Beijing office rents continue to drop under market pressure; investment volume for first three quarters of 2019 surpasses 2018 full-year figure

Beijing, 15 October 2019 – “Despite ongoing downward economic pressure, some larger and more stable tenants took advantage of lower office rents and increased options in the market to consider suitable upgrade opportunities,” said Julien Zhang, Managing Director for JLL North China. Domestic and foreign investors were highly active, with the total transaction volume for the first three quarters of 2019 already surpassing the full-year figure for 2018. Meanwhile, some landlords of prime malls were more optimistic about achieving year-end targets, following better-than-expected sales recorded in the first half of the year. Industrial rents further moderated from previous highs, but demand remained stable in prime locations. In the high-end residential market, overall demand was stable and price growth modest as new luxury apartment supply surged.

The softer demand trend continued in the quarter as downward economic pressure remained, but leasing activity picked up slightly from 1H19 as some tenants took advantage of current market conditions. Larger and more stable tenants considered upgrade opportunities at lower rents and more flexible terms. This resulted in a more active leasing market, with some tenants upgrading to better locations.

No new supply entered the market, allowing landlords in the CBD and surrounding areas to continue benefiting from the limited-supply condition and further delays to the CBD Core Area. The lack of new supply and delays offered some relief to landlords already facing challenges from softer demand in the market. Despite ongoing market pressures and weaker rental affordability from tenants, the overall vacancy rate held steady from the previous quarter at 7.1%.

Rents continued to decline under market pressure. Overall rents followed the downward trend from previous quarters, recording -0.8% q-o-q growth. In a bid to fill empty spaces under current conditions, landlords remained flexible on rent strategies in the quarter. “As landlords look to fill up vacancies and maintain occupancy rates, we continue to see landlords open to varying rental schemes in order to secure the most reliable tenants, fully aware that stability has more to offer at this time than higher rent,” said Eric Hirsch, Head of Office Leasing for JLL in Beijing. “With persistent economic uncertainty, we expect even more landlords to increasingly adopt this mind-set, and as such, we are likely to see rents remain in decline through year-end.”

Investments

Investment piled into Beijing with en-bloc transactions in the first three quarters of 2019 totaling more than 50 billion RMB, already surpassing the full-year 2018 figure. With several deals under negotiation in the quarter, the full-year 2019 figure is poised to set a record high – and close out the year well above the 38 billion RMB figure recorded in 2018. In the quarter, high-profile deals included Keppel Land purchasing Shangdi NEO for RMB 179 million; China Fortune selling China Railway Materials Project to Ping An Insurance for RMB 5.8 billion; and BBMG purchasing Pangu Plaza’s No.5 “Dragon Head” Office Tower for RMB 5.18 billion though a government auction.

With the investment market heating up in Beijing, more foreign investors are increasingly active in pursuing opportunities although domestic investors continue to be the dominant players. Under the current climate, strong fundamentals in Beijing are enticing investors to chase new opportunities as they surface, leading to increased market activity. “Over the last several months, the Beijing market has quickly gained steam and become very hot as market conditions and strong fundamentals have led to a rise in opportunities that were previously inaccessible to a larger majority,” said Michael Wang, Head of Capital Markets for North China at JLL in Beijing. “Even with ongoing economic uncertainty, both domestic and foreign investors are still highly confident about the Beijing market – and with more tradable assets becoming available, we believe that now is the time to get into the market.” 

Bars continued to open at high-profile malls, helping to slowly change the perception of shopping centres as daytime venues to round-the-clock destinations. Key openings included Bla Bla Bar by Nayuki at China Central Mall and Bar Mixato by Starbucks at Kerry Center. Meanwhile, cosmetics stores are accounting for an increased proportion of tenant mixes at malls as the industry continues to see fast growth and landlords place greater trust on these tenants. In the quarter, Dior opened a new cosmetics store at Beijing APM; other brands, including Lancôme and Guerlain, were also preparing to open new stores.

Under the current climate, some reputable landlords with experienced leasing teams reported better-than-expected sales for the first half of the year. The relatively stronger performance recorded at some malls in 1H19 helped to drive a slight pick-up in rent growth in the quarter. Urban rents grew by 0.5% q-o-q, while the Suburban market continued to outperform at 1.1% q-o-q growth; rents at select top performers in the Suburban market even started to match the lower-rent ranges of rates at some Urban malls. “Even as economic concerns continue to weigh on the market, some landlords – with the right offerings – have still managed to tap into the consumption power of customers who remain willing and able to spend to push sales,” said Zoe Yang, Head of Retail for JLL Beijing. “This has helped carry momentum through the cooler climate and, despite the generally lower market expectations for 2019, is giving some landlords a more optimistic outlook for the year-end compared to previous quarters.”

Demand held largely stable in the quarter, even as ongoing downward economic pressure continued to weigh on the market. Third-party logistics companies were the most active in the leasing market, while renewals continued to support demand. Despite economic uncertainty, the majority of tenants remained committed to maintaining their locations, knowing that the tight-vacancy environment remains.

Rents further moderated in the quarter, as the current climate restrained faster growth following previous highs. Rents grew more modestly in the quarter, recording q-o-q growth of 1.7%. The majority of tenants were willing to sign at current market rates, accepting of rent increases from previous leases, well aware that finding suitable available space at more competitive rates would be challenging in the tight market. “At the same time, landlords were less aggressive in raising rents compared to previous quarters, mindful of market conditions,” said Mi Yang, Head of Research for North China at JLL. “As such, we are seeing a more sustainable growth trend set in, and we expect this to continue through year-end.”

The demand for upscale hotels remained stable, and the trading performance growth rate slowed down year-on-year. In 2019, leisure demand continued to grow steadily. According to data from the Beijing Tourism Bureau, as of YTD August 2019, 220 million tourists were received by major tourist attractions in the city, an increase of 5.4% over the same period of last year, while both the demand and budget of business and MICE sector declined slightly. The overall market demand for high-end hotels is relatively stable but the RevPAR growth rate slowed down year-on-year. As of YTD August 2019, the Revenue Per Available Room (RevPAR) of upscale hotels in Beijing has slightly increased by 1.2% y-o-y.

The supply of upscale hotels remained steady, but the new supply growth rate in Beijing is much lower than that of other first-tier cities. As of YTD October 2019, four upscale hotels with 674 rooms opened in Beijing, accounting for 0.9% of existing supply, much lower than 6.5% in Guangzhou and 3.2% in Shanghai. Notable opening in 2019 is BEI Zhaolong Hotel, a Joie de Vivre Hotel, which is the first Joie de Vivre brand hotel of Hyatt Hotel Group in the Asia-Pacific region. In 2020, seven new upscale hotels with around 1,700 rooms are anticipated to enter the market. Influenced by the ongoing land policy restricting new hotel’s entry in the central urban area, future supply is expected to locate in the sub-urban areas, including Tongzhou, Fengtai, and Daxing district.

Continuous improvement of urban infrastructure facilities and active large-scale exhibition activities are expected to drive the trading performance of upscale hotels in Beijing. JLL expects Beijing upscale hotels’ trading performance to achieve steady growth in 2020. In the short to medium term, large-scale exhibitions and urban activities, including the International Automotive Exhibition and Sport Accord, will be held in Beijing in 2020. It is expected to bring more leisure and business tourists to the city, and drive the growth of demand to push up the Average Daily Rate (ADR) and Occupancy. In the long run, Universal Studio will open in 2021 and the Winter Olympic Games will be held in 2022, which will also benefit upscale hotels’ performance. Liang Tao, Vice President of Hotels & Hospitality Group, JLL Greater China said: "Although the performance growth rate of Beijing upscale hotels in 2019 has slowed down compared with the same period last year, with the completion of a major transportation hub and the holding of major international events and urban conference activities, the upscale hotel market will usher in new opportunities of growth.”

Primary luxury apartment prices rose modestly under steady demand, as new luxury apartment supply surged in the quarter. Luxury apartment sales volumes were stable from the previous quarter; prices recorded an increase of 0.9% q-o-q. In the quarter, new luxury apartment supply increased significantly to 1,088 units, doubling that of the previous quarter, as some developers launched projects to ease financial pressures. The large supply is expected to help further facilitate sales in the following quarters. Meanwhile, villa prices were largely stable, decreasing 0.6% q-o-q. No new villa projects entered the market.

New measures for benchmarking the Loan Prime Rate (LPR) for commercial housing mortgage interest rates have not made a significant difference to mortgage rates for first and second-home buyers in Beijing. Effective from October 8, the new LPRs adopt a floating rate rather than a fixed rate to determine mortgage rates, yet previous and current mortgage rates remain around the same levels. “Therefore, given that current mortgage rates in Beijing are in line with before, the move is not expected to have any major short-term impact on the housing market,” said Mi Yang, Head of Research for North China at JLL. “Rather than adding further controls to the housing market, the change in policy should work to gradually promote a more market-driven approach to setting mortgage rates.”