Strong IT growth exception to slower demand momentum in office market; foreign investors expected to be increasingly active

Beijing, 10 Jan 2019 – “Amid economic uncertainty, slower growth momentum was recorded in the office market in the quarter, as tenants paused on relocation upgrades and landlords set lower expectations for 2019,” said Julien Zhang, Managing Director for JLL North China. Meanwhile, foreign investors contributed to a significant number of deals in 2018, as investment activity from a growing number of domestic developers was restrained by the tight-monetary environment. In the retail sector, consumers are expected to prioritise spending on lifestyle-oriented offerings, in a bid to maintain their quality of life as the slowing economy is set to weigh on general consumption. Industrial rental growth reached a new quarterly high, driven by tight vacancy and the tight-policy environment. In the high-end residential market, villa prices soared as new policy banning the construction of new stand-alone villas saw buyers rush to the market.

Grade A Office

Growth momentum slows, but IT demand remains strong. Demand continued to be primarily from IT firms, which was an exception to the general market trend in the quarter, as TMT companies continued to expand with policy support. Outside of the IT sector, however, growth momentum slowed in the quarter under increased economic uncertainty. As a result, some upgrade and expansion demand was put on hold towards the end of the year. As a result, renewal demand remained strong as many tenants preferred to stay put. Due to negative economic news, landlords exercised caution even as vacancy remained tight, diligently checking the reputation and reliability of tenants, prioritising stability over high rents.

Three new projects opened, but had a limited impact on the market. Three projects came online in the quarter. One project is in Wangjing, two other projects opened in emerging Lize, which has yet to develop and attract widespread attention in the market. As such, the new projects did not weigh on the overall market.

Amid economic concerns, domestic firms are expected to lead more strategic growth, if slower, throughout 2019. This would follow rapid growth in 2018, which was the first time in recent years for so many large commitments to be undertaken by both domestic and foreign companies in the market. Notable transactions in 2018 included a domestic TMT giant significantly enlarging its footprint in the market, while a German automotive company leased up an entire office building. The increasing tightness of the market also saw tenants lean toward renewals, a trend that is set to further carry into 2019. “After a year of busy leasing activity in 2018, we are entering 2019 with limited large blocks of space for growth,” said Eric Hirsch, Head of Office Leasing for Beijing at JLL. “We are already seeing this push companies – and particularly growing domestic corporates – to pursue more advanced and strategic planning, and we can expect this trend to continue going forward.”

Investments

In the quarter, Hong Kong-based Link REIT purchased Jingtong Roosevelt Plaza (67,546 sqm) in Tongzhou from global asset manager ARA for RMB 2.56 billion, contributing to more than 20 major deals closed in Beijing by end-2018. Surrounded by residential projects, the mall targeting nearby families was 96% occupied upon purchase. Planned as the sub-centre of Beijing, Tongzhou is a focus area for both domestic and foreign investors looking at opportunities in emerging areas. Several deals were also under negotiation at end-2018, as more domestic owners under increasing financial pressure from the tight-monetary environment considered selling assets to increase capital flows.

Higher sales transaction volume predicted for 2019; foreign investors to pursue more opportunities. With several deals ongoing at end-2018, 2019 is expected to see a higher transaction volume as increased investment activity is expected to carry through to the end of the year. As their financial pressure intensifies, domestic owners will be under growing pressure to complete timely deals. “Given the situation, we are likely to see more foreign investors participating in the process as opportunities arise,” said Michael Wang, Head of Capital Markets for Beijing at JLL. “This increased activity in the market is expected to result in a greater number of deals transacted by foreign investors in 2019.”

Prime Retail

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

Retailers were keen to promote technology-driven services in Beijing. Catering to a growing number of tech-savvy consumers in the city, retailers introduced tech-driven services to enhance the customer experience. Carrefour presented “Scan and Go” shopping in Beijing, while KFC opened its first locations with facial recognition payment functions, supported by Alipay. Domestic retailers across submarkets promoted augmented reality-mirrors, hoping to excite more shoppers into trying new products.

Most new projects opened with high commitment rates in the quarter. Following several delays, M.Cube opened fully committed in Chongwenmen and marked Guangzhou-based property developer KWG Property’s foray into the Beijing market. The small mall (40,000 sqm) targets young and trendy customers, with the large majority of its tenants entering the traditional retail precinct for the first time. Three community malls also opened in the suburbs. Fully occupied upon opening, BCTID Vanke Mall in Changping has a tech-oriented focus, while Tahoe Lane, featuring an open-air concept, opened in Daxing. CapitaMall Tiangongyuan entered the market fully committed with a strong emphasis on art, entertainment, and lifestyle offerings.

Amid economic uncertainty, consumers are likely to prioritize spending on retail categories that enable them to maintain their current quality of life. As a result, we are likely to see demand remain more stable for F&B, children’s, entertainment, and lifestyle categories compared to premium fashion and affordable luxury segments. “Under these market conditions, we can expect retailers to be more cautious on expansion, while landlords will be more inclined to become flexible on rents,” said Queenie Qu, Head of Retail Leasing for Landlord Representation in Beijing at JLL. “As expectations are revised, we can expect to see slower growth in the market for 2019.”

Industrial

Third-party logistics companies continued to serve as a major source of demand in the quarter, but only a limited number of deals from these tenants were recorded due to a lack of available space in the market. Lease renewals from existing tenants further supported demand. While the market was more visibly active than recent quarters, net absorption remained at a low level in 4Q18, contributing little to the full-year figure, which decreased 52.7% y-o-y. Due to the persistently tight market and strict-policy environment, take-up was particularly limited in 2018.

Market conditions benefited landlords greatly as overall rents grew a remarkable 8.2% q-o-q, surpassing the quarterly growth record-high figure from the previous quarter by 2.2 percentage points. The record growth was further significant as it marked a new high since we began tracking the market in 2004. Landlords in prime locations leveraged their advantageous positions in the market given the limited available supply and tight-policy environment. “As available space for lease continues to be scarce and the tight-policy environment remains, the bargaining power of landlords is expected to remain strong through year-end,” said Michael Hart, Head of Industrial Leasing for North China at JLL. “But following huge rental gains in 2H18, the pace of growth in 2019 is expected to slow from the record levels registered in 2018.”

High-end Residential

In the quarter, luxury apartment supply increased a remarkable 250.5% q-o-q, as new projects flooded the market. Under increasing financial pressure from the tight-monetary environment, more domestic developers launched projects on the market. Luxury apartment primary prices continued to register negative price growth (-0.8% q-o-q). In the high-end villa market, following a ban on the construction of new stand-alone villas in the quarter, the high-end villa sales volume increased by a significant 145.3% q-o-q. Fearing it would be harder to make purchases going forward, buyers rushed to the market, pushing up prices 2.9 ppts from the previous quarter to record 0.6% q-o-q growth in 4Q18.

As financial pressure remains or intensifies for some developers, we expect to see more projects promptly released in the market over the coming months. Primary sales prices for luxury apartments are expected to continue to dip as more developers compete to sell units at a faster rate. “We expect developers to continue to sell luxury apartments at more competitive prices as many look to increase cash flows quickly, and this is likely to lead price growth to continue declining into 2019,” said Mi Yang, Acting Head of Research for Beijing at JLL. “But unlike the trend in the luxury apartment market, high-end villa sales prices are forecast to climb higher as the policy ban on stand-alone villas continues to limit future supply and increase demand for high-end villas.”

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