Beijing Office rents continue to fall; investment activity holds strong

Beijing, 14 July 2020 – “As authorities focused on getting the economy back on track, market activity picked up across sectors, despite another round of disruption late in the quarter from the resurgence of Covid-19 cases in Beijing,” said Julien Zhang, Managing Director for JLL North China. In the office market, rents continued to trend downward as landlords prioritised maintaining occupancy rates. Meanwhile, investors continued to be active in closing deals, undeterred by Covid-19 in Beijing. However, the latest outbreak stifled retail leasing activity, putting increased pressure on the market. In the industrial market, soft leasing demand led to a second consecutive quarter of flat rent growth. In the high-end residential market, sales volumes rebounded due to pent-up demand, and favourable market conditions further encouraged cautious buyers to return to the market.
 

Grade A Office

Office	2Q20
Vacancy	14.0%
New Supply	310,000 sqm
Rental Growth	-3.0% q-o-q

Leasing activity picked up slightly from the previous quarter, as the resumption of work brought stability back to the market. However, the extent of the rebound was limited as demand continued to be subdued, and as the virus came back into focus with the resurgence of Covid-19 cases in Beijing late in the quarter. Still, even despite the tough market conditions, domestic firms continued to drive the market, comprising 71% of leasing demand in the quarter. Foreign companies were more apprehensive due to stricter budgeting and cost controls.

Two new completions pushed up the overall vacancy rate by 2.7 percentage points to 14.0% in the quarter. Two new buildings entered the market, adding 310,000 sqm of new supply to the market. One completion in the CBD Core Area is expected to further intensify competition between landlords of existing buildings in the CBD and surrounding areas.

Overall rents continued the downward trend in the quarter, registering -3.0% q-o-q growth and -6.8% y-o-y growth. Following the virus, including the latest resurgence of Covid-19 cases in Beijing, landlords are responding to the slowdown in the market by offering rent concessions and easing requirements on tenant qualifications. “During this challenging time, landlords are becoming increasingly flexible on rent terms as they choose to prioritise occupancy rates over rent growth,” said Michael Zhang, Director of Office Leasing for JLL in Beijing. “This shift in strategy is expected to present more attractive options in the market, giving well-placed tenants greater opportunities to fulfil upgrade demand.”
 

Investments

Investors continued to be active in the quarter, bringing the investment total for the first half of the year to more than RMB 27 billion. In spite of disruptions from Covid-19, investment momentum has held steady in the first six months of the year. Although recording a lower level than a year ago, the 1H20 investment volume was still relatively high and included a few high-profile deals. Among them was Baring Private Equity Asia’s foray into the Beijing market in April, when the investment firm purchased Arca Building in Zhongguancun Software Park from Singaporean Mapletree Group for RMB 750 million. Meanwhile, Zhonghong Building – an unfinished commercial tower in Chaoyang District – was sold through an online auction to China Orient Asset for RMB 3.3 billion.

While the recent resurgence of Covid-19 cases in Beijing will further weigh on the market, we can also expect this difficult period to give way to further opportunities in the market. As fallout from the virus results in delays, buyers may find new opportunities as sellers with a preference in completing transactions sooner rather than later consider more competitive prices than previously. Despite the uncertainty in the market, there remains sufficient interest in the market from investors, who continue to hold confidence in the long-term outlook, as underlined by the strong 1H20 sales volume. “We see that investors continue to be highly interested in core areas, particularly when it comes assets with real upgrade and growth potential; other deals transacted in the quarter included the emerging and suburban areas, demonstrating investors’ growing confidence in decentralised areas,” said Michael Wang, Head of Capital Markets for North China at JLL in Beijing. “While the fallout from Covid-19 is presenting a challenging time in the market, forward-looking investors continue to focus on the longer-term outlook as they pursue opportunities in Beijing.”
 

Prime Retail

Office	2Q20
Vacancy	8.6%
New Supply*	0 sqm
Rental Growth	-1.9% q-o-q

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

Leasing activity and foot traffic at malls had started to rebound after a few tough months at the start of the year, but this progress was disrupted late in the quarter due to the resurgence of Covid-19 cases in Beijing. F&B tenants were among the hardest hit, while fast fashion continued to shrink their physical presence in the market as retailers closed underperforming stores. Fresh food supermarkets, however, continued to benefit from increased demand during this time, with Hema Supermarket actively expanding in the quarter.

The impact of Covid-19 began to show in the quarter, with vacancies rising and rents sliding under the increased market pressure. The situation saw landlords resorting to rent concessions, causing Urban rents to decline 1.9% q-o-q and Suburban rents to fall 3.0% q-o-q. “We saw the weakening climate finally reach a tipping point,” said Ji Ming, Research Manager for JLL in Beijing. “Even landlords who were previously reluctant to lower rents started to do so, providing much greater flexibility on terms than before. Rent concessions are likely to continue through year-end, especially as a number of landlords focus on filling vacancies as soon as possible to keep projects full.”
 

Industrial

Industrial	2Q20
Vacancy	4.9%
New Supply	0 sqm
Rental Growth	0.1% q-o-q

Demand was noticeably soft as the fallout from the virus continued to exert pressure on the market. Market attention was quickly reverted to health safety late in the quarter, as the resurgence of Covid-19 cases in Beijing called into question the handling of supplies at a major wholesale market in the city. Limited deals were signed in the quarter, most of which were closed prior to the latest outbreak, when market activity had started to pick-up after stalling in the first few months of the year.

Although upward pressure on vacancy saw the overall rate climb to a five-year high of 4.9%, the figure still held at a relatively low level. The increase was driven in large by tenants, impacted by the virus, returning space. The soft demand made it difficult for most landlords to raise rents, resulting in flat rent growth for a second straight quarter. “Towards the end of the quarter, in particular, landlords with increasing vacancies were more willing to consider discounts, but others, whose projects remained stable, still preferred to hold off for the time being,” said Mi Yang, Head of Research for North China at JLL. “However, as the current situation further drags on the market, we are likely to see a greater number of landlords resorting to more flexible terms in the coming months.”

Hotels

Hotel*	YTD May 2020
Occupancy	20.5%
ADR*	983.1
RevPAR	201.4

^{Note: Hotels refers to the upscale hotel market. *ADR inclusive of service charge.}

Affected by strict travel restrictions and control measures due to COVID-19, all types of hotel occupancy demands have declined in Beijing. The performance of high-end hotels has dropped significantly year-on-year (y-o-y), resulting in a low revenue per available room (RevPAR).

As of May 2020, the RevPAR of Beijing’s high-end hotels decreased by 74.6%, and the demand dropped by 71.7%. The y-o-y decrease in demand in Beijing is about 5-10 percentage points higher, as compared to other Tier-1 cities. Over the same period, Beijing’s passenger traffic volume (including highway, railway and aviation) decreased by 60%, and the tourists’ arrival to major tourism destinations decreased by 57.7%.
Affected by restrictions on holding large-scale gatherings, the demand for MICE (meetings, incentives, conferences and exhibitions) is also facing a downturn. According to official websites of Beijing’s major MICE venues, all conferences and exhibitions, originally scheduled to be held by June, have been either postponed or cancelled, including some of the notable events such as AutoChina and Sport Accord 2020. The schedule of some events has been shifted to the second half of 2020, –and the venue for many events has been moved to Tier-1 and Tier-2 cities.

Different types and classes of accommodation showed different anti-risk capabilities and performance changes during the pandemic. Serviced apartments have emerged more resistant to market risks than hotels. As of May 2020, the decline in RevPAR of serviced apartments was less than half of all grades of hotels. Besides, the performance stability and risk resistance of mid-range hotel was higher as compared to high-end hotels. The RevPAR of mid-range hotels decreased by 6.6%, which was lower than that of high-range hotels. Besides, all hotel product classes, from high to low, are showing the characteristics of decreasing price stability and increasing occupancy rate stability. The overall average daily rate (ADR) for luxury hotels is relatively firm, while the mid-range hotels are showing a declining trend in ADR, thus providing value for money for keeping the occupancy.

New cases of COVID-19 in June and normalization of the pandemic control measures may bring new challenges in the recovery of Beijing’s luxury hotels. In addition, due to the recurrence of the pandemic and emergence of new cases in some areas of Beijing since June, the control measures and travel restrictions have been strengthened again. This may lead to another drop in business travel demand. Limited recovery of demand for each segment may further extend the downturn period.

“The complete recovery cycle of Beijing’s luxury hotel market may exceed 12 months, and the negative y-o-y growth rate of hotel demand may continue into early 2021,” said Tony Liang, Vice President of JLL Hotels and Hospitality in Greater China.

High-end Residential

Office	2Q20
Luxury Apartments
New Supply	217 units
Capital Values Growth	-1.8% q-o-q
Rental Growth	-0.4% q-o-q
High-end Villas
New Supply	0 units
Capital Values Growth	-1.5% q-o-q
Rental Growth	-0.2% q-o-q

As buyer activity returned to normal, muted demand from the previous quarter bounced back, mainly driven by pent-up demand in the market. Favourable conditions for buyers – including continually falling interest rates and housing discounts – further encouraged those who were cautious to come off from the side-lines. As such, the sales volumes for luxury apartments and villas rose 99.4% q-o-q and 60.0% q-o-q, with 323 units and 32 units sold, respectively.

The recovery in demand convinced developers to release new projects. Four luxury projects added 217 units to the market, more than quadrupling the supply from the previous quarter. No new supply entered the high-end villa market for a fourth consecutive quarter, but the land market continued to record strong sales in the quarter: a total of 10 land plots were sold without price caps, including a few plots in south Beijing, each acquired by Hopson for an average accommodation price of more than RMB 70,000 per sqm. “While authorities as recently as May reaffirmed stable prices as the housing policy direction for 2020, we are expecting to see average prices rising over the forecast horizon,” said Mi Yang. “Considering that several plots without price caps were sold in the first half of the year, we are likely to see an increase in high-end residential projects pushing up prices in the years to come.”