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According to JLL Beijing's First Quarter Property Market Review
Beijing, 12 April 2018 – "Large office tenants snapped up new completions, as city policies work to reduce future supply in urban areas," said Julien Zhang, Managing Director for JLL North China. Meanwhile, in the retail sector, entertainment tenants expanded in the market, with non-conventional cinemas leading the charge. Investment activity picked up across sectors, despite the traditional low season for investment. The overall industrial vacancy rate hit a new five-year low, after a large amount of space was taken in the emerging Pinggu submarket. In the residential market, primary capital values growth for luxury apartments remained negative for a third consecutive quarter, as the high-end residential price restrictions stayed in place. The upscale hotels market was off to a strong start at the beginning of the year, with performance continuing to trend upward.
Recent completions continued to unlock pent-up demand from large occupiers as PetroChina secured all of Hengyi Building in Olympic Area with a long-term lease. Alibaba also took up a significant portion of Radiance in Wangjing, further boosting their huge presence in the submarket. Meanwhile, after a year of record fines imposed by financial regulators, Finance Street saw demand soften in the quarter as firms pause to ensure that their strategies align with the quality growth targets outlined by the central government.
The Beijing government has stipulated building height restrictions of around 100-180 metres for office towers in the CBD Core Area. Exceptions have been made for projects with exteriors that have already surpassed the limit. Therefore, the policy is expected to have little impact on near-term supply, but will reduce future supply later over the forecast horizon and further delay completions.
Tech-led submarkets pulled up overall rents in the quarter. Wangjing and Zhongguancun saw rents increase significantly, as vacancies narrowed and demand from tech firms continued to be strong. "Due to strong IT demand in the area, landlords in these submarkets were confident despite impending new supply in the CBD and Lize," said Eric Hirsch, Head of Office Leasing for JLL in Beijing. "With tech firms poised to see strong growth ahead, these popular tech hubs are expected to maintain leading positions in the market." Meanwhile, Finance Street rents were flat q-o-q; softer finance demand followed several months of increased regulatory oversight.
Investment activity picked up across sectors, with Beijing's total transaction volume totaling 5.3 billion RMB in the quarter, despite the start of the year serving as traditional low season for investment. In the quarter, seven major deals spanned office, retail, hotels, and residential sectors. Notable deals in the quarter included the sale of CapitaMall Cuiwei in West Beijing to Vanke's commercial property arm SCP Group, which teamed up with Triwater Asset Management for the deal. The property belonged to a portfolio deal that included 20 shopping malls in 19 mainland Chinese cities for a total transaction price of 8.4 billion RMB. In Haidian District, the 221-room hotel property Chengyuan Building (Tower A) was sold to domestic Jingrui Investment Group for 269 million RMB. In Sanyuanqiao area, Ascendas Hospitality Group sold Ibis Beijing Sanyuan and Novotel Beijing Sanyuan in a portfolio deal for 1.1 billion RMB to a joint venture between domestic Huazhu Hotel Group and US-based private equity firm TPG Capital.
Domestic demand from institutional investors remains strong, with value-add opportunities in the office sector continuing to attract interest in the market. However, as the availability of office assets in core areas continues to be scarce, an increasing number of investors are open to prospects in retail and hotels, and even business parks, especially as new opportunities surface in the market. "Beijing remains an attractive place for investment due to its strong fundamentals," said Michael Wang, Head of Investments for JLL North China. "As such, investors are continuing to actively search the market for potential opportunities."
Note: Prime Retail refers to the Urban market. *New Supply is inclusive of the Suburban market.
Entertainment tenants expanded in the market with non-conventional cinemas. Non-conventional cinemas entered the market: boutique cinema Huaxia Cinemas opened at Beijing Uni Fans and Wanda Hoytscinema opened with a dedicated children's screening room at Beijing Hopson One. Other cinema operators were committed to opening new-format cinemas or looking for projects to open these cinemas.
Following a record supply quarter, just one small project came online in 1Q18. Located outside of the North Third Ring Road, Beijing Uni Fans opened in the Urban market with 70% commitment. Covering an area of 40,000 sqm, the property is positioned as an F&B and lifestyle project and features two new retail supermarkets, the Tencent-backed Super Species and JD.com's unmanned supermarket. Guiyou Department Store in the CBD re-opened after renovations and introduced several F&B and entertainment tenants to attract nearby white-collar workers. North Star Department Store in Ya'ao closed.
The increasing "childrenization" of suburban properties will help landlords draw more young families to their projects, making these properties a hot spot for children's retailers. "Most new suburban malls are setting aside at least one entire floor for children's tenants, and we continue to see segmentation within this retail category expanding to include all kinds of children's tenants, be it fashion, entertainment, or education," said Queenie Qu, Head of Landlord Representative, Retail Leasing for JLL in Beijing. "Children's themes are also being targeted as the sole or overwhelming focus for a small, but growing number of suburban malls. As such, we can expect children's retailers to continue serving strong as the main source of suburban demand."
Demand from e-commerce companies, 3PLs, and manufacturers remained stable. In the emerging Pinggu submarket, an MNC auto parts manufacturer took up the last large space in the market, driving the majority of net absorption (23,900 sqm) for the quarter. Large e-commerce players remained keen to expand in the market, but the lack of large space in mature areas held back some of this demand.
Marking a new five-year low, the overall vacancy rate fell to just 0.5% in the quarter, following the large take-up in Pinggu. Meanwhile, total logistics stock remained unchanged at 2 million sqm, as no new supply entered the market for a fourth consecutive quarter. No primary land plots for warehouse use were transacted in 1Q18.
Rental growth saw a significant increase of 2.1% q-o-q in the quarter, as landlords took advantage of strong pricing power due to the tight-vacancy environment. Particularly in prime areas, landlords had the upper-hand in negotiating small spaces, helping overall rents to climb to RMB 1.20 per sqm per day. GLP, one of the largest players in the logistics market, acquired a project in Beiwu, Shunyi for over RMB 200 million, and plans to re-develop it into a modern, multi-storey warehouse. "Given the limited future supply for Beijing's warehouse market, this is an attractive prospect for GLP," said Michael Hart, Head of Industrial for North China at JLL. "Landlords hold a favourable position in the market, and over the coming months, we can expect to see them using this to their advantage, especially as they negotiate space that frees up in the mature submarkets."
The Lunar New Year holiday drove the seasonal downturn in sales volume. The luxury apartment transaction volume decreased 69.0% q-o-q due to the traditionally low season marking Lunar New Year; high-end villa sales were restrained by the lack of new supply, decreasing 52.7% q-o-q over the same period.
The annual Two Sessions of China's top legislative and advisory bodies in March confirmed that the tight-policy environment would remain in place. Under the continued high-end residential price restrictions, primary capital values growth for luxury apartments remained negative (-0.8% q-o-q) for a third consecutive quarter. High-end villa primary capital values grew steadily, however, rising 0.8% q-o-q under the limited supply and stable demand. Only four luxury apartment projects were launched; all located near the Fourth Ring Road, the new supply added 231 units to the market. No new villa supply entered the primary sales market in the quarter.
The development of the rental apartment market continued to be a key priority for authorities. Developers were encouraged to convert properties into rental apartment projects outside the Third Ring Road, as authorities restricted conversions to residential sales projects within the Fourth Ring Road. "Direction on the development of the housing market was made very clear during China's most important annual political meetings," said Joe Zhou, Head of Research, China for JLL. "Considering that authorities identified the provision of more affordable housing options as a priority for residents in Beijing, we can expect to see further promotion of the rental market going forward."
Note: Hotels refers to the upscale hotel market. *ADR inclusive of service charge.
Overall market performance continued to recover in the quarter, with the RevPAR y-o-y growth rate recording a significant double-digit increase. The RevPAR increased 14.1% y-o-y to 630.3 RMB as at YTD February. The rise was driven by a 7.8% y-o-y increase in the ADR, which reached 986.7 RMB, and a 3.6 percentage point-rise (y-o-y) in occupancy, which settled at 63.9%. The strong RevPAR growth rate was also significant as it matched that of 2011 levels, before performance fell due to fallout from the Global Financial Crisis.
No upscale hotels opened in the quarter, but 2018 is expected to see a supply wave of 11 new hotels enter the market. The new supply is expected to add more than 2,400 rooms to the market, boosting total supply by 1.7%. Despite the incoming supply, new supply is expected to remain moderate over the forecast horizon. Most of the new hotels in the 2018 pipeline are scheduled to come online in the second half of the year and are dispersed throughout the city, with locations in Wangfujing and Qianmen for the urban areas and Changping and Fengtai for the suburban areas.
Beijing is expected to remain a highly sought-after city by hotel investors. Following the portfolio sale of Ibis Sanyuan and Novatel Sanyuan in the quarter, and taking into consideration the rising transaction volume in recent months, we see the market becoming more active. The upward performance trend, scarcity of upscale hotel assets, and moderate future supply pipeline over the forecast horizon indicate that transaction prices still have room for growth.
Key government priorities are expected to further support strong performance of the market through 2018. The tight-policy environment restricting new hotels in the urban areas will benefit existing hotels, as future competition is restrained. Moreover, key priorities outlined during China's top political meetings in March, placing an emphasis on improved transport integration, environment protection, and balanced industry development for the Beijing-Tianjin-Hebei region is likely to increase demand from both business and leisure travelers. "Greater Beijing-Tianjin-Hebei integration will have many knock-on effects, such as increasing the number of city conventions, which will draw more travelers to Beijing. As the region becomes more integrated, we can also expect people from surrounding areas to make more frequent weekend trips to Beijing," said Adela Zu, Vice President of Hotels & Hospitality for JLL in Beijing. "In addition, the 144-hour visa-free policy introduced for Beijing at end-2017 is expected to attract more foreign tourists from abroad and serve as a further boost to the 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 2017, JLL had revenue of $7.9 billion and fee revenue of $6.7 billion; managed 4.6 billion square feet, or 423 million square meters; and completed investment sales, acquisitions and finance transactions of approximately $170 billion. At the end of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of 82,000. As of December 31, 2017, LaSalle had $58.1 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit, www.jll.com.
JJLL has over 50 years of experience in Asia Pacific, with over 37,000 employees operating in 96 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
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