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According to JLL Beijing's Third Quarter Property Review
Beijing, 16 October 2017 – "There was a noticeable divergence in rent levels between low and high-quality office buildings in the quarter, as the latter group drew considerably stronger demand," said Julien Zhang, Managing Director for JLL North China. "This enabled landlords of quality buildings to command rental premiums over others in the market." Meanwhile, in the retail sector, several segments within F&B drove demand, as "fresh" supermarket concepts, outdoor fine-dining offerings, and "hot" beverage retailers proved most active. Domestic and foreign investors showed strong interest in the Guanghualu Soho 2 office building up for sale in the CBD. In the logistics sector, overall vacancy reached a four-year low, as e-commerce and third-party logistics firms continued to drive steady demand. In the high-end residential sales market, policy restrictions on price and the large amount of supply – resulting from government pressure on developers to launch new projects – drove sales.
Recent high-quality completions drove upgrade demand in the quarter, enabling tenants opportunities to expand or relocate in the market. The majority of take-up came from domestic companies, while established firm from across China continued to consider setting up offices in Beijing to extend their national footprints. "In the CBD, landlords remained interested in finance and professional services tenants with high rental affordability, as tenants from lower-margin industries eyed more affordable options in non-core submarkets or decentralised areas," said Eric Hirsch, Head of Office Leasing for JLL in Beijing. "Regardless of the area, however, landlords of quality buildings across submarkets received the most interest."
Overall rents registered 0.9% q-o-q growth, supported by the strong performance of high-quality buildings and recent completions. Landlords of quality buildings drew strong interest, allowing for rental gains. Also, landlords from the majority of recent completions in the market contributed to the rise, as they managed to raise rents after achieving high occupancy levels. Four new completions from the previous quarter recorded a combined net-take up of 50,000 sqm in 3Q17. Taking into account pre-commitments, the take-up from the quarter leaves less than 20% of the space at these buildings available for lease.
Completions in Lize will offer new, decentralised options. New supply over the next 12 months is expected to concentrate in the emerging decentralised office submarket. The rental flexibility of landlords will be tested as they attempt to attract tenants to the unproven area and replicate the relatively quick success of the maturing Wangjing submarket. Meanwhile, new supply in the city centre scheduled for completion in the near future could also face delays, if restrictions on commercial construction in Beijing are strictly enforced.
Beijing-based developer Soho put Guanghualu Soho 2 in the core CBD up for sale. Such opportunities in the CBD are rare, and the project has quickly received interest from multiple parties. "The open sale of this property is giving investors the chance to acquire an asset in Beijing that would otherwise be unavailable to many," said Michael Wang, Head of Capital Markets for JLL North China. "Interest from both domestic and foreign investors, particularly from institutional investors, has been huge, with many eagerly considering this opportunity."
In the retail market, CapitaLand (Retail China Trust) announced the sale of CapitaMall Anzhen to Beijing Hualian Group (BHG). CapitaLand sold its entire interest in a company holding the 43,443-sqm project outside of Beijing's North Third Ring Road for RMB 1.13 billion (for which the transaction price included, but was not limited to its interest in CapitaMall Anzhen). BHG currently operates the project as a department store under a long-term master lease.
Note: Prime Retail refers to the Urban market. *New Supply is inclusive of the Suburban market.
Several segments within F&B drove demand in the quarter. Alibaba's Hema Supermarket opened its second "fresh concept" store in Beijing to drive more people to its online store. A former luxury flagship building at Taikoo Li re-opened as an outdoor fine-dining destination, tapping into peoples' growing appetites for outdoor F&B options. "Hot" milk tea retailer Hey Tea opened its first two stores in Beijing. "As competition continues to intensify, landlords remain interested in "new and fresh" F&B brands, as these tenants help drive foot traffic and further differentiate their projects in the market," said Queenie Qu, Head of Retail Leasing for JLL in Beijing. "Outside of F&B, affordable luxury retailers are also increasingly popular, due to their high sales-per-sqm ratio, while less traditional tenants, such as co-working operators and more niche fitness providers, are also being considered, as another way to help projects stay ahead of their competitors."
Holding the rental trend steady, Urban and Suburban rents registered growth of 0.3% q-o-q and 0.7% q-o-q, respectively. Rents at select Core projects started reaching their rental ceilings, with at least one Wangfujing landlord reducing rents in the quarter. Suburban rental growth is expected to continue outpacing Urban growth over the next 12 months, as many quality-projects beyond the Fifth Ring Road continue to benefit from a growing number of consumers who choose to spend closer to home.
End-2017 is set to be a peak supply quarter, with a significant 700,000 sqm of new supply scheduled to enter the market. Hongkong Land's WF Central along Wangfujing Pedestrian Street is the highest-profile mall expected to come online by year-end. At the same time, leasing challenges and the restrictions on commercial construction in Beijing could result in opening delays.
Overall vacancy reaches four-year low, driven by steady leasing demand from third-party logistics companies and e-commerce firms. Mature markets continued to lease out vacant space at a brisk pace. Under the steady leasing activity, and following no new supply in 3Q17, overall vacancy declined further, to just 1.7% – its lowest level since 2013. The tight market allowed landlords greater bargaining power, enabling rents to grow modestly by 1.3% q-o-q.
Two projects are set to open by year-end, before new supply peaks in 2018. Both projects are expected to open in emerging areas: Fangshan District and Tongzhou Yongle Economic Zone. As these projects are expected to take longer to fill up due to their more remote locations, vacancy is expected to rise slightly, but should still remain low at end-2017. In 2018, vacancy is expected to rise modestly, with more than 300,000 sqm of new supply scheduled to come online. However, the policy restrictions on commercial construction in Beijing may also cause some of these projects to be postponed.
Capital Values Growth
In 3Q17, sales were driven by the policy restrictions on price and the large supply, as developers were urged to release projects in the market. The luxury apartment sales transaction volume was up 9.2% q-o-q, while the high-end villa sales transaction volume was flat q-o-q. Sales from a well-known luxury apartment project contributed to half of the sales volume for luxury apartments. Following increasing government pressure, developers were more active in launching projects; new luxury apartment supply surged 430% q-o-q. Seven luxury apartment projects received pre-sales certifications for 826 units, up from 192 units in the previous quarter. Many projects entered the market at much lower-than-expected prices, due to the restrictions on price that remained in place in the quarter.
Under pressure from the sudden influx of new supply, luxury apartment primary capital values growth turned negative (-2.6% q-o-q) in the quarter. Many older projects lowered prices to compete with the large amount of new supply that entered the market in 3Q17. Meanwhile, primary capital values growth for high-end villas was flat q-o-q.
In a bid to further limit speculation in the market and keep price growth at bay, Beijing issued measures on joint-ownership at end-3Q17. The new policy allows homebuyers to share property ownership with the municipal government. Land supply will be prioritised for this initiative, with government plans to launch 250,000 units for joint-ownership over the next five years. Housing authorities also announced plans to establish an online platform to better monitor and supervise activities in the leasing market, to better develop the leasing market and support a more stable housing market.
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JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of nearly 80,000. As of June 30, 2017, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.
JLL has over 50 years of experience in Asia Pacific, with 36,800 employees operating in 95 offices in 16 countries across the region. The firm won the ‘World’s Best’ and ‘Best in Asia Pacific’ International Property Consultancy at the International Property Awards in 2016 and was named number one real estate investment advisory firm in Asia Pacific for the sixth consecutive year by Real Capital Analytics. 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
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