News release

Beijing office rents decline; investment market sees explosive growth

According to JLL Beijing’s Fourth Quarter Property Market Review and 2020 Outlook

January 15, 2020

Beijing, 15 January 2020 – “With investment flooding the market, Beijing has proven to be a highly attractive destination, even as downward economic pressure continues,” said Julien Zhang, Managing Director for JLL North China. Despite office rents entering an adjustment period, the office sector remained hugely popular among investors and accounted for the majority of deals closed; the total en-bloc transaction volume for Beijing soared to around RMB 80 billion in 2019, ending the investment year on a high note. Meanwhile, mall landlords and retail tenants were unable to avoid the slowdown by year-end, with leasing demand significantly weakening in the final months of the year. The industrial market marked an exception to the slow-growth environment, as full-year rent growth comfortably reached the double digits in 2019, although a moderating trend had set in by year-end. In the high-end residential market, the last months of the year saw a strong luxury apartment sales volume, as stable demand was supported by large supply.    

Grade A Office

Office

4Q19

Vacancy

11.3%

New Supply

780,000 sqm

Rental Growth

-1.8% q-o-q


Overall leasing demand continued to contract in the slow economy.
As a result, the transaction volume (based on GFA) shrank by 25% y-o-y at end-2019. However, even with less activity due to downward economic pressure, favourable policies did help to stimulate new demand in the market, particularly in the finance sector. With new wealth management set-ups required to separate operations from existing banking divisions, Finance Street was an attractive location for these tenants in the quarter.

The final months of the year saw several new projects come online, including the highly anticipated China Zun building in the CBD Core Area. Five projects completed in the quarter, adding 780,000 sqm of new supply to the market. China Zun was the highest-profile completion, and the new tower surpassed existing buildings in the city to become the tallest in Beijing. The new projects, particularly China Zun and CP Center in the CBD Core Area, further intensified competition between landlords of existing buildings in the CBD and surrounding areas, who have already experienced months of increased pressure due to soft demand in the market. The large new supply led the overall Grade A vacancy rate to climb to 11.3% at end-2019. Downsizing in the slow economy also continued to weigh on vacancy.

Declining rents led the market to enter a long-anticipated adjustment period. Overall rents continued the downward trend, registering -1.8% q-o-q growth and -4.0% y-o-y growth. In accepting the realities of the market, landlords, particularly in the CBD where vacancies are higher, were more flexible on terms. “Without much economic relief in sight, we expect rents to decline further in 2020, especially as landlords seek a new equilibrium between rents and occupancy rates,” said Julien Zhang. “As more office space becomes available in the market, we are seeing strong property management and building infrastructure increasingly serve as truly differentiating factors, further setting top buildings apart from others.”

Investments

Investment poured in despite economic hardships, pushing Beijing to see a record transaction volume of around 80 billion RMB in 2019. The figure soared from the previous year, doubling the RMB 38 billion total for 2018 – and more than tripling the RMB 25 billion total for 2017. Despite the economic slowdown in 2019, interest from investors in Beijing was stronger than other cities in mainland China, as the overall market outperformed competing markets. Office assets were the most popular sector in Beijing, accounting for nearly 70% of deals transacted in 2019.

A number of significant deals in Beijing closed out the record year of investment in the quarter. Major deals recorded in the office sector included: Allianz and Alpha purchasing an office tower in Greater Wangjing for 7.8 billion RMB and GIC buying out Capital Land to fully own its asset in Lize. Other notable deals included GoHigh Capital purchasing Aegean Sea Shopping Center and Vanke buying out COFCO’s 50% stake in the mixed-use Fun Mix project for RMB 797 million to fully own the asset. “With many opportunities still being chased and deals under negotiation at end-2019, we expect the strong investment activity from 2019 to carry into 2020,” said Michael Wang, Head of Capital Markets for North China at JLL. “Even during these challenging economic times, Beijing has remained a reliable and attractive investment destination due to its market strong fundamentals, and we expect this value to continue to shine through in 2020.”

Prime Retail

Retail

4Q19

Vacancy

5.7%

New Supply*

80,000 sqm

Rental Growth

0.2% q-o-q

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

Mounting pressures from slowing sales performance made for an increasingly challenging environment at year-end. Both retailers and landlords were increasingly distressed about the situation towards the end of the year, as downward economic pressure continued to drag on the market. Leasing activity slowed as retailers reconsidered expansion strategies. Domestic snack brands were an exception to the overall trend, however, and they remained active with expansion. Luxury brands such as Gucci and Moncler opened new segmented stores – including a pet accessories store – at the new Beijing SKP South project, which introduced technology-inspired concepts to draw consumers in the market. 

The Michelin Guide introduced for Beijing in late 2019 may serve as a bright spot in the market for 2020. Although restaurants are expected to continue to see slower sales performance in 2020 due to the economic slowdown, some landlords were considering starred restaurants as a means to attract more customers to their malls. “This guidebook has given some serious credibility to a number of restaurants, helping them to potentially grow a larger presence in the city. As a higher-quality food scene is developed, this will further put Beijing on the world culinary map and ultimately serve as a boon to the overall retail market.” said Ji Ming, Research Manager for JLL Beijing.

Industrial

Industrial

4Q19

Vacancy

3.7%

New Supply

95,000 sqm

Rental Growth

3.4% q-o-q


Third-party logistics companies (3PLs) remained a key source of leasing demand, even as the economy continued to grow at a slow pace.
Large 3PLs even pursued opportunities to build self-use projects; SF Express broke ground on a new logistics facility in Beijing Airport Logistics Park in the quarter. Still, downward economic pressures continued to impact the market, and there were cases of tenants downsizing as strategies were adjusted due to shrinking business. Prime locations were less impacted than more remote areas.

One new project completed in the quarter, closing out a record year of supply. In the quarter, the second phase of a recently entered project in Tongzhou Logistics Park was fully completed, adding 94,800 sqm to the market. The year 2019 saw a total of more than 380,000 sqm of new supply enter the market, marking the largest annual supply level since 2005. The majority of supply came online committed, however, and as such, did not heavily weigh on the market. Although rent growth moderated in the second half of the year, full-year growth settled comfortably in the double-digits. “Landlords in prime locations near the city centre held the best positions in the market as vacancy in these areas remained tight, allowing them to leverage rent gains throughout 2019, even as downward economic pressure persisted,” said Mi Yang, Head of Research for North China at JLL. “Over the coming months, however, we do expect to see the moderating rent trend from 2H19 deepen, and we expect this to lead to more sustainable growth levels in 2020.”

High-end Residential

Residential

4Q19

Luxury Apartments

New Supply

205 units

Capital Values Growth

-1.7% q-o-q

Rental Growth

-0.2% q-o-q

High-end Villas

New Supply

0 units

Capital Values Growth

0.2% q-o-q

Rental Growth

-0.2% q-o-q


The luxury apartment market recorded a strong sales volume at year-end, after a total of 793 units were sold in the final months of 2019.
The figure reached its highest point since end-2017, as stable demand was enabled by large supply after developers flooded the market with projects in the previous quarter. Modest discounts were offered towards year-end as developers aimed to push up sales and reach annual targets, further supporting the sales volume.

In 2020, policy is set to focus on maintaining market stability, with authorities affirming that the housing market will still not be used to provide any short-term stimulus for the economy. With authorities re-emphasising of the importance of supporting a stable housing market, land and housing prices are expected to hold steady. “As authorities walk this line, we are unlikely to see any significant loosening in policy for the housing market in 2020,” said Mi Yang. “Therefore, we can expect to see the current policy environment remain relatively unchanged throughout the year.”

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About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $16.3 billion, operations in over 80 countries and a global workforce of more than 93,000 as of September 30, 2019. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.