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Built to last: wholly owned office buildings outperform

​​By Mi Yang

Following 30 years of development, Beijing is scattered with buildings which have failed the test of time and shown rapid deterioration since their completion. But a handful of buildings have bucked this trend to remain relevant and competitive for 20 years or more.

We look at the best examples in the market to see how quality, forward-looking construction is crucial in helping office​ buildings maintain their premium positions rather than fall behind.

Building for the future

In order to last as Grade A office buildings in Beijing, developers must build for the future to guard against premature obsolescence. Due to the speed at which the market is evolving, standards for new construction should exceed what is typical in the marketplace today.

Many structural features of a building are difficult to upgrade in the future, and therefore, are important to get right from the start. For example, the average elevator and restroom provisions in post-2010 Grade A buildings are 20-30% larger than those built pre-2010. But some buildings stand out: China World Trade Center Towers 1 and 2, completed decades ago, still offer competitive quality. If we take a combination of specifications (as developed in No Turning Back: Beijing's Grade A Office Market Set to Shine, buildings like CWTC 1 and 2 were ahead of their time in terms of quality.

Average Grade A Quality Index

Maintain in order to gain

Good maintenance always makes things last longer, but a generous annual capital expenditure budget is also required. It is important to note that there is more to maintenance than keeping a clean space with working facilities: upgrading is essential along the way, as it is impossible to predict everything that will be needed for the future. For example, personal computers were not yet the norm in the late 1980s, but now, the power capacity of offices has had to be adjusted to accommodate higher power consumption needs for each workstation. Buildings like China World Trade Center Tower 2 (CWTC2) have carried out upgrades to their building infrastructure over the years to meet the needs of today's tenant.

Outperforming the market

Landlords who put more in tend get more out of their buildings, allowing them to maintain a leading position with rent levels in Beijing's central business district over decades. In Figure 1 we show how CWTC 2 is a consistent top performer and outperforms 90% of CBD buildings even today. Others have not fared so well: their rental performance has lagged or fallen behind with age.

Rental Performance Ranking of  CBD Grade A Office Buildings in Beijing

Source: JLL Research​

Wholly owned vs. strata-titled

While some of these observations seem fairly obvious, only a few buildings appear to have survived the test of time. What are the challenges holding them back? First and foremost is strata-titling. Only single-owned projects have the full flexibility required to keep up with the latest standards. If a building is built for strata-title sale to individual investors, less capital is in invested in higher-quality building features with lengthy payback periods. Second, after the building is sold to individuals, consistent and centralized maintenance is much more difficult. Some owners might use the space for office leasing, but others may use it for unintended purposes. Third, it will be easier for a single-owned building to make decisions regarding maintenance and upgrades. In many cases, maintenance is ignored to cut back on costs, and often the result is the lowest standard of maintenance or even no maintenance at all.

Revamps are also hard to achieve by consensus. It is nearly impossible to convince dozens of landlords to agree on capital expenditures. While the city's top buildings were pressing ahead with upgrades, the counter examples were stalled by a lack of decision-making. Even today, some buildings still do not have 24-hour chilled water, which most large tenants demand. In some poorly performing projects, a turnaround has been attempted by trying to buy back units and bring them under central ownership, but with limited success.

As new higher-quality office projects enter the market over the next 5-10 years, baseline building standards will further rise. To ensure their buildings last in the market, landlords need to plan for the future now – otherwise it will be too little, too late.

Mi Yang is the lead office analyst for JLL Research in Beijing. ​

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About JLL

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 $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. As of December 31, 2016, LaSalle Investment Management has $60.1 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information,

JLL has over 50 years of experience in Asia Pacific, with 36,000 employees operating in 94 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 fifth consecutive year by Real Capital Analytics.​  

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​.​​​​​​​​​​​​​​​​