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Office – Rents continued to see robust growth, rising by 10.5% q-o-qBy the end of 3Q11, total Grade A reached approximately 6 million sqm as four office projects were completed, adding 200,000 sqm of new supply. Phoenix Place Towers F and H, as well as One Indigo, entered the leasing market, while the north and south towers of Chaoyang Plaza were purchased by domestic companies for self-use. New supply YTD has totalled approximately 600,000 sqm.
Demand in the Beijing office market continued to be strong, despite the volatile global financial markets and the resulting lowered expectations of global economic growth. MNCs continued to experience rapid market growth in China, leading to greater demand for office space. Meanwhile, domestic companies, covering SOEs and privately owned companies, continued to show insatiable demand for self-use buildings. Total net absorption YTD hit 789,177 sqm, with 40% of the net take-up for self-use.
In terms of leasing demand, financial entities, consulting firms, law offices, and high-tech and manufacturing companies were the leading demand drivers. With limited vacant space and record high rents in the market, some companies with plans to expand chose to either renew their current leases, or expand within their existing locations, while others were forced to relocate or expand externally. The latter was the case for many companies in the CBD, 3rd Embassy and East Chang’an Avenue areas.
Even with 200,000 sqm released to the market, overall market vacancy rates remained at an historic low of 8.2% in 3Q11, down 0.1 percentage points q-o-q. All sub-markets, except the 3rd Embassy area, which saw one newly completed office project, experienced declining vacancy rates. The CBD and the Zhongguancun area recorded the largest declines in vacancy rates, dropping 2.3 and 2.8 percentage points q-o-q, respectively. With vacancy rates at record lows, landlords continued to aggressively raise rents across the market; the average overall net effective rent increased to RMB 269 per sqm per month (based on GFA), up 10.5% q-o-q in 3Q11 and 29.7% YTD.
Only one office project is expected to be completed in 4Q11, adding a total GFA of 62,000 sqm. Increasing price-sensitivity on rents and some slowdown of office expansion activities are expected to ease the aggressive growth in rents over the coming quarters. According to Eric Hirsch, Head of Markets at Jones Lang LaSalle Beijing, “Despite the small downward adjustment to the economic growth forecast for China, overall demand should remain strong for the immediate future”. Over the remainder of 2011, the overall vacancy rate should continue to tighten at around 8%, while rental growth is projected to exceed 40% y-o-y, a record increase that is based on the forecast total net take-up of 870,000 sqm over total new supply of 670,000 sqm.
Retail – Several projects are undergoing repositioning by adding more luxury and fast fashion retailersIn 3Q11, Shine City opened near the South Third Ring Road. Positioned as a community shopping centre, it has a total GFA of 50,000 sqm, and has successfully attracted UNIQLO, Vanguard and Xingmei Movie. Meanwhile, Longfor Starry Street and Living Mall opened in Haidian District.As competition among shopping malls increases, several shopping malls in the CBD, and Wangfujing and Xidan commercial areas have begun upgrading their tenant mixes and shopping environments in a bid to strengthen their competitiveness, with many luxury and fast fashion brands replacing underperforming brands. For example, FENDI, MAX&Co and Giuseppe Zanotti will open in China World Shopping Mall Phase I, squeezing out a number of badly performing retailers.
Moreover, fashion retailers have accelerated their pace of expansion. JOYCE, a luxury retailer from Hong Kong, opened in China World Shopping Mall Phase III, taking a GFA of 2,000 sqm; DIOR began fitting out in Shinkong Place; and Moncler opened its fourth store in China in Village North, where MIUMIU, Marni and other luxury brands are expected to arrive soon. In addition, H&M, GAP, ZARA, Stradivarius and Massimo Dutti are quickly replacing other fashion brands to become the most popular retailers. Meanwhile, shopping malls are introducing new brands to attract consumers. For example, Oysho, a Spanish brand, opened its first store in Beijing in Solana, where American Eagle also plans to launch its first China store. Other active retailers were F&B and cosmetics chain stores, such as Singaporean restaurant Seven Nana, Watsons and Costa. Apple is also expanding its market share through direct and authorised stores, and a new Apple experience store just opened in Shine City.
“Based on strong demand, the average rent in Beijing’s retail market grew steadily, and in 3Q11, net effective retail rents reached RMB 679 per sqm per month (based on NLA), an 8.8% increase YTD and an 11.8% rise y-o-y,” said Jason Chang, Head of Retail, North China at Jones Lang LaSalle Beijing. “As several projects opened and many shopping malls began repositioning, the overall vacancy rate in the market was pushed up, reaching an average of 11.5%.”
Due to the repositioning of shopping malls and fierce competition for limited retail space, Jones Lang LaSalle predicts that rents will surpass RMB 700 per sqm per month in 4Q11, an increase of approximately 12% y-o-y.
Guoson, Phoenix Shopping Centre, Gongsan Plaza, Seasons Place Phase II and XinAo Shopping Centre will all open before the end of the year, adding about 400,000 sqm of new space to the market and taking the total supply in 2011 to over 500,000 sqm. Based on increasing supply and the aggressive expansion by retailers, the vacancy rate will rise to approximately 13%.
Residential – The leasing market continue to be active, while the area transacted in the sales market increased; sales prices experienced a slight declineIn 3Q11, the leasing market for luxury apartments continued to be active as rental growth caused an increase in relocation demand. Leasing demand for luxury apartments comes mainly from foreigners, who prefer to live in mature communities in areas with which they are familiar. Although some new apartment projects were completed in 2011, the different preferences for fit-out styles between local landlords and foreign tenants have left some apartments vacant as tenants do not find these apartments appealing. The employees of MNCs remained the main tenants of serviced apartments, due not least to MNCs involved in the pharmaceutical and automobile sectors having grown rapidly in 2011, employing increasing numbers of expatriate engineers and technicians. Most business people prefer to live in a serviced apartment than a hotel, causing short-term leasing demand to boom.
On the supply side, East Gate Plaza closed in 3Q11 and Ascott, located in the CBD, is now only accepting short-term tenants. These factors have caused a shortage of available space in the market. Thus, the occupancy rate for all serviced apartments in the CBD is above 95% and the overall occupancy rate reached an historical high of 92.5% in 3Q11, an increase of 2.2 bps q-o-q and 7.7 bps y-o-y. Consequently, in 3Q11, average rents increased to RMB 187.9 per sqm per month, a q-o-q growth of 5.1% and a y-o-y growth of 12.5%. The Head of Residential Services at Jones Lang LaSalle Beijing, Zhang Hong, notes: “although rental growth will slow in 4Q11, we expect rents to increase by more than 10% in 2011. The leasing market will remain active in 2012, with three serviced apartment projects due for completion, which will alleviate the shortage of serviced apartments.”
Developers launched eight high-end and luxury apartment projects in 3Q11, offering a total of 3,319 units for sale, an increase of 50.0% compared to 2Q11. This increase in new supply provided cash-rich homebuyers, who meet the purchase requirements and want better quality housing in order to improve their living conditions, with a wider choice. In addition, a small group of buyers are long-term investors who hope to store wealth while inflation runs high. As a result, the transacted area of high-end and luxury apartments increased 18.4% q-o-q in 3Q11, with the number of transacted units rising 6.0% q-o-q after two quarters of decreases. Sales prices have continued to decrease since 1Q11, down 3.4% q-o-q and 7.6% y-o-y in 3Q11 to RMB 40,078 per sqm. The proportion of high-end projects priced between RMB 30,000-40,000 per sqm, which are typically purchased by homebuyers seeking to improve their living conditions, increased to 73.6% of the total, up 1.6 bps q-o-q.
High-end and luxury apartment transactions for 2011 as a whole are expected to decrease by more than 20% y-o-y and transaction prices are forecast to continue to drop in 4Q11. New supply of high-end and luxury apartments is expected to increase in 2012, with luxury apartment projects in prime locations expected to experience stable prices. However, high-end apartment projects located outside the Fourth Ring Road are expected to start offering discounts in the face of growing competition. As prices come down, more potential buyers will choose to purchase housing, pushing transaction levels higher than those seen YTD.
Industrial – Persistent strong demand pushed rents to a record high; large, quality business parks experienced burgeoning demand Logistics: In 3Q11, two projects were completed, namely GLP Park Daxing in Daxing District and GLP Park Beijing Airport B-5 in Shunyi District, with total GFAs of 96,000 and 29,299 sqm, respectively. Although these projects added 125,299 sqm to the total stock, warehouse space was quickly pre-leased by e-commerce, retail and third party logistics (3PL) companies. Meanwhile, more companies sought to secure prime space in the increasingly tight logistics market by pre-leasing space or sourcing build-to-suit opportunities.Persistent robust demand and limited new supply contributed to the fall in vacancy rates and the rise in rents in the logistics sector. Indeed, absorption of logistics space remained high, lowering market vacancy rates to a record low 1.2%, a fall of 0.5% q-o-q. Average net effective rents climbed to RMB 0.97 per sqm per day, up 5.4% q-o-q and 15.1% y-o-y. The most active tenants in the market continued to be retailers, e-commerce and 3PL companies.
One project is expected to enter the market in 4Q11, adding 25,000 sqm of supply to the market. Limited new supply will barely meet long pent-up demand and vacancy rates will remain low, leaving most projects with no space available. As e-commerce business expands at a rapid pace and demand grows further, average net effective rents for logistics space are expected to set new highs of over RMB 1.0 per sqm per day by end-2011.
Business Parks: In 3Q11, the business park market experienced strong demand. Strengthening occupier demand for high-quality business park space is underpinned by the expansion of R&D activities among high-tech and pharmaceutical firms seeking space with high specifications, as well as by the rapid growth in business process outsourcing (BPO) and by large MNCs seeking park-style space outside the higher cost CBD areas. Meanwhile, more MNCs and domestic firms with strong balance sheets are beginning to shift their attention to build-to-suit business parks. Apart from lower costs, these projects meet their demand for varied and tailored office space.
The leasing of significant amounts of space led to high absorption and falling vacancy rates in 3Q11, with vacancy rates in business parks dropping 1.5% q-o-q to 4.4%. Due to strong demand and relatively new supply, average net effective rents rose to RMB 2.98 per sqm per day, up 7.8% q-o-q and 17.2% y-o-y.
Throughout the remainder of the year, the business park market is expected to see more than 200,000 sqm in new supply, with annual new supply exceeding a total of 400,000 sqm. The market will continue to see high absorption of new projects, leading vacancy rates to stabilize at around 5%. Due to the maturing business park environment and sustained strong demand, average net effective rents are forecast to top RMB 3.0 per sqm per day.
Investment – Institutional investors with strong financial backgrounds are investing in retail property in BeijingA number of retail plots have been acquired recently by overseas institutional investors. Thanks to a large population and strong consumer spending, both notable retailers and institutional investors with strong financial backgrounds and development experience have entered the Beijing market. Although soaring prices have slowed en bloc transactions somewhat, some investors have recently acquired retail plots to build shopping centers as a long-term strategy. During 3Q11, Hong Kong Land purchased a retail plot in the Wangfujing area for a total of RMB 2.91 billion.
In August, Singaporean developer GuocoLand announced that it will cooperate with a subsidiary of the Dongcheng District government to develop the “Xinzhongjie” project, featuring mostly retail. In addition, the Hainan Airline Group made public its negotiations with the Gome Group to acquire the retail project Gome Shangdu, which involves a large amount of retail space.
In line with the rapid appreciation of capital values and the lack of willingness to sell property, no en bloc office buildings were transacted in 3Q11. Some buyers acquired office space for self-use, with a notable international retailer purchasing 8,200 sqm in the east tower of the Prosper Center in the CBD and a local firm with an educational background acquiring 7,500 sqm of office space in Hesheng Plaza in the Zhongguancun area. The average price of these two deals was more than RMB 50,000 per sqm.
“All in all, last quarter, market yields remain flat due to the rapid increase in sales prices and rents for prime office and retail space in Beijing,” notes David Hand, China Investment Head at Jones Lang LaSalle.
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