Finance and IT office relocations drive demand recovery; 2Q21 marks largest single deal for Beijing investment market in recent years

Beijing, 8 July 2021 – “Office and retail leasing demand recovery further progressed as the first half of the year drew to a close, encouraging a number of market stakeholders to hold a more confident view,” said Julien Zhang, Managing Director for JLL North China. “More than a year after the height of Covid-19 in China, some top landlords even considered raising expectations, targeting growth in the latter half of the year.”

In the office market, domestic companies continued to be active as leasing demand further rebounded, helping to push down the overall vacancy rate. Investors remained active and closed the largest single deal for the Beijing investment market in recent years. Meanwhile, luxury retailers actively opened new stores at high-profile malls as multi-brand stores expanded quickly, introducing multiple locations across the city. Logistics demand remained stable, benefiting from pandemic-related and seasonal demand. Supported by a large amount of supply, luxury apartment sales soared, but price growth held largely flat. 

Market recovery progressed with an increasing number of relocations driving another uptick in leasing demand in the quarter. Relocations accounted for the majority of demand with sizable transactions from domestic companies recorded. Tenants from the finance sector presented relatively strong demand, especially some securities companies. The IT industry also remained a main source of leasing demand, particularly as leading TMT companies expanded and relocated across the city. This activity from domestic firms helped to further alleviate market pressure to some extent.

As leasing demand continued to recover, recent completions destocked at a faster rate compared to the previous quarter. Further relief from supply pressure was seen to a degree, as no new supply entered the market in the quarter. As such, the overall vacancy rate modestly declined to 14.2%. Landlords saw the sliding vacancy rate to be a positive market signal.

The improving market conditions saw rents decline at a noticeably slower pace in the quarter. Overall rents recorded less of a drop in the quarter, recording just -1.0% q-o-q growth and -6.4% y-o-y growth. Due to the growing momentum in demand recovery, some landlords of stable projects with greater bargaining power were even considering raising rents in the following quarter. “Landlords are starting to feel more confident about the future, especially as the market observes real indications of improved demand. In fact, strong projects in better-performing submarkets are predicted to see rents flatten in the second half of the year, while the best performers can even expect to gain from positive rent growth by year-end,” said Michael Zhang, Director of Office Leasing for JLL Beijing. “Moreover, these buildings are expected to lead the overall trend in recovery as rents gradually rebound across the city over the horizon.”

Investments

The en-bloc transaction volume registered more than RMB 28 billion (excluding related-party transactions) for the first half of the year. The 1H21 figure was largely flat y-o-y and included a number of high-profile deals. Among them, South Korean SK Group, which purchased SK Tower in 2008, sold the asset to Hexie Health Insurance in the quarter for RMB 9.06 billion. The sale marked the largest single deal for the Beijing investment market in recent years. Meanwhile, Ping An Life Insurance purchased partial stakes in a Raffles City portfolio from CapitaLand for RMB 33 billion.

Despite disruptions from the pandemic, Beijing’s investment market remained active in the first half of the year. Foreign investors accounted for as much as 37% of the transaction volume. Outside of the mainstream office and retail sectors, data centers remained popular in the quarter. IDC operators and institutional investors continued to pay close attention to the sector, and GDS purchased another data center property in Beijing. “Domestic and foreign investors are actively searching for assets in Beijing and are open to various opportunities,” said Michael Wang, Senior Director of Capital Markets for JLL North China. “As we get into the second half of the year, we expect to see more ongoing negotiations settled, leading a greater number of deals to contribute to the year-end transaction volume – a figure that still has room to grow.”

Luxury brands quickly grew their market presence, encouraged by a robust rebound in sales. Top-tier brands targeted high-profile locations in the quarter, with Bottega Veneta and Alexander McQueen preparing to open new stores at Taikoo Li North. Luxury jewellers were also active, with Chaumet and Harry Winston among those committed to opening new stores. Meanwhile, multi-brand stores also showed strong performance, becoming one of the fastest-growing retail segments in the market. Landlords showed great interest in adding multi-brand stores, as they can quickly fill vacant space while expanding the reach of existing tenant mixes. Among them, LLAABB MIX expanded fast, opening three new locations across the city.

Following steady recovery in leasing demand, both Urban and Core rents declined at a slower pace. Urban rents recorded -1.1% q-o-q growth, while Core rents held stable at -0.3% in the quarter. Some landlords at top-performing Core projects even started to increase rent levels in the quarter. Meanwhile, the Suburban market also witnessed a pickup in demand, which helped the overall vacancy level slide to 7.8%. Although vacancy pressure remained in the suburbs, landlords offered fewer rental concessions after seeing signs of demand recovery. Suburban rents registered -2.1% q-o-q growth.

Meanwhile, the much-anticipated Lize Paradise Walk was the highlight of three new completions in the quarter, serving as the first shopping mall for Lize Financial Business District (LFBD). Boasting more than 220 brands, the retail property introduced several new F&B brands to Fengtai District, such as Taco Bell and Manner Coffee. “The opening of this mall is significant for the market because it expands the prime urban retail landscape to include emerging Lize,” said Ji Ming, Research Director for JLL Beijing. “With quality amenities previously lacking in the area, the new mall is expected to play a key role in supporting growth of the area, especially as the recently established district continues to develop and attract larger crowds of white-collar workers.”

Pandemic-related and seasonal demand supported steady leasing activity in the quarter. Increased cold-chain storage demand from biomedicine and fresh supermarket industries was observed as ongoing vaccine campaigns continue and residents have grown accustomed to ordering daily goods online. E-commerce tenants also generated seasonal demand in the quarter, helping to further drive overall market activity. A number of retailers signed short-term leases to meet additional demand anticipated from the 6.18 online shopping festival.

Rents recovered modestly faster than previous expectations in the quarter. Overall market rents grew at a slightly quicker rate, rising 1.3% q-o-q. Many landlords used pocket vacancies to raise rents, especially for short-term leases. As demand recovery momentum continues and the market remains stable, rent growth is expected to continue rebounding at a slightly faster rate compared to previous expectations. “Mainly due to disruptions and recovery from Covid-19, many landlords were reluctant to adjust rents upward over the last year or so,” said Mi Yang, Head of Research for JLL North China. “However, with strong feelings in the market that things have largely returned to normal, we expect to see an increased number of landlords actively chasing higher rents by year-end.” 

Anti-epidemic control policies have been eased and large-scale exhibition activities have gradually resumed, and Beijing’s upscale hotel market gradually rebounded in the first half of 2021. The outbreak of the epidemic at the end of last year brought the occupancy rate back to 20%-25% at the beginning of this year. Since March 16th, Beijing has eased the epidemic prevention restrictions, including the resumption of various cultural and tourist activities, the rapid return of business and leisure demand, and the pick-up of upscale hotel performance; large-scale conferences and exhibition activities have gradually returned to normal since April. In the first half of 2021, Beijing's large-scale conference and exhibition activities have gradually returned to normal. A total of more than 70 large-scale exhibitions have been held, returning to the level of nearly 70% of the same period in 2019. Driven by the recovery of the exhibitions, the demand for upscale hotel conferences and exhibitions has also recovered rapidly, further boosting the overall performance. As of May 2021, Beijing’s upscale hotel occupancy rate reached 47.1%, recovered to 65.5% of the same period in 2019; the ADR was CNY 936.3, equivalent to 84.5% of the same period in 2019; RevPAR reached CNY 441.0, restored to 55.3% of the same period in 2019.

The supply of upscale hotels in Beijing remained stable, and the growth rate of supply was lower than that of other first-tier cities. In April 2021, Commune by the Great Wall was renovated and reopened with the Unbound Collection brand, in 2021, Beijing is expected to open another two upscale hotels, bringing 893 guestrooms new supply to the market, accounting for 1.0% of the existing supply in Beijing, which is lower than 4.7% in Shenzhen, 1.7% in Guangzhou and 1.3% in Shanghai. It is worth mentioning that the new supply of Beijing Marriott Hotel Yanqing is located near the Winter Olympics area and will guarantee room supply for one of the three major venues of the 2022 Beijing Winter Olympics.

The opening of Universal Studios and the hosting of the Winter Olympics will benefit Beijing’s upscale hotel performance growth. Beijing Universal Studios is about to enter the trial operation stage. According to the official estimation, the first phase will receive 12-15 million visitors per year. After the completion of the project, the annual number of tourists will exceed 30 million, which will greatly benefit the growth of demand for leisure tourism in Beijing, and will also play a certain role in profiting the growth of upscale hotels. In the medium and long term, the Beijing Winter Olympics will be held in February 2022. It is expected to bring increases in both leisure and group visitors to the city, pushing up the ADR and occupancy rate. Tony Liang, Vice President of JLL Hotel & Hospitality Group Greater China, said: "Beijing's upscale hotel performance gradually returned to stability in the first half of the year. In the medium and long term, thanks to stable supply and predictable positive factors in the medium and long term, the overall performance of Beijing's upscale hotels is expected to maintain a good growth trend."

Sales volumes for the high-end residential market continued to swell, supported by the large amount of new supply. A total of 839 luxury apartment units were sold in the quarter, up 79% q-o-q. Developers accelerated new launches in the high-end market in light of the positive buying sentiment. However, even as buying momentum gained further traction, high-end prices held largely flat as many developers continued to offer promotions to push sales. Luxury apartment primary prices rose only nominally by 0.1% q-o-q on a like-for-like basis. Meanwhile, secondary prices showed just slight growth at 0.4% q-o-q, putting an end to the continuous decline that began in 4Q20.

The high-end leasing market recorded rental growth for the first time in two years. High-end leasing rents grew 1.0% q-o-q in the quarter, after having not recorded positive growth since 2Q19. Demand recovery in the overall leasing market also helped to boost demand in the high-end market. Economic recovery in China has also pulled domestic managerial employees back to high-end rentals. “As overall market conditions continue to improve, many companies are getting back on track and revisiting growth plans that were previously put on hold,” said Mi Yang. “With more firms starting to take proactive steps to re-grow and expand, we expect to see an increasing number of their employees returning to the high-end leasing market, and this should help to sustain a rebound in demand.”