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News Release

Hong Kong and Macau

Domestic demand helps lessen the downturn in Beijing’s Office Market

In a quarter where office rents tumbled in cities such as Hong Kong and Shanghai, average rent in the Beijing office market declined by a surprisingly modest 8.3% q-o-q in 1Q09. Rents in Finance Street recorded the sharpest decline, down 11.7% q-o-q; while in the CBD, rents declined 10.7% q-o-q despite vacancy climbing up to 37.4% by end-1Q09.
Though significant reductions in rent were seen in some lower quality buildings and buildings newly completed with high vacancy rate, this was not indicative of the broader market trend. Indeed, encouraging levels of demand, especially from domestic companies, and increased optimism in the government’s economic stimulus plan saw the majority of landlords refrain from lowering rents too severely. Julien Zhang, Managing Director and Head of Markets at Jones Lang LaSalle’s Beijing office, commented, “Though demand is relatively lower than the boom of the past several years, it has not fallen off a cliff. For many landlords, including those of new buildings where vacancy is high, the level of active inquiries in the market and potential improvement in the domestic economy does not warrant them to drastically reduce rents as yet.”
The impact of rising vacancy on market rent was also muted. With the completion of four new office buildings in 1Q09, overall vacancy climbed to 24.7%; the completion of Henderson Land’s 177,000-sqm World Finance Centre contributed to the rise in vacancy in the CBD area. Zhang added, “Though vacancy rates are on the rise, it remains concentrated largely on newer buildings. And many of these landlords are not prepared to drastically undercut market rent. This has a huge impact on the rental strategy of other landlords in the market.”
However, with vacancy set to rise further on the back of an additional 2 million sqm of new supply scheduled for completion in the remaining three quarters of the year, whether this trend can be sustained remains unclear. “How the market performs for the remainder of the year will likely hinge on what transpires in 2Q09. If current levels of demand can be sustained, then we may continue to see rents in the Beijing office market decline more moderately than in other regional office markets. Unlike Hong Kong or Shanghai, Beijing remains largely driven by domestic demand. And the majority of domestic companies are not contracting”, said Zhang. 
Haidian District Government ramps up incentives to spur leasing demand. In an effort to attract more financial companies to relocate or establish offices into the district, the Haidian district government announced a series of fiscal allowances specifically targeting such companies. Allowances for purchasing business property and rents were outlined for various sized companies. For example, financial institutions with registered capital of over RMB 1 billion are allowed a maximum allowance of RMB 10 million for purchasing a business property or up to 30% of three years’ rent. Furthermore, small private equity or venture capital firms are eligible for an allowance of up to 30% of three years’ rent if they lease space in Haidian High-tech building – a building owned by the district government.

New Grade A Supply. Hong Kong developer Henderson Land’s flagship World Finance Centre (WFC), located at the junction of Chaoyang Road and East Third Ring Road in the CDB area, was one of four new office developments completed in 1Q09. With a total office floor area of 177,000 sqm, spread over two 24-storey towers, WFC is the largest International Grade A office in Beijing and has some of the largest floor space on offer, boasting typical floor plates of 4,400 sqm. Already pre-certified for LEED, the building is aiming for LEED platinum status, and will be the second office building within the city to receive LEED certification. Other office developments completed during 1Q09 included: Jinqi Building (60,000 sqm); Fairmont Tower (60,100 sqm); and Guanghualu SOHO (40,000 sqm).

Leasing demand remains weak as retailers continue to focus on consolidation over expansion. Slowing retail sales growth and the retailers’ focus to consolidate rather than expand saw activity in Beijing’s shopping mall leasing market start the year on a quiet note. In view of the deteriorating short-term growth prospects, some luxury brand retailers were seen withdrawing offers on space for new stores and in some instances unprofitable stores were closed. Jason Chang, General Manager of Sandalwood’s North China operations, commented, “The growth in retail sales is being supported by heavy discounting which is putting a squeeze on retailer margins and demand.” The slowdown in demand was also reflected in the pre-commitment leasing in new and soon to be completed projects. Shopping malls completed in 2008 enjoyed relatively high occupancy levels, which helped keep vacancy at low levels. On the other hand, the completion of U-town Mall (110,000 sqm) and Glory Mall (130,000 sqm) during the quarter has pushed vacancy up from 10% at end-2008 to 15.7% at end-1Q09. The combination of rising vacancies and a weak leasing market saw average prime shopping mall rent decline 5.9% q-o-q. In spite of the slowdown in leasing demand, retailers remain committed to the Beijing retail market. Chang added, “Though some retailers closed stores during the quarter, this is more of a result of the market entering a phase of stabilization after a rapid year of growth rather than a sign that the market is contracting.” Hong Kong department store operator Parkson Group, for example, purchased the 51,400-sqm Shuangquan Building in Choayang for USD 165.4 million in 1Q09 to facilitate its expansion plans within the city.

Launches held back as developers adopt a wait-and-see approach. A poor leasing market and strong supply pipeline has led to some developers delaying the opening of their shopping malls. With retailers focused on consolidation, some upcoming shopping malls are finding it increasingly difficult to secure retailers of their choice. “First impressions are pivotal when establishing the image of a new shopping mall and can often be the difference between success or failure. With retailers reluctant to open more new stores, some developers are opting to wait for market sentiment to improve before launching their malls,” said Chang. Up to as much as 50% of the 1.2 million sqm of new shopping mall floor space scheduled for completion in the remainder of 2009 may potentially be delayed.

Price cuts spur recovery in transaction volumes. Cuts on the price of new projects led to encouraging sales volumes in Beijing’s residential market in January and February after a dismal year in which the number of transactions dropped 40%. On a daily measure, this deal growth was reminiscent of peak levels seen in 2007 with 500 to 600 deals done per day in the capital’s primary and secondary markets. The surge in sales, however, was short-lived with transactional growth reversing in March. Many prospective home buyers have continued to delay their purchases when it appeared that the government was not going to implement any further relief measures. A sustained rebound is unlikely to occur until a significant shift in prices and sentiment stimulates the market.

Prices in the top-end of Beijing’s residential market continue their decline. Despite the strong growth in Beijing’s overall sales volume earlier this year, most luxury projects saw very few transactions with many failing to execute a single deal. The weaker demand for luxury projects saw developers continue to soften prices. In 1Q09, prices of luxury apartments fell by 6.9% q-o-q to RMB 22,151 per sqm, while the average sales price of a villa dropped 5.0% q-o-q to RMB 19,280 per sqm. Leasing demand for these properties, highly driven by Beijing’s expatriate population, also continued to fall against a backdrop of slowing MNC expansions due to the global financial crisis. Average rental values of luxury apartments decreased 15.9% q-o-q to RMB 91.7 per sqm per month. Vacancies in the luxury apartment and villa markets continue to rise, increasing to 22.9% and 23.2%, respectively. Denis Ma, Associate Director at Jones Lang LaSalle’s, commented, “An influx of new supply scheduled for completion this year coupled with the ongoing global economic turmoil will continue to depress rental values. On the sales side, it appears that the current price adjustments are still not sufficient to attract potential buyers. As such, we expect capital values of luxury apartments in Beijng to drop another 10-15% by the end of this year”.

Weak demand pushes warehouse rentals lower. The slowdown in both the global economy and demand for Chinese exports continues to translate into weaker demand for warehouses. In the Beijing warehouse market, few new lettings were recorded in 1Q09. The government’s efforts to encourage domestic consumption as part of the economic stimulus plan released last year and the central government’s elevation of the logistics industry into one of the country’s ten preferential industries had little impact on boosting demand in the local market. Lacklustre demand and rising vacancy, which went up to 24% at end-1Q09, provided occupiers with the upper-hand in rental negotiations and contributed to average rent declining by 4.6% q-o-q. Looking ahead, the low prospect of demand growth and completion of new supply are expected to drive rentals down by another 10–15% in the remainder of 2009.

Lower land prices spur interest in China’s investment market. More affordable land prices are indirectly contributing to a pick-up in investment activity of built assets in China’s property markets. The lower price of land is attracting the attention of real estate players. With the availability of credit still tight however, some non-core real estate assets are being brought to the market to help boost capital for investing in development land. Asset prices are coming under pressure from not only the rise in the number of projects available for sale on the market but also from vendors lowering prices to ensure they secure their target capital. David Hand, Head of Investments for Jones Lang LaSalle’s China operations, commented “Asset prices being more closely aligned with the expectation of buyers will trigger greater interest in the investment market. With rentals declining more rapidly than capital values however, a gap between buyers and vendors albeit closer, is likely to remain. This can and will very likely be overcome by structuring deals that are tenable to both parties involved in the transaction.”