Beijing office rents slide further, but pace of decline slows; enthusiasm in data centres underlined by cluster of investment deals

Beijing, 15 October 2020 – “There was definitely a much stronger sense that things were finally getting back to normal in Beijing, especially after the city weathered a resurgence of Covid-19 cases in the previous quarter – but recovery from the virus in the slow economy continued to be challenging,” said Julien Zhang, Managing Director for JLL North China. In the office market, rents dropped further, although the pace of deceleration slowed following several straight quarters of declines. Investors remained active, with the popularity of data centres highlighted by a number of deals in the quarter. Local authorities encouraged offline retail spending, in a bid to help drive a rebound in the hard-hit market. The industrial market saw slight growth resume, after rents held flat for half a year. High-end residential sales soared, supported by the huge influx of new supply, after many buyers held off from making purchases in the first six months of the year. 

Demand remained on a downswing, with market activity dropping off after the slight pick-up in the previous quarter. At the same time, following several quarters of rental declines, the pace of relocations and upgrades accelerated. Market conditions encouraged high-performing tenants to leverage the more tenant-favourable environment to their advantage. Nearly 70% of deals in the quarter were driven by domestic tenants; foreign tenants remained conservative as they continued to face uncertainties in their home markets.

The overall vacancy rate held steady at 13.9% in the quarter. No new supply entered the market, with projects in the CBD Core Area and Lize delaying completion dates and further mitigating supply pressures to some extent. However, more space could be freed in the market towards year-end, as more companies consolidate and/or pursue more aggressive strategies to reduce real estate costs.

Overall rents continued to drop as market pressures mounted, although the pace of decline slowed. Rent growth in the quarter registered -1.2% q-o-q and -7.1% y-o-y. Following several quarters of rent concessions, some landlords recorded more stable occupancy rates. “Many landlords are still working with the mind-set that views a further reduction in rents as a means to securing more stable occupants, putting highly reliable tenants in a better position to negotiate with landlords,” said Michael Zhang, Director of Office Leasing for JLL Beijing. “As for the minority of tenants who are fortunate enough to be in a position to upgrade at this time, the current market is offering real opportunities to land terms that would not have even been entertained by landlords a year ago.”

Investment momentum was stable, with foreign investors continuing to show strong confidence in the market in spite of these challenging times. SDP formed a joint venture to lead the purchase of U-Show Plaza by the Second Ring Road. The deal demonstrated that a high level of interest in the market continues to come from foreign investors despite the current downturn.

The rising popularity of data centres as an alternative investment to office buildings was also highlighted in the quarter, after several of such assets were purchased in Beijing. Among at least seven data centres transacted in the quarter was the site of a future data centre project in Tongzhou, purchased through a joint venture between GDS and CITIC; also in the quarter, GDS closed a portfolio deal for another three data centres in Shunyi. “As we entered the second half of the year, investors continued to chase opportunities and pursue long-term strategies in Beijing, remaining confident in the future of the market,” said Michael Wang, Head of Capital Markets for JLL North China. “This should see more deals closed in the final months of the year, but of course, given all of the disruptions from Covid-19, the 2020 sales volume is unlikely to match the high from 2019. Still, considering the year that we have had, the year-end level for Beijing is expected to hold up well, especially relative to other competing markets.”

^{Note: Prime Retail refers to the Urban market. *New Supply is inclusive of the Suburban market.}

Local retail spending offline was further encouraged in the quarter, with policy support promoting shopping at malls to help with economic recovery. Discounted vouchers for meals, movie tickets, appliances, and electronics were distributed to residents after the resurgence of Covid-19 cases in Beijing in June was over, and the city lowered its emergency response level for the virus. The more relaxed environment supported new energy vehicle retailers in carrying out active expansion plans; Nio and Roewe were among those that opened new locations in the quarter, while others committed to space. Meanwhile, leasing demand was also supported by foreign and domestic coffee and tea-drink retailers, among them Tim Hortons and Hey Tea.

Market rent growth remained negative in the quarter, with many landlords continuing to lower rents under threat from rising vacancy pressures. Urban rent growth was recorded at -3.3% q-o-q, while Suburban rent growth was -3.4% q-o-q. The downward pressure is likely to continue through year-end, as occupancy rates remain a top priority for most landlords as they prefer to keep their projects full. “Although some retailers started to report a recovery in sales, encouraging them to reconsider expansion plans that were previously put on hold, most of these tenants were bottom fishers looking to take advantage of lower rents and greater flexibility on terms,” said Ji Ming, Research Manager for JLL Beijing. “While bottom fishers still present opportunities for landlords at this time, many landlords also worry about how the virus and the colder months ahead will impact the willingness of consumers to visit and spend at malls – all of which is expected to be reflected in the rent trend during the last months of the year.”

The market was considered to be largely stable in the quarter, following increased attention on logistics operations after the resurgence of Covid-19 cases in Beijing during the previous quarter. Sufficient demand remained active to help steady the market, and market recovery continued, although not at a robust pace; overall leasing demand continued to be softer than the previous year. In the quarter, the main supporters of market stability remained third-party logistics firms, as well as industries benefiting from the current environment, such as pharmaceuticals and the fresh food delivery segment.

No new supply entered the market, as slight rent growth resumed in the quarter. The overall vacancy rate held flat from the previous quarter at 5.0%. Although the level remained at its highest point in five years for a second straight quarter, vacancy continued to rest at a healthy level. Despite the downward pressure in the market, the overall stability of the market helped landlords of high-quality and/or stable projects manage modest rent increases, enabling market growth to edge up slightly to 0.5% q-o-q at end-3Q20. “Landlords with the ability to raise rents are walking a fine line,” said Mi Yang, Head of Research for JLL North China. “They need to go about it cleverly so as not to deter tenants, many of whom are under much tighter budgets at present, but also to ensure that any gains that can be had are made, if minimal, given that 2020 has turned out to be such an exceptionally challenging year.”

Primary sales in the high-end residential market continued to recover, recording a strong pick-up in the quarter, as buyers felt increasingly confident to return to the market. In the quarter, after Beijing had recovered from the resurgence of Covid-19 cases in June, sales volumes for luxury apartments and villas rose a significant 166.9% q-o-q and 112.5% q-o-q, respectively. Proving highly resilient, the strong sales were supported by the huge increase in new supply that gave homebuyers ample options and developers’ continued prioritisation of sales over price growth.

In line with the increasingly recovering sales momentum, primary prices for luxury apartments returned to positive growth, rising 0.2% q-o-q on a chain-linked basis. Meanwhile, several high-profile luxury apartments pushed prices up by 5.1% q-o-q on a spot basis. Developers regained confidence after seeing buyers return to the market, attaining pre-sales certification for 1,222 new luxury apartment units and 48 new high-end villa units, a huge increase from 217 units and zero units in 2Q20. Possibly nearing debt limits, some developers accelerated new launches to shore up cash flow. “As some developers prepare to face tighter financial channels in 2021, accelerating sales is likely to remain a priority for many through year-end,” said Mi Yang. “With this in mind, this could mean that after the traditional peak sales season in October, we may see transaction volumes recover to the 2019 level or higher.”