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News Release

Beijing

Office landlords hold back under softening demand; Hotels performance on upward trend, due to rise in business travellers, affluent tourists

According to JLL Beijing Second Quarter Property Review


​BEIJING, 15 July 2016 - JLL Beijing’s 2Q16 Property Review reveals the following: 

  • Cost-sensitive foreign firms relocate from Finance Street and other higher-rental areas
  • Softening demand weighs on CBD rents, pushes up vacancy
  • Hotels performance continues upward trend in the quarter  
  • Two retail projects open: one near the high-profile Taikoo Li and Vanke’s third suburban mall in Beijing  
  • The high-end housing sales volume remained strong, continuing trend from mid-1Q16
  • Industrial take-up was down significantly under slowing economy 
  • Shimao Gongsan sold to LeTV as media conglomerate makes foray into real estate  
  • Domestic insurance investors turn to the domestic market as outbound controls tighten 

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Office

Cost-sensitive foreign finance firms relocated from high-rental Finance Street to the CBD, in an effort to reduce expenditures under a slowing economy. The new vacancies in Finance Street were quickly filled by domestic finance companies as these firms remained a strong source of demand in the quarter. Foreign firms from other industries also acted conservatively, relocating from the CBD to lower-rent areas, such as Third Embassy and Wangjing.  

In the CBD, negative net take-up was recorded for a second straight quarter, leading the rental growth for the submarket to turn negative (-0.5% q-o-q). Many landlords have taken a more conservative approach, focusing on quality, well-established companies, rather than younger, higher-risk tenants, such as P2P firms, despite their relatively strong demand. This combined with relocations, as well as some cases of foreign firms returning space as they downsized, contributed to the negative absorption. “In response to rising vacancies, many landlords were left with little choice, but to lower rents, albeit slightly,” said Eric Hirsch, Head of Office Leasing for JLL in Beijing. “As such, CBD rentals dipped into negative territory for the year.” 

Two new Grade A completions drove up overall vacancy slightly to 4.6%. Covering 100,000 sqm in Third Embassy, Genesis attracted citywide interest. The Grade A building was nearly 25% committed, while a significant portion of its remaining space was under negotiation. Over in Finance Street, the huge Yuetan Nanjie project completed with four self-use buildings and one for-lease building that was largely committed. 

Year-end performance will vary by submarket, but Finance Street is projected to lead far ahead of the others. Finance Street will continue to enjoy strong demand from domestic finance and government-related companies, allowing for significant rental growth despite relocations by foreign tenants to other submarkets. “While we have observed a greater degree of caution from foreign firms, we are also mindful that domestic demand is not as strong as it was a year ago,” said Hirsch. “In light of further softening in demand, rental growth expectations for the CBD and Third Embassy need to be readjusted; declines in both submarkets will offset rental gains in Finance Street, contributing to moderate overall growth.”


Hotels

Trade performance and occupancy rose in the quarter, with the average daily rate (ADR) increasing 2.4% y-o-y to 1,034 RMB and occupancy climbing 3.5 percentage points to 66.3%. The ADR has been climbing since 1Q16, rebounding from the fallout of central government anti-extravagant consumption campaigns that have significantly curtailed over-spending on luxury hotels since 2013. Hotels have responded by changing their strategies, offering more competitive prices and better quality service to draw demand from more sustainable sources, such as business travellers and tourists. “The push towards a more service-oriented economy has boosted business travel budgets significantly in recent years, and hotels have done well to cater to this demand,” said Mandy Li, Head of Hotels and Hospitality for JLL in Beijing. “Likewise, as tourists have more money to spend and prefer to stay at quality hotels with superior service, hotels have placed greater emphasis on improving services to attract more customers.”

One new hotel entered the market in Zhongguancun in the quarter, adding 226 rooms to the market. The newly opened Tylfull Hotel brought the total hotel stock in Beijing up to 1,162 rooms, increasing the total supply by around 3.0%. New supply through 2016 will continue to be moderate, and looking ahead to the forecast horizon, new hotels are set to open at a slower pace compared to other major cities in China such as Shanghai and Chengdu. Beijing previously experienced a supply boom back in 2008, when the Beijing Olympics triggered a 70% increase in total supply. “Due to the large amount of inventory in Beijing, the market has become quite competitive – leading investors to pursue opportunities with greater caution,” said Li. “The more reasonable investment trend is expected to support the upward ADR trend in the future.”

Both trade performance and occupancy will continue to increase slightly in 2016, as corporate and leisure demand are expected to remain relatively strong even under a slowing economy. New high-profile hotel firsts for Beijing are also expected to support demand for luxury hotels, as Bulgari and Mandarin Oriental enter the market in 2017. For the longer-term demand outlook, strong headline events such as the opening of Universal Studios in 2020 and the 2022 Winter Games in Beijing and Zhangjiakou are considered a further boon for the market. “These exciting events are already raising the profile of Beijing and the city’s appeal as a must-visit destination,” said Li. “As such, we can be sure to see an increase of visitors from both near and far as these events draw closer. The Winter Games are also likely to prompt upgrades at hotels and ski resorts, as operators look to draw more sports fans. All of this activity bodes well for the future of the market and its further development.”


Retail

Virtual reality (VR) concepts are appearing in the market, in a bid by landlords to build foot traffic at malls. VR gaming booths, especially in the form of pop-ups, are increasingly surfacing. Two new openings were observed at Xidan Joy City and Glory Mall in the quarter. “As landlords increasingly look to innovative retail to boost foot traffic, we can expect to see more VR concepts in the market,” said Alice Law, Head of Retail for JLL in Beijing. 

The long-awaited Topwin mall project across from the high-profile Taikoo Li finally came online with a focus on high-concept tenants, featuring a Mercedes experience centre. However, physical occupancy at the project, which also includes a cat-themed barbeque restaurant, was just 30% while commitment registered 60%. Meanwhile, Vanke’s third suburban project in Beijing, Zhuzong Vanke, opened in Daxing during the quarter. The 98,000 sqm-community mall was fully committed, boasting an impressive physical occupancy rate of 98%. “Like many new community malls in the suburbs, F&B and kids’ brands at this Vanke mall account for more than 50% of the project’s tenants,” said Law. “These tenants cater to the needs of nearby families with young children who are the most frequent visitors.”

The weak market conditions continued to restrain rents, with rents recording flat growth in the quarter. Meanwhile, an inverted rental hierarchy pattern is also forming; with Core rents flat, Urban rents up slightly, and Suburban rents rising the fastest – in contrast to recent years. “Though suburban malls are growing fast, a climate of slower sales growth is leading to slower rental growth at more shopping centres around Beijing,” said Law. “This is making it difficult for landlords to raise rents.”


Investments

The highest profile deal of the quarter was the 2.972 billion RMB purchase of Shimao Gongsan Plaza across the street from Worker’s Stadium and near landmark mall Taikoo Li in Sanlitun. The 50,000 sqm-property was purchased by online media conglomerate LeTV, rumoured for the purpose of creating a user-experience flagship centre to promote greater interaction with end-users. “We understand that the net operating income of the mall has been negative for some time and continues to be negative. Therefore, the property does not generate immediate cash-flow,” said Kevin Qin, Head of Investments for JLL in Beijing. “This indicates that the company will likely do something very different with the property.”

Domestic insurance companies have started to look at the domestic market, as controls on outbound capital flows have tightened. Though no policy changes have been announced, outbound investments deals are becoming more difficult to execute under the current environment as regulations are more closely enforced. “The situation is forcing more domestic companies to look at their home markets, where domestic demand is already strong, especially among institutional investors,” said Qin. “However, like their institutional investor-peers, domestic insurance companies will also find it hard to land opportunities, as the availability of assets on the market continues to be limited; landlords are content to hold out for higher prices given that stable rents are allowing capital values to further increase.”


Residential

Continuing the trend from mid-1Q16, the sales volume was strong, mainly due to fears from buyers that prices will further escalate as well as a surge in upgrade demand. A total of 677 luxury apartment units and 541 high-end villa units sold in 2Q16, up a significant 46.0% and an impressive 106.0%, respectively. Developers raised sales prices, benefiting from the increasing transaction volume. At the same time, fierce competition and the abundant supply of high-priced projects in the luxury apartment market also restrained price growth to just 0.6% q-o-q. Meanwhile, high-end villas were more popular in the quarter and prices increased at a faster rate, registering 5.1% q-o-q growth.

Leasing demand for luxury apartments and serviced apartments was flat y-o-y, despite the arrival of more expatriates, a major source of leasing demand. However, three project closures triggered helped to trigger relocation demand, some of which spilled over to Ascott Beijing, which reopened in the CBD a year after renovations. Meanwhile, the shrinking stock enabled some serviced apartment landlords to increase rents slightly. As such, rents inched up 0.4% q-o-q. Luxury apartment rents rose 0.9% q-o-q, supported by the active market. However, soft demand in the high-end villa market continued to compress rents, by 0.9% q-o-q.

Housing prices are forecast to rise at a slower pace, given abundant inventory in the market. Less new supply in the luxury apartment market, but more new supply in the high-end villa market is expected as more residential land is supplied outside of the Fifth Ring Road. Though the 2016 sales volume is expected to surpass that of 2015, the inventory is expected to take two-plus years to clear, putting downward pressure on capitals values growth. 


Industrial

Net take-up was 56,000 sqm in the quarter, down a significant 51% q-o-q. Many companies hesitated to expand under the slowing economy, but cash-rich industry giants or state-owned companies were still looking for larger spaces. However, the limited availability of large units held back deals. Absorption was largely driven by the newly opened and wholly leased Golden Road Logistics Centre in Tongzhou Logistics Park. 

Rents were flat in the quarter, as slower leasing progress in mature submarkets caused landlords to find a balance between rental growth and tenant quality. Most landlords still preferred to maintain or attract high-quality tenants instead of quoting higher rents. As a result, chain-linked rents were flat at RMB 1.13 per sqm per day. Though demand is softening, landlords in strong locations will still have opportunities to raise rents slightly through end-2016, considering the limited supply, especially in mature areas. 

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​About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 280 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. Its investment management business, LaSalle Investment Management, has $58.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, www.jll.com

JLL has over 50 years of experience in Asia Pacific, with over 33,000 employees operating in 92 offices in 16 countries across the region. The firm won 15 awards at the International Property Awards Asia Pacific in 2016 and was named number one real estate advisor in Asia at the 2015 Euromoney Real Estate Awards. www.jll.com/asiapacific  

​In Greater China, the firm was named ‘Best Property Consultancy in China’ at the International Property Awards Asia Pacific 2016, and has more than 2,200 professionals and 14,000 on-site staff providing quality real estate advice and services in over 80 cities across the country.  www.joneslanglasalle.com.cn​​​​​​​​​