Beijing office rents start to fall under market pressure; ‘First Store’ policy may encourage more retailers to enter city

Beijing, 11 July 2019 — “Due to persistent economic pressures in the market, office rents started to drop, benefiting large companies as landlords sought to secure more reliable and stable tenants under the current climate,” said Julien Zhang, Managing Director for JLL Beijing & North China. Meanwhile, strong market fundamentals in Beijing attracted renewed interest from domestic and foreign investors. In the retail sector, a ‘First Store’ policy may help further incentivise retailers to open new stores and flagships in Beijing; also in the quarter, toy retailers across categories expanded their presence in the market, while domestic new energy vehicle manufacturers sought showroom space at prime locations. Industrial demand held steady as downward economic pressure persisted. In the high-end residential market, demand saw a modest rebound with the arrival of the ‘warm spring’ season.

Grade A Office 

Under the continued economic uncertainty, landlords prioritised larger and more stable tenants. In the current climate, the stability of tenants was deemed more important than rental figures within reason. Demand from high-risk companies was weak as they became less active. At the same time, demand for large space requirements remained relatively strong in the market, especially in tight-vacancy submarkets such as Finance Street and Zhongguancun. The pace of destocking for smaller spaces slowed, however, as small and medium-sized businesses were more impacted by market pressures.

After several delays and much anticipation in the market, tenants started moving into the first CBD Core Area project after it came online. China Life Financial Centre was mainly serving key anchor tenants. As the project was only partially open in the quarter, it drove up the CBD vacancy rate by 3.8 percentage points (ppts) q-o-q to 8.9% in 2Q19. The higher CBD vacancy rate further contributed to a modest rise in the overall vacancy rate as market pressures drove an increase of 1.1 ppts q-o-q to 6.9% in the quarter.

In the quarter, market rents started to drop under the persistent economic pressure. Overall rents fell slightly as growth turned negative, recording -1.2% q-o-q growth in the quarter. Landlords made concessions on rents for new leases and renewals, preferring to secure more reliable tenants given rising pressures from economic uncertainties in the market. “Given all of the economic uncertainties, market pressures are unlikely to subside over the short term,” said Eric Hirsch, Head of Office Leasing for JLL in Beijing. “As landlords continue to make concessions due to current conditions, greater flexibility on rental strategies is likely to lead to further downward pressure on rents.”

Investments

After a busy start to 2019, the second quarter of the year was a comparatively quieter period, but investors were nonetheless occupied with negotiations – expected to lead to a higher sales volume by end-2019. Among the more notable transactions in the quarter was the sale of Anzhen Hualian Department Store, purchased by Sino-Ocean Capital and BHG Long Hills Capital, which jointly acquired the retail property. Each party retained a 50%-equity stake and reportedly intend to convert the upper floors of the project to office space. 

Under the current climate, Beijing is attracting renewed interest from domestic and foreign investors due to strong market fundamentals. Beijing remains among the top choices for domestic investors, while foreign investors are particularly drawn to the city, confident about the mid to long-term view on the market despite short-term economic challenges. “Given the persistent downward economic pressure, a number of investors are increasingly turning to Beijing where market indicators remain healthy and are providing reassurances,” said Michael Wang, Head of Capital Markets for JLL in Beijing. “This added confidence in Beijing bodes well for the market going forward.”

Prime Retail

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

Toy vendors expanded across categories as domestic new energy vehicle manufacturers actively sought showroom space. Toy vendors from the children’s, lifestyle, and entertainment sectors opened new stores, drawing consumers of all ages and supporting foot traffic at malls. Key openings included US toy store FAO Schwarz at China World Mall and LLJ Station, a domestic toy-focused arcade, which opened stores at Huaxi Live Hi-Up and Chaoyang Joy City. Meanwhile, domestic new energy vehicle manufacturers searched for prime locations, as the high-visibility strategy in the market has proven successful for Tesla. Lixiang opened its first store at Huaxi Live Hi-Up, and Xiaopeng opened at Hopson Mall.

China World Mall opened a new luxury section with flagship stores, while two new mall projects opened in the suburbs. China World Mall Phase 3B (Section 2) officially opened nearly fully committed. An extension of the huge complex, the new section provides features luxury brands, including two-floor flagships from Versace and Saint Laurent. New openings from Tiffany & Co. and Cartier are among those relocating from within the project. In the suburbs, community mall Majiapu Pano City opened with a high commitment rate, with more than half of its space dedicated to children’s tenants. Fangshan Capital Outlets (Phase 2) also opened nearly fully committed, introducing more experience-oriented tenants, including a CGV movie theatre and 7Fresh new retail supermarket to complement offerings at its Phase 1 project.

A ‘First Store’ policy for Beijing may lead more domestic and foreign retailers to enter the city with new stores and flagships. As landlords and retailers work together, the policy includes an expedited approvals process for new entrants and flagship set-ups as well as subsidies for qualified tenants. “Although Beijing is already highly popular as an entry point to the region or wider China market, this new policy could make the Chinese capital an even more enticing option for retail newcomers to the city,” said Zoe Yang, Head of Retail Leasing for Tenant Representation at JLL in Beijing. “The more new brands to market, the merrier. With more retailers present, consumers will have greater choice in the market.”

Industrial

Under rising economic pressure, demand held steady in the quarter. As economic pressure in the market increased as a result of rising trade war tensions, demand managed to hold stable in the quarter. E-commerce firms, third-party logistics companies, and manufactures remain key sources of demand, but we also started to see notable activity from tenants in preferred industries such as biopharmaceuticals.

One small project opened fully leased in the quarter, but had little impact on the market. In south-western Beijing, the first phase of a new project in Fangshan entered the market fully committed, adding approximately 33,000 sqm of new supply to the market.  

Rents recorded 3.3% q-o-q growth, moderating from recent quarters, when robust rental growth included record highs. Growth in the quarter was largely driven by rental increases at projects in prime locations such as Beijing Airport Logistics Parks and Tongzhou Logistics Park. Despite a moderating rental trend amid downward economic pressure, we may still see rents achieve double-digit growth by end-2019, considering the relatively strong growth already achieved in 1H19.

High-end Residential

Demand sees a moderate rebound as the ‘warm spring’ season arrives. Boosted by a slight decline in the first-home mortgage rate and tax deductions for secondary purchases, overall demand picked up with the ‘warm spring’ season after the traditional-low winter sales period, driving up the transaction volume in the mass market. In the high-end market, the primary market continued to destock at a modest pace after recording a supply peak in late 2018, with a total of around 300 luxury apartments and around 100 villa units sold in the quarter. The secondary market remained active as more buyers focused on existing projects in core areas.

In the quarter, one notable land plot was transacted – without a price cap. Located in the Sunhe area of Chaoyang District, an established villa community, the transaction recorded an accommodation value of RMB 69,542 per sqm. Due to its high price, the land is expected to be developed for the high-end residential market in the future. Meanwhile, high-end residential supply remained at a relatively high level, given the recent supply peak and as developers continued to release projects in the market. New luxury apartment supply recorded a 6.6% q-o-q increase. High-end villa supply saw a significant q-o-q increase, which is expected to impact sales prices in the following quarters. 

Despite the downward economic pressure, high-end primary prices held relatively steady. Primary luxury apartment prices were largely flat (recording only a marginal decrease of -0.3% q-o-q), as a few recently launched projects slightly lowered prices to achieve higher sales rates. Meanwhile, stable demand supported high-end secondary prices, which rose slightly by 0.7% q-o-q. “Under the recently reaffirmed ‘One City, One Policy’ mandate, local authorities are expected to become slightly more flexible on policy to support steady prices in the near term in a bid to maintain demand as the current economic environment weighs on the market,” said Mi Yang, Acting Head of Research for Beijing at JLL. “When we consider current conditions, increased flexibility on policy may help better manage the market to help smooth the path ahead.”