Beijing's Office Rents Explode 41% Over Last Year

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According to a new report by Jones Lang LaSalle, rent of Grade A office and warehouse property increased throughout the whole of 2011:

• Office - Continued strong demand and ongoing limited available space has significantly boosted rents.

• Retail - Strong demand from domestic and international retailers pushed the overall vacancy rate down in 2011.

• Residential - The average rent of serviced apartments increased by 12.5% y-o-y in Beijing. The sales area of high-end apartments decreased significantly in 2011, and the average price marginally decreased.

• Industrial - Persistent robust demand from e-commerce, retail and 3PL companies has contributed to full leasing of most warehouses and record-breaking high rents.

• Investment - The majority of domestic institutional investors have been purchasing office buildings for self-use, whereas international institutional investors have favoured shopping centres and business park properties.

• Hotel - Optimistic Performance Outlook brings New Opportunities for Hotel Investors.

Office Market

2011 was a record year for the Beijing office market with rents rising by 41% year-over-year.

Accumulated new supply in 2011 reached approximately 750,000 sqm, almost the same level as that of 2010. However, new supply from lease-only projects was less plentiful, and in the case of Finance Street there was no new supply at all. This year saw 11 Grade A office projects completed, four projects, were for self-use, accounting for 42.0% of the new supply. As such, total Grade A stock increased to approximately 6.2 million sqm.

Demand in the Beijing office market remained strong throughout the year, despite uncertainties and turbulent external factors impacting domestic business growth. Total net absorption hit 860,000 sqm, indicating that 2011 was another big year in the Beijing office market in the vein of 2010. From 1Q11 to 3Q11, healthy momentum in the growth of demand for office space continued. In 4Q11, although global financial market turbulence and the European sovereign debt crisis cut the world's economic growth forecasts, the Beijing office market still experienced increasing demand, albeit with a slightly lower growth rate than in previous periods. Indeed, some hotspot sub-markets, such as Finance Street, have a number of clients waiting in line for any surrendered space.

In addition to demand for self-use buildings, mostly from domestic companies, leasing demand continued to be driven by financial services companies, consulting firms, law offices, and high-tech and manufacturing companies. Even with 750,000 sqm entering the market, overall vacancy rates continued to drop and remained at an all-time low on the back of the strong demand from both self-use owners and tenants. As of end-2011, the vacancy rate reached 9.1%. In various sub-markets most vacancy rates dipped below 10.0%, while Finance Street, East Second Ring Road and Zhongguancun saw vacancy rates even lower, within the range of 0.0- 5.0%.  Two new projects, with a total GFA of about 140,000 sqm, entered the market at the end of the fourth quarter and one of these developments is not in a prime business location.  Without these buildings, the total vacancy would be 7.0% with a commitment rate of 96.4%.

For the year as a whole, average net effective rents were significantly boosted by continuing strong demand and limited supply, especially in the traditional principal sub-markets of the CBD and Finance Street. In 4Q11, rents increased to RMB 293 per sqm per month (based on GFA), up 9.1% q-o-q in 3Q11 and 41.4% y-o-y.

Seven projects are expected to be completed in 2012 offering a total GFA of approximately 420,000 sqm.  Leasing-only projects will account for half of the new supply, while the remaining space is reserved for self-use owners.  Despite reduced economic growth forecasts and record high rents, overall demand in the Beijing office market is expected to experience stable growth in 2012 with net take-up over 400,000 sqm.  The overall vacancy rate is likely to continue to remain low, at around 9%, while rent is projected to grow by the slower pace than 2011.

Retail

An increasing number of retailers have been competing in the Beijing retail market and several projects underwent repositioning to strengthen their competitiveness.

In 2011, three shopping malls, China World Mall Phase Ⅲ, Shine City and Galleria, opened inside the Fifth Ring Road in Beijing .The total GFA of these projects amounted to 140,000 sqm, an 82% y-o-y decrease in new supply.  Due to the repositioning and upgrading of many core shopping malls, there is more available space for retailers in core areas and this impacted the leasing progress of new projects. In addition, many new projects which were due to open by year-end 2011 postponed their launch dates to 2012.

With the increasing disposable income of local residents, consumer demand for high-end products and services increased in 2011 and as a result, retailers of jewellery, luxury brands and supermarkets were busy expanding and refurbishing. In 2011, several shopping malls in the CBD, Wangfujing, and Xidan commercial areas upgraded their tenant mixes and shopping environments. A number of luxury brands and brands without an existing presence in the Beijing market took the place of under-performing brands.  Around 40 luxury jewellers and clothing brands opened in China World Mall Phase Ⅲ, 92 international brands opened in Shinkong Place and many creative high-end brands, such as MIUMIU and Alexander Wang, held their grand openings in the Village North. Furthermore, high-end supermarkets such as OLE and BHG have been expanding quickly in core commercial areas.

Favourable prices and popular designs meant that fast fashion retailers, such as UNIQLO, ZARA, H&M and GAP continued expanding in Beijing's shopping malls and community malls. In 2011, ZARA along with its sister brands, Stradivarius and Massimo Dutti, opened 7 new stores and GAP and H&M each plan to open two new stores in Beijing in 2012. Local fashion brands, Urban Renewal and MC Jeans, have also been busy selecting sites facilitate their expansion. As a result of this strong demand, net absorption in Beijing's Retail market reached 310,000 sqm in 2011.

With aggressive expansion by retailers, the overall vacancy rate maintained its downward trend in 2011, dropping to 10% in 4Q11, a 3.9% decrease y-o-y.  Many mature projects which performed well raised their rents several times throughout the year, leading to an overall increase in the average rent in the Beijing retail market. Net effective retail rents reached RMB 701 per sqm per month (based on NLA), a 12.3% rise y-o-y.

In 2012, 14 new projects will be launched, adding 800,000 sqm of GFA to the total stock. These new projects are mainly located in the Chaoyang and Dongcheng Districts. Projects undertaken by international developers such as CapitaLand and Swire are experiencing good preleasing rates of around 70%-85%. Optimism about the future of Beijing's retail market has meant that a number of luxury brands and brands new to Beijing have signed leasing contracts in the Wangfujing area. Jones Lang LaSalle predicts that retail demand will continue to be strong in 2012, while the growth rate of net effective rents will slow due to discounts offered in newly launched projects.  Vacancy rates are expected to increase due to the abundance of new supply.

Residential

In 2011, the average rent of serviced apartments increased by 12.5% y-o-y in Beijing. The sales area of high-end apartments decreased significantly and the average price marginally decreased.

In 2011, the average rent for serviced apartments increased by 12.5% in Beijing. There was no new supply for serviced apartments in the whole of 2011 and one project was strata-title sold and thus exited the leasing market, resulting in a decrease in total supply to 8,095 units. In addition, the number of available houses in the market has further decreased due to the refurbishment of several projects. Leasing demand remained strong throughout the year despite uncertainties and the turbulent world economy impacting domestic economic growth. China continues to be a very important market for MNCs and many expatriate managers and engineers relocated to Beijing in 2011. The fourth quarter is the traditional low season for the leasing market, but leasing demand remained stable and in some areas, such as the CBD, Sanlitun and the Third Embassy area, available housing is limited. Much of the leasing demand continued to be driven by automobile, medical, energy and manufacturing companies. The strong demand and the limited supply resulted in a new vacancy rate low of 7.2% as of the end of 2011. Landlords increased rents substantially, and many tenants found available housing to be too expensive. In 4Q11, rents increased 12.5% y-o-y to RMB 190 per sqm per month (based on GFA). Looking forward to 2012, three serviced apartment projects are expected to be completed, offering 580 units which will alleviate the shortage of available housing. However, impacted by the reduced economic growth forecasts for 2012, it is expected that some MNCs may slow down their expansion in China and some may limit the number of expatriate employees in order to reduce costs. Overall demand will remain stable in 2012, and the vacancy rate will increase a little due to new supply, while the average rent will experience an increase of around 10%.

Influenced by the purchase restriction policy, the transaction area of Beijing high end apartments decreased greatly in 2011 to 1.18 million sqm, a decrease of 21.4%, and average prices decreased marginally. Buyers aiming to improve their living conditions are the major consumers in the current Beijing high end apartment market. Such purchasers, in order to meet the stringent purchase requirements must have readily available capital and not rely on bank credit. Influenced by the slowing down of sales and a stricter examination and approval process, the average transaction price decreased slightly in 2011 reaching RMB 40,141 per sqm in 4Q11, a decrease of 2.2% y-o-y. Thus, the high apartment price has been influenced to a lesser extent than prices in the mass residential market due to good locations and more competitive products. New supply of high end apartments is expected to increase in 2012, with the price of luxury apartment projects in prime locations expected to remain stable. However, high end apartment projects located outside the Fourth Ring Road are expected to start offering incentives to potential purchasers in the face of continuing fierce environment, which will improve the transaction area in 2012.

Industrial

Persistent robust demand from e-commerce, retail and 3PL companies has contributed to full leasing of most warehouses; MNCs and hi-tech companies favor high quality business parks.

Logistics: In 2011, five high quality logistics warehouses entered the market, adding new supply of approximately 177,000 sqm, a y-o-y growth of about 65,000 sqm. To date, total stock of Beijing's quality logistics warehouses has surpassed 1.3 million sqm, increasing 15.6% y-o-y.

Throughout 2011, persistent robust demand led to full leasing of most warehouses across the market and record-breaking high rents. By the end of 4Q11, average net effective rents reached RMB 0.99 per sqm per day, up 15.5% y-o-y. Net absorption remained high while market vacancy fell to 0.6% from 5.1% at the beginning of 2011. New logistics projects have been quickly preleased by e-commerce firms, retailers, manufacturers and 3PL companies, with especially strong demand coming from the e-commerce sector. Meanwhile, more companies seek to secure prime space in the increasingly tight logistics market by pre-leasing space or sourcing build-to-suit and self-build opportunities.

Throughout 2012, six projects are expected to enter the market, bringing more than 200,000 sqm of new supply. Jones Lang LaSalle predicts that the explosive growth of e-commerce firms and the fast expansion of retailers and 3PL companies will mean that new projects will continue to record high net absorption figures. Market vacancy is expected to stay low and average net effective rents will top RMB 1.1 per sqm per day.

Business Park: In 2011, new supply of quality business parks was mainly concentrated in Beijing Electronics Zone (BEZ), Beijing Development Area (BDA) and Zhongguancun. By the end of 4Q11, new supply of quality business parks exceeded 350,000 sqm, increasing by 100,000 sqm y-o-y, and total stock has surpassed 2.8 million sqm.

More and more MNCs and high-tech companies begin to favour quality business parks to establish their headquarters or R&D centres. This growing trend is not only due to the extension of favourable tax policies and potential cost savings, but also because areas like BEZ, Zhongguancun Software Park and BDA are expanding to offer more specialized and integrated facilities. Meanwhile, some MNCs and domestic firms with strong balance sheets are beginning to shift their attention to build-to-suit business parks to meet their demand for varied and tailored office space. Throughout 2011, the Beijing business park market experienced strong demand mainly from IT, electronics and pharmaceutical companies. As of 4Q11, the market vacancy for business parks averaged 8.1%, and average net effective rents hit RMB 3.0 per sqm per day, up 13.4% y-o-y.

Looking forward 2012, new supply of business parks is expected surpass 1.4 million sqm, and over half of this will be for sales. Market vacancy is projected to grow at a moderate pace due to large supply. In 2012, with continuing increases in the price of land in Beijing, rapid rental increases of prime office space and the gradual improvement of amenities in business parks are expected. Strong demand from MNCs from the IT, electronics and pharmaceutical fields, high-tech companies and growing enterprises which are sensitive to business costs, will continue to push rents up further.

Investment

The majority of domestic institutional investors have been purchasing office buildings for self-use, whereas international institutional investors have favored shopping centers and business park properties.

In 2011, despite the implementation of residential purchasing restrictions and the volatility of the world economy, Beijing en bloc transactions remained stable, with more than 10 deals closed during the year. The office segment is still the most active, with several deals transacted in the first half of the year; most investors in the office market come from a domestic background and own the properties for self-use. During the second half of the year, the continuing soaring office rents pushed up the capital values of assets and reduced the intentions of owners to sell their properties, leading to few transactions in the office segment being closed in Beijing.

Beijing's booming retail sales market has attracted international institutional investors, who dominated the shopping centre en bloc transactions of 2011. In adopting a long-term outlook, overseas investors are prioritizing the acquisition of retail property in Beijing and are targeting projects currently in the development process as well as completed but currently underperforming projects.  Business park property transactions experienced an upbeat trend in 2011 with two deals transacted in 4Q11. Projects located in the Shangdi, Wangjing and Yizhouang areas were mostly acquired by institutional investors. The incentive policy for the high-tech industry not only encourages the broad development of R&D businesses in Beijing, but also supports stable, attractive yields for business park properties.

David Hand, China Investment Head at Jones Lang LaSalle pointed out "The stand-out performer and target for new investment capital in Beijing is the Grade A office market.  This sector, along with strong interest in prime retail, business park & logistics properties will remain the primary focus for investor interest for the foreseeable future underpinned by incredibly strong supply/demand dynamics in the medium term. "

Hotel

Optimistic Performance Outlook brings New Opportunities for Hotel Investors.

Following a year of occupancy recovery, 2011 was an even more exciting year for Beijing hotel owners. Proving its pivotal role as the capital of China's growing economy, Beijing has seen strong growth in the tourism and hotel sector. Year-to-date November 2011, international tourist arrivals to Beijing increased 5.8% to 4.84 million. On top of continued growth in corporate and leisure travel already observed in 2010, corporate meeting business (including incentive travels) has returned in 2011.

Demand growth, together with limited new supply, has created an environment conducive for hotel performance to record solid improvement. In 2011, Beijing hoteliers shifted growth focus from occupancy to room rate. According to year-to-date November 2011 data, Beijing's five-star hotel sector recorded an occupancy rate of 66.9% (+5.3 p pt) and an average daily rate of RMB 1,141 (+9.0%). This corresponds to a growth of 17.8% in Revenue per Available Room (RevPAR).  Room rate growth was even more pronounced in the luxury sector, showing not only hoteliers confidence in raising rates, but also declining rate sensitivity amongst travelers.

As new supply remains limited and the demand outlook positive, we expect Beijing's high-end hotel market to continue to improve trading performance. "In the medium to long-term, Beijing is expected to see additional supply of office-space, creating potential for continuous growth in hotel demand, whilst new hotel development in Beijing's core areas is likely to be limited. This gives rise to opportunities that can be favorable for asset dispositions" says Hans Galland, Senior Vice President, Jones Lang LaSalle Hotels. "Existing hotel owners should evaluate their hotel asset strategies to capitalize on the upward trend in market performance."