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News Release

Beijing

2015 4th Quarter Beijing Real Estate Market Property Review

Beijing‘s recent 'red alerts' provide office market with forward-thinking opportunities as 2016 gets underway; Carrefour opens first mall project in Wangjing


​BEIJING: January 14, 2016 – JLL’s 4Q15 property review revealed the following:
  • 4Q15 Grade A Office take-up levels reach five-year high
  • Heightened air quality concerns provide Office market with forward-thinking opportunity  
  • Huge hypermarket chain Carrefour opens first shopping centre project in Beijing 
  • No major investment deals in 4Q; investors still interested, but hesitant over market uncertainty 
  • 3PLs continue to drive logistics demand though leasing activity slow due to tight conditions 
  • Policy re-starting warehouse land supply sales to help relieve market in future
  • Luxury apartment sales volume declines significantly

Office


Robust domestic demand drove record 4Q take-up, the highest levels seen since 2010. Net take-up hit more than 180,000 sqm in 4Q15, up 13.8% y-o-y. Wangjing, Zhongguancun, and Finance Street were the biggest contributors as buildings completed earlier in the year filled up steadily. “Domestic IT and finance companies continued to lease space in Wangjing, where the availability of larger spaces was high compared to tight submarkets like the CBD and Finance Street,” said Eric Hirsch, Head of Markets in Beijing for JLL. “We further expect domestic companies, especially from the finance and IT sectors, to remain a strong source of demand in 2016.”

Strong demand in 4Q15, which also contributed to steady leasing progress at new projects, further pushed market vacancy down to 2.7%, its lowest level of the year. With no new projects for the second consecutive quarter, the limited new supply in 2015 also helped keep vacancy rates low at end-2015. However, a new wave of supply scheduled for 2016 – including two Finance Street projects delayed from 4Q15 – means that vacancy will climb over the next 12 months as the market requires time to absorb the new supply.

Due to the strong demand and tight market conditions, landlords maintained the upper hand and were able to increase rents slightly by 0.7% q-o-q. However, landlords in mature submarkets, such as the CBD, were increasingly cautious toward peer-to-peer (P2P) lending companies. “Even though this sector does not account for a large portion of the Grade A market, the high-profile nature of a recent failure in the P2P industry has caught the attention of landlords, especially given all of the recent uncertainty in the market.” JLL’s analysis reveals that less than 2.5% of Beijing’s occupied Grade A space belongs to small-scale domestic financial firms under 500 sqm, including P2P firms. Meanwhile, the rental outlook is modest: steady demand and limited space at existing projects are expected to continue slowly pushing up rents over the next 12 months. 

A growing number of landlords are considering how best to reduce PM2.5 levels inside their buildings, after air quality concerns affecting health and productivity have escalated following Beijing’s first “red alerts” in 2015. JLL’s own spot tests revealed that 90% of buildings are not achieving meaningful reductions in PM2.5 levels indoors. With air pollution shown to have major negative health and productivity effects and up to 75% of PM2.5 found to enter office buildings, the need to address indoor air quality is crucial. A three-step strategy outlining practical and effective measures that can both protect the health and increase the productivity of building occupants is presented in JLL’s latest white paper Every breath we take: transforming the health of China’s office space published in partnership with indoor environmental consultancy PureLiving China. “While we cannot change the situation outdoors, we can all do something to control conditions indoors, which also happ​ens to be where we spend most of our time,” said Hirsch, one of the report’s authors. “By addressing air quality concerns head-on, the Beijing office market has a real opportunity to be at the forefront globally, not just for the rest of China, but also in other industrialising nations, where highly polluted markets could benefit from taking Beijing’s lead.” 


Investments


No major en bloc deals were recorded in 4Q15, the quietest quarter of the year as limited tradable assets and high pricing expectations on available assets greatly restricted deals. Though Office remains the hottest sector in Beijing, much of this interest has shifted outbound as investors look to diversify – uncertainty in the China market under the economic slowdown has made it harder for investors to reap the same rewards as previously. Although the office rental growth outlook has softened, pricing has not yet taken this into account, and prices remain too high. “Even investors who made bad decisions used to be saved by the good market and favourable currency situation, but that’s no longer the case,” said Kevin Qin, Head of Capital Markets for North China at JLL. “Decisions are a lot more complicated now; while there is still interest in the market, there is also hesitation as investors want to see cash flow stability and a clear exit strategy.”

Changes in the USD exchange rate will effect investor behaviour in 2016. The Chinese yuan’s inclusion into the SDR (Special Drawing Rights) in December is expected to result in more movement in the exchange rate. This could result in more foreign funds looking sell their assets in Beijing, especially for those with holding periods that are coming due soon. At the same time, a weakening exchange rate may trigger more outbound investment by investors that want to preserve the value of their portfolios by getting more exposure to other currencies. Ultimately, more foreign investors will look at China, says Qin. “In the case of foreign funds already holding assets in China, they will want to off-load their assets as soon as possible since the currency exchange is not in their favour. This could result in more buy opportunities as buildings appear for sale on the market. This may be good news for other funds, which are already under pressure to invest in value-add opportunities.” 


Retail


One of the world’s largest hypermarket chains, Carrefour, opened its first mall project in Beijing, just shy of reaching 100% commitment on opening day. Located next to the city’s busy IKEA in Wangjing, community-based shopping mall Siyuan Plaza entered the market with an impressive 99% commitment. A massive two-floor Carrefour store serves as the anchor, taking up some 30% of the space at the 63,000 sqm-project. “Carrefour’s project taps into local demand for reliable and convenient shopping options close to home” said Alice Law, Head of Retail in Beijing for JLL. “The mall has already proven popular with nearby residents, who no longer need to travel very far for their weekly shopping.”

A new normal of slow growth has fully set in under the current market conditions. Under increasing pressure from the 3 Os (online, overseas, and outlets), the slow growth trend of 2015 saw luxury brands consolidate store locations in Beijing. F&B and kids were the most active sectors, while cosmetics is emerging a new driver of demand. “Now that the new normal of slow growth has fully set in, the softening physical retail market means that going ahead landlords will need to adjust expectations. However, with the right tenant mix and adjustment, popular destination projects are still likely to achieve reasonable levels of growth in 2016.”

Industrial


Third party logistics (3PL) firms drove demand in the quarter, mostly through renewals and a limited number of deals in emerging markets. Some tenants expanded in emerging Pinggu, as space remained tight inside Beijing’s mature submarkets. Meanwhile, JD.com signed on to 30,000 sqm of space in nearby Tianjin’s Wuqing. “Tight market conditions continue to restrict leasing transactions in Beijing,” said Sharon Luo, Head of Industrial at JLL. “This situation coupled with a third straight quarter of no new supply further allowed landlords to achieve modest rental increases at end-2015.”

With the majority of space at new projects in mature submarkets already committed or under negotiation by tenants with larger requirements, this new supply is not expected to weigh on the market in 2016. New projects in emerging areas, however, will experience slower lease-up over the next 12 months. Given ongoing pent-up demand in Beijing, the local government recently re-started warehouse land supply sales after stopping them in 2Q14. “As underlined by how quickly two warehouse plots in TLP were snatched up in the quarter by the joint venture between BJ Properties and Kerry Logistics, interest in logistics remains high,” said Luo. “With a total land area of around 234,000 sqm and a planned GFA of 350,600 sqm, the development should help relieve tight market conditions in the future.”

High-end Residential


The luxury apartment sales volume declines significantly by 32% q-o-q to just 432 units in 4Q15. Abundant new supply gave buyers more choice, but much higher quotations for new projects constrained the sales rate. However, 304 high-end villa units were sold during the same period, up 2% q-o-q. Villa projects with lower unit prices recorded higher sales volumes. Meanwhile, high-end residential leasing demand remained soft. Heavy air pollution pushed some expatriates to consider relocating from Beijing.

Increasing land cost to drag on sales rate and prices ahead. The hot land sales market by year-end demonstrated that many developers are confident. However, several developers cancelled the land they purchased, reflecting the increasing risk and uncertainty of the market. High prices at new projects, partially due to high land prices, and Beijing’s continued house purchase restriction, are likely to restrict sales despite modest demand. Therefore, high-end residential prices will be stable in 2016 as price appreciation is expected to be limited under the slow sales rate.