors and retailers selling food and wine. However, the project's lack of pre-commitment drove up the market's overall vacancy rate upon opening, increasing it by 3.5 percentage points q-o-q to 4.4%.

Rental growth was flat q-o-q as competition from warehouses close to Beijing continues to weigh on landlords' pricing power. Interest from investors and developers, however, remains high; these groups were actively combing the market for investment opportunities at year-end, but no en bloc transactions were recorded this quarter. Coupled with limited tradable properties, continued optimism in the market placed downward pressure on yields and the market yield compressed further as a result.

Two projects, GLP Park Pinggu Phase I and Prologis DC 2, are scheduled to complete over the coming 12 months and add 170,000 sqm of new supply to the market. However, given that Prologis DC 2 is slated to open late in the year, overall vacancy is expected to climb at end-2015. "With third party logistics companies continuing to capture the market through a range of services offered to retailers and manufacturers, demand is expected to remain strong throughout the year," said Sharon Luo, Head of Industrial, Beijing, at JLL. "Even in the tight-vacancy environment, this should allow landlords to take advantage of opportune moments to competitively raise asking rents."

Prime Retail

Four of the five new project openings this quarter were in the suburbs, representing a turning point in Beijing's suburban super-regional mall boom. Largely focused on the mid-market, these modern properties beyond the Fifth Ring Road added a grand total of 740,000 sqm of stock to the suburbs: Wanda Tongzhou and Livat (Inter IKEA) opened with nearly 100% commitment rates, while the massive 270,000-sqm Paradise Walk managed a commitment rate of around 85% upon opening. Covering a more modest area of 50,000 sqm, Beijing One, a new department store in Tongzhou, opened to serve the local market. Meanwhile, located several blocks from landmark mall Taikoo Li in the Third Embassy Area, Yongli Mall officially opened with 90% commitment, following its soft opening several quarters ago; the project features ground-floor F&B and a multi-brand luxury store.

Core vacancy fell slightly to 4.9% in 4Q14 from 5.4% in 3Q14, as some properties upgraded their tenant mixes and helped brands enter new projects or expand their presence in the market. For example, Beijing Oriental Plaza welcomed Esprit and Sephora, and the property's very successful Coach store expanded. German brand Marc O'Polo entered Beijing via three projects during the quarter. Despite slower growth in the luxury market, niche designers such as Celine and Kenzo committed to space in the Urban market. Meanwhile, Vera Wang is also preparing for her Beijing debut at Tai Koo Li North.

Suburban projects are set to dominate the future supply, with more large-scale projects to cement the presence of malls in the suburbs and represent opportunities for growth as these outer areas of the city continue to develop and draw larger crowds of customers. While rental growth will be moderate in 2015, destination malls throughout the city will continue to explore upgrade opportunities and will enjoy above-average rental growth. Some new projects also plan to enter high-profile city locations over the coming 12-month period, including Spot on Wangfujing, and Tongying Centre across the street from Taikoo Li.

Investments

Strong demand from institutional investors and a limited number of en bloc transactions point to an undersupply of investment grade stock available for sale. Despite great interest from institutional investors, their involvement in en bloc sales transactions remains rare due in part to the low yields demanded by owners. The limited number of tradable assets in the market also continues to restrict the transaction volume – and subsequently, no en bloc transactions were recorded in 4Q14. Even with several large strata-title sales contributing to the 4Q14 transaction volume, the RMB 1.5 billion-figure was 73% lower than the same period last year. For the full year of 2014, the commercial real estate transaction volume reached just RMB 12.6 billion, down 61.1% y-o-y.

Special interest buyers are expected to remain the Grade A office market's ultimate price-setters over the medium-term, continuing to drive prices too high for institutional investors. The potential for positive rental reversion as leases come up for renewal and the irreplaceable nature of well-located assets have bolstered landlords' unwillingness to sell. However, demand from special interest groups has arguably had the most influence on Grade A office landlords' pricing expectations. "Special interest investors tend to seek purchases for self-use headquarters buildings, and because they typically have a lengthy holding period, they are willing to pay more," said Julien Zhang, Managing Director of JLL, Beijing and North China. "This means that institutional investors, both foreign and domestic, will continue to find themselves priced out of the market. Going forward, strong holding power is likely to continue unabated; however, local developers looking to recapitalize developments or find institutional joint venture opportunities will likely present investors with a way to gain exposure to the commercial real estate market in Beijing."

High-End Residential

After People's Bank of China continued to loosen credit policies in late November, cutting benchmark lending rates and further liberalising deposit rates, a total of 733 luxury apartment units were sold in 4Q14, up 56.2% q-o-q. Due to their lower-than-expected market prices and high quality, several projects, including Riverside Palace and Guo An Mansion, recorded high sales volumes. By contrast, just 240 high-end villa units were transacted in 4Q14, a decline of 18.4% from 3Q14. Given their comparatively high prices, many newly launched high-priced villa projects were poorly received by the market in 4Q14.

Hot-selling projects drove luxury apartment capital values up 2.7% q-o-q. Underperforming villa projects, however, weighed on the market, with high-end villa primary capital values sliding 1.8% q-o-q. Meanwhile, rents for serviced apartments were flat in 4Q14, but due to the continued trend of shrinking housing budgets, larger and costlier units were difficult to lease out. Demand for high-end villas was weak, with rents decreasing by 0.7% q-o-q.

Another batch of high-end projects will enter the market in 2015, and this increase in supply combined with stable demand in the high-end residential market is expected to put pressure on prices. The serviced apartment sector will also feel some pressure with rising vacancy in the coming quarters, given that two new serviced apartment projects are scheduled to open by end-2015 and weak demand from expatriates is unlikely to change, especially as more serviced apartment operators increase rents to cover rising operational costs.

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