IT leasing demand surpassed that of finance firms for the first time; stricter housing loans policy to restrain ‘rigid demand’

According to JLL Beijing's Third Quarter Property Market Review

October 15, 2018

"CBD Core Area project delays helped to keep the overall office vacancy rate low, pushing up office rents citywide." said Julien Zhang, Managing Director for JLL North China. In the retail sector, fitness and related retailers proved popular as consumers increasingly seek healthy and active lifestyles. The tightening monetary environment may lead developers to put more assets up for sale on the market in the coming months. Industrial leasing activity was restrained by a lack of available space, driving rental growth to soar to a record high in the quarter. Luxury apartment prices continued to record negative growth under the tight-policy environment. Two new upscale hotelsopened, expanding supply to the suburban areas.

Grade A Office

Office

3Q18

Vacancy

3.2%

New Supply

45,800 sqm

Rental Growth

1.5% q-o-q

IT companies were very active and served as the dominant source of leasing demand in the quarter. Although finance firms remained a major source of demand in the quarter, IT demand surpassed that of finance firms; an IT giant quickly absorbing space returned by a start-up forced to reconsider its business plan. Some landlords also leveraged interest from funds with high rental affordability to increase rents.

One small project came online, adding some 45,800 sqm of new supply to the market. Near the centre of Beijing, COFCO Landmark opened in Ditan, attracting demand from nearby office submarkets, as tenants were attracted to the central location for relocation, expansion, or upgrade purposes. Leasing was off to a strong start, with an environmental firm taking up a sizeable space at the project.

For a second consecutive quarter, rents climbed across all submarkets in the tight market. Third Embassy, Zhongguancun, and Wangjing led the rise, as IT and finance tenants chased available space in these areas. "The lack of available office space throughout the city helped landlords continue to benefit from rental increases in the quarter," said Eric Hirsch, Head of Office Leasing for JLL in Beijing. "Due to the tight market, landlords were more selective about tenants, pursuing the highest-quality tenants. Also, as the CBD Core Area projects experience further delays, we expect landlords to continue enjoying strong bargaining power for the remainder of the year, particularly as quality space in mature areas continues to be limited."

Capital Markets

In the quarter, several deals were said to be under negotiation. "The tighter monetary environment could lead more projects to surface on the market," said Michael Wang, Head of Capital Markets for North China at JLL. "The situation is likely to see the gap between buyers and sellers' pricing expectations narrow, and this is expected to lead more office assets to switch hands over the next several months."

Investor interest in the office sector is expected to remain the strongest through end-2018 and into 2019. Due to high rents and the low-vacancy environment, the office market remained highly popular with investors in the quarter. As a result, domestic and foreign investors continued to comb the market for opportunities in the office market. Also in the quarter, experienced investors from other sectors such as retail were still interested in acquiring suitable assets.

Prime Retail

Retail

3Q18

Vacancy

6.1%

New Supply*

136,000 sqm

Rental Growth

0.4% q-o-q

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

Fitness demand remained strong as home accessories continued to expand in the quarter. Hong Kong-based Pure Yoga opened its first location in Beijing at WF Central in Wangfujing. Fitness studio openings such as Super Monkey and Lefit continued to differentiate from traditionally popular gyms. Online fitness retailers also focused on raising visibility in the market, with fitness app Keep committing to space at a number of prime malls. In the lifestyle category, home accessories retailers such as Nome and M&G Shop were active in the quarter, opening new locations around the city. "Consumers are increasingly seeking balanced lifestyles, and this is placing a greater emphasis on their efforts to be healthy and live more comfortably," said Zoe Yang, Head of Retail Tenant Representation for JLL in Beijing. "This has allowed fitness retailers and lifestyle segments to flourish, especially as a greater number of people benefit from higher disposable incomes for spending. While gyms and fitness studios tap into growing demand for more active lifestyles, home accessories retailers have done well to sell products that provide a more pleasant or relaxing home environment."

One new, large mall opened in the quarter, introducing 120 new brands to suburban Fangshan. Paradise Walk Fangshan opened fully committed and occupied on opening day, marking Longfor's third Paradise Walk project in Beijing. Targeting the mid-market in southwestern Beijing, the project anchors new retail supermarket Super Species and includes other new-to-market brands for Fangshan such as Bouthentique and Nike's Kicks Lounge. The mall is expected to benefit from its wide tenant mix, which offers nearby residents several F&B choices across segments, including fast-food chains, casual dining as well as plenty of coffee, tea, and dessert options to feed into increasing demand for F&B leisure concepts.

Industrial

Industrial

3Q18

Vacancy

0.5%

New Supply

0 sqm

Rental Growth

6.0% q-o-q


The extremely tight-vacancy market led to another quiet leasing quarter. Demand continued to be strong, but since most transactions were renewals negotiated directly with landlords, we observed limited deals in the quarter. Once again, the number of new leases or opportunities for expansion in the quarter remained low, as almost all quality warehouse space across Beijing continued to be fully occupied. The scarcity of available space coupled with the lack of new supply in the market led to zero net absorption being recorded in the quarter.

The extremely limited availability of space in the market drove rents to register 6.0% q-o-q growth in the quarter, a record high since JLL began tracking the market in 2004. The rise led net effective rents to soar to 1.29 RMB per sqm per day. The tight market led the overall vacancy rate to stay at its five-year low (0.5%), after a sixth consecutive quarter without new supply. "Rents have been soaring in the extremely tight market in recent quarters, and without signs of this growth momentum slowing anytime soon, we can expect the trend to continue through end-2018," said Michael Hart, Head of Industrial Leasing for North China at JLL. "Looking ahead, as demand remains steady and space limited, we are likely to see landlords continuing to benefit from strong rental gains well into 2019."

High-end Residential

Residential

2Q18

Serviced Apartments

Vacancy

10.2%

New Supply

102 units

Rental Growth

1.0% q-o-q

Luxury Apartments

New Supply

440 units

Capital Values Growth

-2.6% q-o-q

Rental Growth

2.3% q-o-q

High-end Villas

New Supply

55 units

Capital Values Growth

-2.3% q-o-q

Rental Growth

0.2% q-o-q


High-end residential sales volumes continued to be restrained by the tight-policy environment. As price caps remained in place, the luxury apartment volume increased 14.9% q-o-q, but continued to record negative y-o-y growth (-8.9%). Following a similar trend, high-end villa sales were also up, rising 12.8% q-o-q, but the figure was still down significantly y-o-y (-83.0%).

While price restrictions have led developers to hold back supply in recent quarters, many launched new projects in the quarter. A total of 440 luxury apartment units were released in the quarter, after no new luxury supply entered the market in the previous quarter. In the high-end villa market, 55 units were released over the same period, up 44.7% from the previous quarter. Some developers have come under greater financial pressure given the tighter monetary environment, prompting them to launch new projects even as the price caps continue to be in place.

Primary prices for luxury apartments continued to record negative growth, as some developers further lowered prices to increase sales. This drove luxury apartment prices to further decline, recording negative q-o-q growth (-2.6%) in the quarter. High-end villa prices also declined by -2.3% q-o-q in the quarter. "As financial pressure heightens for developers, we expect to see more projects launched on the market in the coming months," said Mi Yang, Acting Head of Research for Beijing at JLL. "In the mass market, stricter loans policy is expected to hold back 'rigid demand,' and this could lead more would-be buyers to the leasing market."

Hotels

Hotels*

YTD August 2018

Occupancy

76%

ADR**

1,103.7

RevPAR

838.9

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

Coupled with moderate new supply, a recovery in international tourist arrivals and large events hosted in Beijing, such as the Forum on China-Africa Cooperation, benefited upscale hotels' trading performance in the quarter. As at YTD August 2018, occupancy increased by 3.4 percentage points to 76%, pushing the Average Daily Rate (ADR) up 8.0% y-o-y to RMB 1,103.7. Rapid growth of the ADR drove the RevPAR to increase sharply by 13% y-o-y to RMB 838.9 – sustaining the YTD double-digit growth figure recorded since the start of 2018.

Two upscale hotels opened in the quarter, adding 773 rooms to the market and expanding supply to the suburban areas. In northeast Beijing, Hyatt Regency Hotel Wangjing (348 rooms) opened, and in the northwest of the city, Beijing Marriot Hotel Changping (424 rooms) entered the market. The openings follow that of Muji Hotel Beijing in tourist precinct Qianmen, which opened in June, marking the first new upscale hotel opening for Beijing in 2018 and the Japanese brand's second hotel in China.

New supply in Beijing will be concentrated in Wangfujing at the end of the year, as two new luxury hotels are set to add 200 rooms to the popular tourist area. Mandarin Oriental Hotel Wangfujing (74 rooms) features a high-profile location along the pedestrianised Wangfujing shopping street, while Puxuan Hotel (116 rooms) will serve as the third property in China for Urban Resort Concepts, after Shanghai and Xiamen. "In Wangfujing,  the recently opened Guardian Art Centre and WF Central mall have helped to upgrade this traditional retail submarket, developing it into an art, culture, and retail destination," said Adela Zu, Vice President of Hotels & Hospitality for JLL in Beijing. "The prestigious Mandarin Oriental and Puxuan hotels are expected to further transform the area and attract more high-end leisure and business travelers, which will continue to drive trading performance for upscale hotels in Wangfujing."

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