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News Release

Hong Kong and Macau

Jones Lang LaSalle Forecasts Cautious Optimism in Second Half of 2009

In 2Q09, the Beijing office market showed steady improvement over the previous quarter. Not only was there an increase in demand from domestic firms, but many healthy foreign firms were also picking up and looking for space to expand their operations. At the same time, six new projects were completed this quarter, bringing 408,300 sqm of new space to the market and further pushing up vacancy rates. While downward pressure on rentals has persisted, the rate of rental drops has eased. However, because of the large amount of vacant space in the market and with the impending new supply expected in the next 12 to 18 months, landlords in newly completed buildings are still offering attractive leasing terms in an effort to attract tenants.

With global wealth continuing to decline, many international retail brands have put their global expansion plans on hold, with some even closing their underperforming outlets. However, international and domestic mid-range brands have expanded aggressively during the last few months, showing that many retailers are confident that the fundamentals in China’s retail market remain strong. Due to the lack of leasing commitments, many developers have delayed their opening dates, with some pushing back their launches to 2010. With an expected 570,000 sqm still to enter the market by the end of the year, vacancy rates will rise, weighing down on rental prices.

The Beijing high-end residential market began to show more activity in the second quarter. In the leasing market, expatriates with compensation packages have returned and landlords continue to offer incentives to attract tenants. In the sales market, with developers offering a series of discounts and promotions, transaction volumes rebounded. However, because of the uncertainty in the economy, we hold a cautious view towards a sustainable recovery in the second half of this year even with this sales volume surge.

With domestic investors becoming major players, the investment market is picking up. Currently, there is a narrowing gap between investors and buyers, and we expect this trend to continue through the next six months. It is anticipated that domestic investors, especially state-owned insurance companies, are likely to play a big role in the property investment market in the second half of this year.


Pressures Continue Despite Slightly Rebounding Demand.  Although landlords in the Beijing prime office market further decreased rentals to encourage demand, the rate of decrease in 2Q09 was much less than in the previous two quarters. Overall average rental reached RMB 214 per sqm per month, a 4.7% decrease q-o-q. Due to significant demand from domestic firms, rental values in Beijing did not fall as much as those in Hong Kong and Shanghai, where high vacancy and suppressed demand have led to rental decreases of 10.2% and 8.9%, respectively.

Domestic financial institutions, energy companies and media companies dominated demand for space this quarter. The market saw several large transactions by domestic financial institutions, particularly provincial banks and government regulatory bodies. In the CBD, the steady influx of new supply over the past few years has created a wide array of choices for tenants. The establishment of BJTV’s new building and the planned relocation of CCTV have largely encouraged media companies to relocate to the CBD. In this quarter, the total net absorption reached 78,450 sqm, slightly more than the previous quarter, while net absorption in Hong Kong reached only 59,330 sqm. According to Mr. Julien Zhang, Managing Director of Jones Lang LaSalle Beijing, “The demand for Beijing high quality office buildings is slightly rebounding, domestic firms are aggressively taking high quality space, and demand from strong international firms with plans to expand their business in China is also picking up.”

Six new projects were completed this quarter, adding another 408,300 sqm of new space into the market and increasing the total stock to 8.8 million sqm. This influx of new supply further pushed up the vacancy rate in the overall market by 2.6 ppts to 27.3% this quarter. Among the 1.14 million sqm of new supply expected to enter the market, Grade A office space will account for 43%. “Although we are optimistic that demand is picking up in the market, there will still be a large amount of new supply in the next half year. As vacancy will likely climb above 30%, new landlords will face substantial pressure in gaining tenants. As such, we still expect to see a further slide in rentals,” pointed out Mr. Zhang.


Mid-range brands expand aggressively despite a slow leasing market.  With global wealth continuing to evaporate, corporations and consumers alike have had to tighten their belts, leading to many international luxury retailers putting their expansion plans on hold and adopting a wait-and-see attitude towards the market. Beijing even saw a few retailers withdraw from the market. In 2Q09, many projects scheduled for completion postponed their opening dates, a sign that leasing commitments across the retail market remained sluggish. Two new projects, however, did open to the public: Raffles City and Legend Centre, totalling 66,000 sqm of GFA, bringing Beijing’s prime retail stock to 3.6 million sqm.

Performance at mid-range shopping malls has remained relatively stable, showing that the fundamentals in China’s retail market remain strong. Many upcoming projects have actually repositioned themselves to attract vibrant mid-range retailers rather than luxury boutiques. The current downturn, the first experienced by Beijing’s prime retail market, although painful will ultimately make landlords and shopping mall operators more mature. That being said, demand in the overall market this quarter was still fairly weak. Average rentals, however, have somewhat stabilized, down 4% to RMB 528 per sqm per month. Because of the project delays, overall vacancy remained largely stable, up only 0.4 ppts to 16%. 

A total of seven shopping malls are still slated to open in the second half of this year, delivering over 570,000 sqm into the market. “Due to fierce competition and volatile economic growth, new supply and adjustments in existing shopping malls will continue to push up the vacancy rate,” said Mr. Jason Chang, General Manager of North China Sandalwood.


Leasing market demand warming.  Rental values in the high-end apartment market dropped 1.3% q-o-q in 2Q09 to RMB 84.8 per sqm per month. In the villa sector, the leasing market was most active in the Chaoyang and Shunyi Wenyu areas. The average rental value of villas dropped 0.9% to RMB 109.2 per sqm per month. “In the second half of 2009, due to the effect of summer vacation and the Christmas holiday, it is expected that the average vacancy rate will increase slightly. In addition, rental values are forecasted to drop slightly,” according to Ms. Zhang Hong, Head of Corporate Residential Services, Jones Lang LaSalle Beijing.
Current rise in sales prices may trigger another wait-and-see period.  Several recently launched properties were released with marked down asking prices, with many units being quickly absorbed by the market. Bolstered by the surge in sales, many developers incrementally increased their asking prices toward the end of the quarter, thus causing a sharp reduction in the transaction volume of high-end residential properties in May and June, indicating many purchasers still consider residential properties over priced. The average capital value in the high-end apartment market increased 0.8 % q-o-q to RMB 22,338 per sqm and in the villa market by 0.6% q-o-q to RMB 19,389 per sqm. Because of the continued uncertainty in the economy, we hold a cautious view towards a sustainable rebound in the second half of this year.


Amid weak demand, landlords introduce incentives to attract tenants.  Despite strong retail sales showing some support for the market from the domestic side, the import and export sectors continued to suffer in 2Q09. As overall demand for logistics and manufacturing space remains weak, high vacancies and impending new supply will continue to weigh on rentals. In addition to the 10% drop in rentals from their peak in 2008, many landlords are beginning to introduce a slew of incentives such as rent-free periods and subsidized fit-outs. Vacancy stands at 27.2% with some tenants surrendering extra space back to landlords.

In order to support Beijing’s logistics sector, the government introduced a national-level bonded park near the Beijing airport called the Beijing Tianzhu Free Trade Zone. This new park provides benefits such as favourable tax policies and easy foreign currency exchange and is expected to help support the development of the logistics industry in Shunyi District. Furthermore, Majuqiao, a logistics hub between Beijing and Tianjin, has also attracted significant investment from domestic players. At the same time, the lack of confidence and strained balance sheets of many foreign investors has hindered their ability to return to the market. We anticipate that they will keep this cautious approach throughout the end of the year, causing many projects to be further delayed. Nevertheless, the government’s inclusion of the logistics industry in its stimulus plan should help generate new opportunities in the market.


The market is improving, with domestic investors becoming major players in the commercial property sector.  Following a rebound in transaction volumes in the mass residential market and moves by the central government to lower the minimum capital requirement for developing mass residential projects, both the property and land investment markets were robust in the second quarter. Overall, market activity was driven by a combination of local developers engaged in portfolio adjustments, often via equity transactions, and international investors continuing to divest their balance sheet assets.

As retailer and tenant demand continues to drop sharply due to a large influx of new supply, rentals will continue to experience downward pressure, concurrently dragging down capital values. Though a number of institutional investors are holding a bullish view of the Beijing property market, acquiring a revenue generating property with attractive yields remains a challenge. However, we are currently witnessing a convergence between investors and buyers and expect this trend to continue through the second half of the year. Lastly, with the revised version of “The Insurance Law of the PRC” formally going into effect in early October, state-owned insurance companies will be allowed to directly acquire real estate in China. This new policy has spurred a number of large domestic insurance companies to actively establish property investment teams in order to take advantage of this investment opportunity.


Post-Olympic Weakened Demand and Increased Supply.  After a difficult 2008, when the high expectations of strong growth in tourist arrivals resulting from the long-awaited Olympic Games remained unfulfilled, the first five months of 2009 continued to be challenging for hotels in Beijing. Mr. Andreas Flaig, Managing Director of Jones Lang LaSalle Hotels, commented, “The projected after-Olympic effects, which we have seen in other Olympic cities in the past, have been offset by the weakened economy. In particular international tourist arrivals have been negatively affected and with the considerable new supply in the run up of the Olympic Games now fully penetrating the market, Beijing’s four- and five-star hotels feel considerable pressure on both occupancy and ADR.” ADR and occupancy among a sample of five-star hotels (8,957 guest rooms) as of year-to-date May 2009 declined by 22.2% and 18.4 percentage points compared to the same period in 2008, respectively, resulting in a decline in RevPAR of 43.9%.   

Mr. Flaig added, “With no apparent signs of recovery among the world’s financial markets we do not assume international tourist arrivals to recover in the short-term. We however expect domestic demand to continue to record healthy growth rates, which is also supported by the central government’s considerable stimulus packages.” Despite the recent influx of new hotels, the supply pipeline remains strong with the number of internationally-branded upscale hotel guest rooms to increase by more than 30% over the next three to four years. “Competitive pressure is assumed to increase going forward and we expect the market to consolidate with non cash-flow generating hotels facing intense pressure to undergo a re-positioning to remain competitive or profitable,” said Mr. Flaig.