2019 off to a strong start after a number of en bloc deals close in the first quarter

Beijing – “Office leasing demand picked up slightly from end-2018, but heightened economic concerns in the quarter continued to influence the market with some tenants under noticeable pressure to reduce rental budgets,” said Julien Zhang, Managing Director for JLL North China. Meanwhile, IT hub Zhongguancun drew widespread attention from investors, as domestic tech giants and foreign investors closed deals in the tech-driven submarket. In the retail sector, online companies expanded offline rapidly, increasing their presence at prime malls. Industrial absorption marked an eight-year high, after witnessing the highest supply peak since 2006 in the quarter. In the high-end residential market, the luxury apartment sales volume increased significantly as buyers anticipated a moderate loosening in policy over the coming months.

Grade A Office

Demand picked up slightly from end-2018, but IT expansion momentum slowed due to heightened economic concerns. While tenants were more active in searching for space during the quarter, rental budgets were noticeably lower than recent quarters. As such, despite quality tenants in the market, in several cases, demand failed to meet landlord expectations. IT firms, a strong source of demand in the market, acted more conservatively at the start of 2019 due to heightened economic concerns, with some companies putting expansion plans on hold.

No new office projects were opened in the quarter, benefitting existing landlords under increased pressure to fill vacant space. As such, the overall vacancy rate remained stable at 4.7% at end-1Q19. With IT demand strongest in Zhongguancun, submarket vacancy for the IT-focused area dipped further to 0.8% in the quarter, nearing its historic low (0.5%). Meanwhile, the CBD Core Area was facing more risk of delayed completions in the quarter, but select landlords are pursuing their own solutions in a strong effort to still open in 2019. In the emerging areas, Great Wall Financial Centre in Lize was delayed from entering the market in the quarter due to slow progress on infrastructure for the area. 

In the quarter, rents held steady q-o-q, despite witnessing noticeably lower budgets from tenants in the market. As pressure from the current economic climate continued to build in the quarter, several tenants prioritised low-cost options. “Landlords, on the other hand, were waiting on tenants with better budgets and/or pedigrees. As such, they were generally unwilling to reduce rents despite ongoing economic concerns,” said Eric Hirsch, Head of Office Leasing for JLL in Beijing. “So long as occupancy rates remain stable and delays in new office construction continue, we can expect landlords to take a wait-and-see approach rather than lowering rents significantly.”

Investments

The first quarter of the year set 2019 off to a strong start, with investors transacting a total of more than 10 billion RMB by end-1Q19. Self-use buyers continued to dominate the market, driven largely by the high-rent and tight-vacancy office environment making it difficult for companies to satisfy large leasing requirements. As such, Domestic dairy producer Yili Group purchased an office building in Nuode Centre in Fengtai Science and Technology Park for a total consideration of 1.87 billion RMB.

Considered the Silicon Valley of Beijing, Zhongguancun continued to be a hotspot for investment in the quarter and drew widespread interest in the market. Several high-profile purchases were closed or under negotiation in the quarter. IT giants continue to be active investors in the area. JD.com purchased Jade Palace Hotel in Zhongguancun for 2.7 billion RMB with plans to use the project for technology R&D purposes. ByteDance was also rumoured to be planning a purchase in the same area for similar purposes. At the same time, foreign investors also continued to be highly interested in opportunities and proved active in the market. Dinghao Electronics Plaza in Zhongguancun was purchased by a joint venture between Partners Group, The Family Office, SDP Investments, and The Carlyle Group for a total consideration of around 9 billion RMB. “Given the strong presence of leading and fast-growing IT firms in the area, Zhongguancun remains a bright spot for investment opportunities in Beijing,” said Michael Wang, Head of Capital Markets for JLL in Beijing. “Due to the lack of commercial leasing space in the IT-driven submarket, rapidly expanding companies are increasingly choosing to purchase entire buildings to meet large office requirements.”

Prime Retail

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

Online companies quickly expanded their physical presence in the market during the quarter, while premium coffee and cosmetics retailers also actively opened new stores across the city. Fitness app Keep opened four Keepland studios in the quarter, while recipe app Xiachufang opened its first physical store in Beijing and committed to a second location in the city. Import goods shop KKguan.com also committed to opening its first store in Beijing at Chaoyang Joy City. Demand was also supported in the quarter by premium coffee shops such as Seasaw and Mellower, which actively expanded as landlords recognized the strong potential these tenants have in helping to upgrade the image of their projects. Cosmetics momentum also continued in the quarter with multi-brand stores like Chinese cosmetics retailers Fionacos and Colorlab by Watsons further increasing their presence in the market.

No new supply helped to drive Urban and Core vacancy rates to record lows. After no new supply entered the market in the quarter, the overall Urban vacancy rate dropped to a historic low of 5.3% as top performers continued to fill pocket vacancies and low performers were flexible on terms to fill vacant spaces. In a similar move, the overall Core vacancy rate edged down to a historic low of 2.8%. Meanwhile, department store closures continued to be a theme in the market. Chang’an Market Department Store reported plans to close and refurbish before opening as a community-oriented shopping centre by year-end.

A slower economy is expected to shift the weight of consumer demand to more lifestyle-oriented offerings such as F&B and entertainment categories, as people look to maintain their quality of life. Children’s retail and cosmetics are also projected to remain popular as consumers are likely to prioritize these segments over other categories. “Under the current economic climate, demand for experience-related offerings is expected to see increased stability as consumers prioritise spending on retail offerings that directly impact their quality of life,” said Zoe Yang, Head of Retail Leasing for Tenant Representation at JLL in Beijing. “As such, by providing affordable and quality offerings, these retailers are most likely to tap the strongest consumer demand and witness greater potential in the market.”

Industrial

In the quarter, net absorption recorded an eight-year high, after new supply marked a peak unsurpassed since 2006. Third-party logistics companies remained a major source of demand in the quarter, while retailers across categories supported demand, taking advantage of available space at new warehouses. The strong absorption was driven largely by a new large project that opened fully committed in phases in Tongzhou Logistics Park. Meanwhile, rents witnessed a more moderate increase, following robust growth from the previous two quarters in the second half of 2018. Much of the 4.3% q-o-q chain-linked growth in the quarter was led by landlords with projects in prime locations.

Following the highs from 2018, rents are expected to moderate through end-2019, but are still projected to reach double-digit growth levels by the end of the year. The low-vacancy environment is expected to continue to favour landlords, ensuring their bargaining power remains strong. Despite two new projects scheduled to follow the 1Q19 supply peak before the end of 2019, the overall vacancy rate is set to further decrease by year-end and return to a near-record low (0.6%) – as the new supply is set to enter the market fully or nearly fully occupied.

High-end Residential

Despite the traditional low season that coincides with Chinese New Year, buyers were more active in the quarter as they expected a moderate loosening in policy in the near future. The luxury apartment sales volume increased significantly by 27.4% q-o-q, following the supply peak from the previous quarter. Chain-linked primary prices were stable q-o-q. In the high-end villa market, buyers continued to be active after new policy introduced in the previous quarter banned the construction of new stand-alone villas, prompting buyers to rush to the market. The high-end villa sales volume increased 30.0% q-o-q, while prices slightly declined (recording -0.9% q-o-q chain-linked growth) as landlords of older projects lowered prices to lure buyers.

In mid-February, Beijing municipal authorities halved the annual rental income tax rate for individual landlords to 2.5% (for monthly rental incomes below 100,000 RMB). The latest move, announced after new tax rules in January permitted Chinese residents to claim rental deductions from their personal income tax, is expected to better facilitate steady development of the rental market. “As housing authorities look to strengthen the overall rental market, we can expect to see even more new measures introduced,” said Mi Yang, Acting Head of Research for Beijing at JLL. “This should help the rental market catch up with the strongly regulated sales market and expedite the development of a more stable and reliable overall housing market.”

Hotels

Note: ‘Hotels’ refers to the upscale hotel market. *ADR includes service charge.

Beijing’s upscale hotel market achieved sustainable growth as at YTD February 2019, with its average daily rate (ADR) as the main driving factor. Trading performance showed double-digit growth every month in 2018. Meanwhile, the market’s revenue per available room (RevPAR) continued to increase during the first two months of 2019. ADR increased 5.9 percent y-o-y to RMB 1,042.8, and occupancy remained stable at 64.2 percent. Likewise, RevPAR climbed 5.9 percent y-o-y to RMB 669.4.

Only two luxury boutique hotels opened in Q1 2019: Puxan Hotel, with 116 rooms, and Mandarin Oriental Hotel, with 73 rooms. Both are located in the Wangfujing submarket. Six new hotels—whose combined rooms total 1,755—will enter the market in the next three quarters. Key openings include the Mandarin Oriental Hotel Qianmen and the Marriott Hotel Fengtai Science Park.

Hotel asset trading forecast to be more active, asking price to continue increasing. Hotel Investment Highlights, released by JLL in September 2018, outlines the sale of Ariva Beijing West Hotel & Serviced Apartments to Modern Land (China) at RMB 1.55 billion, the largest single hotel asset transaction in Asia Pacific for 2018. In Q1 2019, a notable hotel asset transaction was JD.com’s purchase of the Beijing Jade Palace Hotel at RMB 2.68 billion. Along with the recovery of the trading performance and the scarcity of high-quality assets, we expect hotel assets’ asking price to keep rising.

Upscale hotels’ trading performance will continue to grow. Government officials expect the Beijing Daxing International Airport, which becomes operational on China’s National Day 2019, to enhance the air route density (both international and domestic) in, as well as increase tourist arrivals to, the city. Upcoming large-scale conventions and city events, which include the International Horticultural Exhibition and the Beijing International Consumer Electronics Expo, are also expected to drive demand in the business and leisure sectors. Active city events and improvements to infrastructure are also likely to benefit the upscale hotel market’s trading performance. Adela Zu, Vice President of Hotels & Hospitality at JLL Beijing, said: “The positive trade in hotel trading performance and the ongoing government land policy will continue to push hotel assets pricing higher.”

– End –