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News Release

Hong Kong and Macau

Jones Lang LaSalle: Rebounding Demand Leads to Slight Upturn in Beijing Property Market in 4Q09

As 2009 came to a close, Jones Lang LaSalle saw a rebound in demand across all sectors of the Beijing property market, which resulted in rental decreases to slow down or, in some sectors and submarkets, actually turn around.  Some market highlights during the fourth quarter are as follows:
• Office – Beijing once again showed that it was one of the most active markets in the region despite global economic conditions, as it registered a net absorption of 93,600 sqm in 4Q09.
• Retail – Luxury brands returned to the market in the fourth quarter as several pre-leases were signed during the period. Newly completed projects continued to put pressure on rents, although some well-occupied malls ended the year on a high note.
• Residential – Leasing demand increased steadily and capital values reached another record high.
• Industrial – Despite better economic indicators, demand in the industrial leasing market remained weak, causing landlords to become more aggressive in the lead-up to the year-end.
• Investment – Prime office capital values steadily increased as demand from overseas investors picked up and domestic firms aggressively purchased prime office buildings in core commercial areas.
High vacancy rates weighed on rents despite continued strong take-up
Demand for office space continued to grow and leasing activity was quite high in 4Q09, with net absorption reaching 93,600 sqm. The CBD continued to be the most active submarket, accounting for 41,658 sqm of net absorption. State-owned enterprises (SOEs) were still very active in the leasing market, while demand from foreign companies began to recover with several large leasing transactions taking place. Leasing transactions from foreign companies were mainly driven by consolidation demand, with financial, high-tech and pharmaceutical companies being especially active in the market. Companies in these sectors both consolidated and expanded their existing office space, with some moving to higher quality spaces, eyeing future expansion in China once the economy fully recovers. In 4Q09, foreign companies accounted for 52% of leasing transactions, a 20 percentage point increase q-o-q.
Some of the notable transactions in the fourth quarter included: Standard Chartered Bank leasing 9,000 sqm in World Financial Centre; Intel leasing 9,000 sqm in Global Trade Centre; and Bureau Veritas leasing 2,500 sqm in The Fifth Square. Overall office rents decreased slightly, by 3.1% q-o-q to RMB 202 per square meter (psm) per month (pm). This is a 17.8% drop y-o-y and a 22.0% drop from the market’s peak in 2Q08. Rents in the CBD decreased 3.0% q-o-q to RMB 210 psm pm, or a drop of 24.1% y-o-y—the largest of any submarket. Grade A office rents decreased by 1.7% to RMB 240 psm pm, an 18.8% drop y-o-y.
New supply in 4Q09 was lower than the previous quarter with three new projects totaling 136,200 sqm, bringing the total market stock to 9.2 million sqm. Grade A stock reached 3.86 million sqm, accounting for 42% of total stock. MCC Tower in the 3rd Embassy Area was the only Grade A office completed this quarter— in which 60% of the building has been reserved for the landlord’s self-use, while the remainder will be available for leasing. Several SOEs purchased space for self-use in WHOSE Centre in Finance Street. In the Zhongguancun submarket, the Metropolis Building was the only newly completed building in 2009. These new buildings pushed vacancy rates up to 27.9%. Despite having no new supply in the CBD this quarter, the vacancy rate reached 35%, which is an all-time high for Beijing. The vacancy rate for Grade A offices increased by 1.3 percentage points q-o-q and 6.0 percentage points y-o-y to 29.7%.
Several transactions larger than 5,000 sqm were completed in 2H09, the majority of which took place in the CBD and Finance Street. Total net absorption in the CBD for 2009 reached 168,336 sqm, accounting for 43.2% of the year’s absorption. Mainland Chinese firms, especially SOEs in the financial, energy and media industries, were the main players in the market this year, accounting for about 62% of the total activity—a 37 percentage-point y-o-y increase. Landlords reduced their rents to attract tenants, while the leased-up rate of all Grade A office space completed this year reached 45%.
Due to the economic downturn and other delays, approximately 900,000 sqm of office space under construction has been pushed back for the next two years. In 2010, new completions are expected to be around 1.2 million sqm, 62% of which will be Grade A offices—four such projects, totaling 440,000 sqm, are to be located in the CBD. “While demand is expected to increase, the influx of new supply will continue to push the vacancy rates higher; hence, landlords will face substantial pressure to lease their buildings,”noted Julien Zhang, Managing Director of Jones Lang LaSalle Beijing. “Domestic companies are likely to remain active in the market for the time being as demand from foreign companies gradually recovers. As a result, competition in the market will remain brisk, while downward pressure on rents will remain in 1H10, particularly in areas where new projects are located.”
Demand recovery has slowed, while rents continued to decrease slightly
Due to the delay of several projects, only one prime retail project, EC Mall in the Zhongguancun submarket, opened in 4Q09. Compared to 3Q09, market demand declined in the quarter and vacancy rates climbed from 16.1% to 17.1%. The slowing of the recovery in demand in the quarter was due to the fact that most retailers had already completed their yearly expansion projects, which, combined with the holiday season, resulted in a slowdown in the pace of store openings. In 4Q09, F&B, entertainment, supermarkets and children’s education were the main drivers of the leasing market. Meanwhile, after witnessing three consecutive quarters of economic recovery, international luxury brands became active once again. For example, Versace and Emporio Armani each signed contracts for over 1,000 sqm in The Village North. However, rents still decreased 2.9% q-o-q and 16.8% y-o-y to RMB 486 psm pm as landlords of newly opened projects lowered their rent expectations in order to attract good tenants and keep their occupancy rates high. Other shopping centers refocused their brand collections to suit the preferences of price-conscious shoppers. However, rents in reputable malls along prime locations and with convenient access to transportation stopped decreasing and even began climbing again, with rents rising by 1.3% in the CBD and 2% in Wangfujing.
Only seven malls, with a combined total GFA of 455,562 sqm, opened in 2009. They were EC Mall, U-Town Lifestyle Centre, Glory Mall, Legend Centre, Raffles City, Qianmen Street and Beijing Scitech Premium Outlet Mall Phase I. Although the total GFA of newly opened projects in 2009 was only half of that in 2008, the weak demand in 2009 meant that the vacancy rate increased by about seven percentage points.

“In 2010, we expect market demand to continue to pick up with luxury brands implementing new expansion plans, while mid-range brands and entertainment tenants continue their aggressive expansion,” said Jason Chang, Head of Retail for Jones Lang LaSalle North China.  “However, with around 880,000 sqm of new supply coming in 2010, the downward pressure in rents will continue, and the vacancy rate will increase somewhat. Overall, though, rents will stabilize and capital values will continue to increase along with economic recovery and the implementation of favorable government policies.”
Leasing demand picked up and capital values reached another record high
In 4Q09, leasing demand cooled as the city entered the traditional off-season. “Along with the global economic rebound, a number of MNCs have implemented expansion plans in China as evidenced by the increase in planned arrivals of senior management in Beijing in early 2010,” noted Zhang Hong, Head of Residential at Jones Lang LaSalle Beijing.  “This helped to drive market demand.” While effective rents of luxury apartments have fallen 28% from the 2Q08 peak, overall market rents, supported by recovering leasing demand, stabilized in the fourth quarter. Some embassy officials and senior managers of MNCs with large housing budgets have sustained demand for high-quality residences in the commercial and Shunyi villa areas. Landlords have attempted to meet demand by providing quality furniture and fittings favored by potential clients. However, as the supply of large units in the CBD is limited to just one project, demand has been very competitive in this submarket.

Because prices of serviced apartments are relatively high, the majority of clients are business people staying in Beijing for six months, as well as senior managers arriving in Beijing in the past year. Only one new project was launched in the fourth quarter, Ascott Raffles City in Dongzhimen, which formally opened in November. Given the limited new supply and increased demand, the occupancy rate of most serviced apartments increased notably in the past year, leading to rent increases of 1.9% to RMB 164 psm pm, the first q-o-q increase this year. Rents of luxury apartments and villas were at RMB 82 and RMB 107 psm pm, with respective q-o-q decreases of 0.2% and 1.3%. In 4Q09, rents were stable compared to sharp drops earlier this year triggered by repercussions of the world financial crisis. Supported by the increasing demand, we forecast that rents in the high-end residential market will stabilize and increase steadily.
Meanwhile, the average sales price increased at a similar pace as that of the last two quarters. Pre-sale prices for high-end projects launched earlier this year increased sharply, as did prices of new projects launched in the second half of the year - some of which were record highs. After investment by new owners, some re-launched distressed luxury projects were welcomed by the market given their prime locations and strong rebound of potential demand. Domestic buyers once again continued to dominate the high-end market. Capital values of luxury apartments increased 12.1% q-o-q, reaching RMB 27,478 per sqm - a new high. While the government recently instituted several regulatory changes that should cool demand, we expect capital values to continue to rise due to soaring land costs and bullish demand, albeit at a more moderate pace.
Landlords continue aggressive posture to secure tenants
As the domestic component of Beijing’s economy continued to move forward, as a result of huge increases in investment in the fourth quarter, the import and export sectors also saw some slight improvement. Retail sales, a huge driver of the logistics market, increased 15.9% y-o-y in October and November, while freight carried into the city increased 12.6% y-o-y over the same period. On the trade side, the value of exports over those two months declined by 11.1% y-o-y, while the value of imports was similar to last year. The slight increase in imports may bode well for downstream manufacturing and the export sector, as many manufacturers in China serve as assembly points for components made elsewhere. Investment into Beijing’s industrial sector in October and November totaled RMB 62.38 billion, a 19.4% y-o-y increase.
In general, demand for space in the industrial market, particularly from MNCs, remained weak, pushing landlords to make further rental cuts to secure tenants. In the logistics market, 4Q09 saw Japan-based KWE International vacate space as Korea and Japan-oriented firms continue to suffer from weak consumer demand in those countries. At the same time, however, the Bank of China leased 11,000 sqm in the Beijing Airport Logistics Park (BALP). Nevertheless, most new leases signed were at low rents, as landlords rushed to fill their buildings before the end of the year. As a result, rents for logistics space continued to decline by 3.0% q-o-q to RMB 24.0 psm pm. Vacancy dropped slightly, but still remains high at 37.9%. Although the BALP saw more activity in the fourth quarter, we expect the Tongzhou Logistics Park (TLP) to remain the preferred location for distribution logistics in the city.
Manufacturers were quiet in 4Q09, with little movement in the market. Rents stayed mostly unchanged at around RMB 28 psm pm, while vacancy increased slightly to 25%. BDA remains the hottest area in the eyes of manufacturers, especially the three newly launched major industry park developments: the Biology-Pharmaceutical Industrial Park, Digital-TV and Mobile Communication Industry Base. In general, few industrial spaces for leasing were completed, as the government continues to promote built-to-suit or self-use space in both the manufacturing and logistics sectors instead. However, with some new logistics space coming online in 1Q10, there will likely be greater pressure on the market.
Office capital values increase steadily while land values soar
In line with bullish rebound in the residential market, capital values in prime office sectors increased steadily. A number of domestic and overseas institutional investors, with an optimistic view of the mid-to-long term Beijing property market, actively negotiated with landlords for en- bloc purchases. Several overseas institutional investors, who had owned property for a long time, decided to exit the market with a high yield. In the fourth quarter, two reputable serviced apartments were transferred through equity to offshore investors. Meanwhile, domestic firms continued to aggressively purchase prime office buildings in the core commercial area. “Supported by strong confidence in the Beijing property market, several foreign institutional investors are actively negotiating several projects in the pipeline,” added Eric Pang, Head of Investment at Jones Lang LaSalle Beijing.  In 2009, the value of Beijing land transactions reached a record high. According to information released by the municipal authority, accommodation price for land between the 3rd and 6th Ring Roads increased by more than 50% y-o-y. Developers acquired sites through bidding at public auctions and also through equity purchases. Several distressed projects were launched in the market at high prices after investment and re-positioning.
China Market Outlook
Office - Like Beijing, China’s overall office market stabilized in the 4th quarter, as rents across major Chinese cities fell at a slower rate, and leasing demand in Tier 1 cities was robust. Domestic companies and purchases by owner-occupiers drove demand in most markets. At the same time, looming supply remains a concern and will pressure rents in most Tier 1 and 2 cities.
Retail - Compared to the rest of China, Beijing’s continuing rental declines were the exception in the retail market, as most Tier 1 and 2 cities saw retail rents rise slightly with strong demand from international brands keeping vacancy rates low.
Residential – In 4Q09, capital values were strong in the luxury residential market in most Tier 1 and 2 cities across China, with Beijing leading in price increases. Rents in luxury apartments were mostly flat inTier 1 cities due to weak expatriate demand.  Higher rents are expected in 2010, however, as more business expatriates move to China.