Office rents start to decline at a slower pace; housing sales reach highest levels in recent years as buyers stay put over CNY
According to JLL Beijing’s 1Q21 Property Market Review
Beijing, 13 April 2021 – “Leasing demand started to pick up across sectors in the first months of 2021, sending a somewhat positive signal to the market in terms of demand recovery,” said Julien Zhang, Managing Director for JLL North China. “Although there were still flare-ups of Covid-19 in Beijing early in the year, they were relatively few and far between, and as cases were quickly localised, the impact of the virus on the overall market was much more limited than a year ago – allowing for the majority of market activity to continue uninterrupted.”
In the office market, tenants actively upgraded or relocated throughout the city, taking advantage of the low-rent environment. Investors continued to pursue opportunities, with the sale of an office building in Zhongguancun showcasing their continued confidence in the city’s most popular tech hub. F&B demand increased significantly in the retail sector, and multiple high-profile brands entered the city. Meanwhile, as travel abroad remained challenging, duty-free retail rose as an area of interest in the market, with policy encouraging retailers in this space to focus on domestic consumers. Industrial leasing demand was stable, helping to drive steady rent growth recovery. Supported by the continued large supply, as many buyers stayed in the city instead of traveling during the Spring Festival holiday, housing sales volumes achieved their highest levels in recent years.
Grade A Office
A pick-up in leasing activity in the quarter was largely driven by upgrade and relocation demand, helping to alleviate some market pressure. Following a tough year of weak demand, the increased demand also saw several notable upgrades from the healthcare sector, which continued to be an active player in the market. Meanwhile, IT companies remained a key source of overall market demand, supporting not just traditional tech-focused submarkets, but office precincts citywide.
Market rents continued to drop, but after falling for several consecutive quarters, the rate of decline started to slow. Overall rents recorded -1.9% q-o-q growth and -8.4% y-o-y growth in the quarter. The pick-up in demand started to offer a sense of relief to some landlords at stabilised projects, after they had continuously signed tenants at lower rents over the last several months. “The uptick in leasing demand that we saw in the quarter was welcomed by landlords, especially after such a challenging year,” said Michael Zhang, Director of Office Leasing for JLL Beijing. “As more tenants were seen to be active in the market, a growing number of landlords became cautiously optimistic that market recovery would continue to improve over the coming months. As this happens, we can expect to see more pronounced shifts in leasing strategies starting to take hold in the market.”
The investment market was relatively active, with the city’s en-bloc transaction volume registering nearly RMB 9 billion (or almost RMB 22 billion, if including related-party transactions) in the quarter. Among the highest profile deals closed in the quarter were: Qidi Block D – an office building in the IT hub of Zhongguancun – purchased for RMB 2.65 billion by Go High, Shoukai, and Jinmao; and serviced apartment project Fraser Suites in the CBD, sold to Tishman and Shanghai Dowell for RMB 1.6 billion.
Investors continued to be highly interested in the overall Beijing property market. Office assets remained popular, with progress in leasing demand recovery supporting confidence in the sector. The most experienced retail operators considered opportunities to acquire retail properties. In terms of alternative investments, industrial assets continued to draw attention, while data centres also remain highly attractive. Residential projects were also increasingly viewed as reliable investments. “With more tradable assets surfacing in the market, investors are actively pursuing opportunities all over the city – showing that their confidence in Beijing’s future remains high,” said Michael Wang, Senior Director of Capital Markets for JLL North China. “Moreover, as investors continue to prioritise the Beijing market, we expect to see a very active market in 2021, and this is likely to significantly push up y-o-y sales volumes.”
The market witnessed steady recovery of leasing demand, with a growing number of F&B retailers returning to the market. Besides popular restaurant chains, multiple high-profile dining brands entered Beijing, contributing to leasing demand for large F&B space. Among them, Gaga Garden from Shenzhen debuted its first Beijing store at Taikoo Li South. Accessory retailers further supported demand recovery, quickly growing their presence in the quarter. Driven by investment funding, the popular wholesale-style accessory store, BA, entered Beijing via Hopson Mall. Meanwhile, fashion jewellery retailers such as Pandora and King Baby were also active with expansion plans.
Urban and Suburban rent trends started to diverge, as malls in the city centre generally made more progress with demand recovery. Urban rents started to decline at a slower pace, recording -2.6% q-o-q growth. However, in the suburbs, a number of malls remained under high vacancy pressure, leaving landlords little choice but to offer further concessions. Suburban rents slid by -3.9% q-o-q. “The Urban market is likely to see a faster recovery than the Suburban market,” said Ji Ming, Research Director for JLL Beijing. “While Urban rent growth is not predicted to drop by more than 5.0% for 2021, Suburban rents will be under greater downward pressure, as high vacancy is expected to remain a challenge for many Suburban malls throughout the year.”
Leasing demand remained stable, with many of the same players continuing to look for space. Logistics companies and 3PLs were among the most active, while other tenants still benefiting from the prolonged impact of the virus, such as fresh supermarkets, also sought options in the market. Meanwhile, increasing demand was observed for cold-chain storage in the quarter. Some landlords planned to partially upgrade designated sections of their projects with cold-chain warehouse space to further attract tenants or fulfil requests.
Steady demand and the tight-vacancy environment further supported rent growth recovery in the quarter. Overall market rents continued to gradually recover, rising 0.9% q-o-q in the quarter, in line with the slow-growth trend that had resumed from mid-2020. Many landlords used opportune moments to push for increases within reason, but there were still cases of landlords suffering from higher vacancy, leaving them to offer discounts to fill space more quickly. “Landlords started the year off with far less pressure than a year ago and felt largely removed from ongoing cases of Covid-19 as the situation was strictly contained to pockets of the city away from their projects,” said Mi Yang, Head of Research for JLL North China. “This allowed them to continue with business as usual, with some landlords finding opportunities to pursue rental increases. As the economic situation continues to improve, more landlords are expected to pursue higher rents, and as such, we are expecting to see further recovery in rent growth.”
Despite the first quarter of the year not serving as the traditional peak sales season, the luxury apartment sales volume reached 470 units, outperforming the first quarter-sales average of the last five years (up 12.7%). The figure was also significantly higher than the 162 units sold in 1Q20, when the market had stalled during the height of Covid-19 in China. Unlike a year ago, sales activity in the quarter remained busy into February and beyond, as many buyers stayed in Beijing during the Spring Festival holiday to prevent spread of the virus in the early winter months of the year. Positive market sentiment further encouraged buyers, while ample new supply and accelerated project launches largely supporting the upward trend.
The large supply in the quarter marked a first-quarter high not achieved since 2011. Although the figure was still down 42.1% from the sizeable figure in the previous quarter, the new supply was still notable, given that first-quarter supply volumes are typically lower. Three luxury projects added 1,566 units to total stock. Notable launches included Jinmao Palace and Honor of China, both located by the southeast Third Ring Road. As the buying momentum gained more traction in the quarter, high-end prices edged up. Luxury apartment primary prices grew 0.9% q-o-q on a like-for-like basis, but still declined 0.7% y-o-y. “The positive buying sentiment witnessed in recent quarters is likely to continue with residents expected to remain active with purchases through year-end,” said Mi Yang. “Although the healthy sales volumes should lead to slightly higher prices in the near term, the housing market is set to remain well-regulated, in terms of financial regulations for both developers and buyers, as reaffirmed during Lianghui – or the nation’s top political meetings – in March. Therefore, price growth should be kept moderate, even as large supply continues to support strong sales.”
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