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The Knowledge Report Beijing Office Property Market - 4Q 2011

Jan 20, 2012
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4Q 2011 | Office

The Knowledge Report


Beijing Office Property Market

Market Overview
Beijing's overall office property market continued to show a strong performance in the last quarter of 2011. Despite that the stock of office property expanded with new completions, existing vacant space and new projects were promptly digested by robustly sustained demand, with the overall vacancy rate resting at a historical low level. The average net effective rent grew consecutively over the past two years albeit the pace was decelerating as it has since 3Q11. While tenants showed growing cautious sentiment and transaction volume slipped q-o-q, some landlords became less ambitious in rental quotations and offered more realistic terms to renewal occupiers, especially key tenants, in pursuit of stable occupancy rates. An en bloc sales concluded by a domestic player highlighted the office investment market while overseas investors' presence continued to be constrained.

2011 2011

EcOnOMic inDicatOrS
Growth china GDP* Beijing GDP** fai*** Utilised fDi** Beijing cPi*** Bank rate* tertiary industry** 9.2% 8.0% 14.2% 4.9% 5.7% 7.05%^ 8.5%


* Data as of end-4Q11 ** Data as of end-3Q11 *** Data as of end-Nov 2011 ^ 5-year term lending rate Source: Beijing Statistics Bureau, PBOC

MarkEt PErfOrMancE
Rents Overall Grade a Grade B cBD East chang an avenue East 2nd ring financial Street Lufthansa Zhongguancun asian Games Village Others


Two new developments, namely Parkview Green, located in the CBD submarket, and Beijing Sun Place Building, located in the Lufthansa area, were completed and launched onto the market during this quarter. This added a combined new office space of 127,000 sqm to the stock. Consequently, the total stock of the Beijing office property market (including Grade A and Grade B) expanded to 11.97 million sqm as of end-2011, up 4.25% y-o-y.

CBD 127,000 () 20111,197 4.25%

The average net effective rent grew consecutively over the past two years albeit the pace was decelerating as it has since 3Q11.

Supply Vacancy rents capital Values

During 4Q11, demand was widely spread in various kinds of industries, with major generators coming from finance, automobile, IT, pharmaceuticals, energy and services

2011 IT 4.25%5.06

The Knowledge Report | 4Q 2011 | OfficE | Beijing

sectors. The overall vacancy rate continued to drop, resting at 4.25% as of end-4Q11, down 5.06 percentage points y-o-y. Meanwhile, net absorption amounted to 125,278 sqm, which was 53.2% of that in the last quarter. The fall of the net absorption was primarily a result of diminishing availability and rising occupational costs. Significant leasing deals in this quarter included's commitment of 20,000 sqm in Sinolight Plaza, located in the Wangjing area, Eli Lilly and Company's take-up of 5,000 sqm in Indigo, and Cathay Life Insurance's lease of 1,900 sqm at Parkview Green. It is worth noting that climbing rental costs have incubated a "wait and see" sentiment among many occupiers, especially those with large space requirements. Therefore, some expansionary and relocation demand appeared to have been put on hold and targeted to converge in decentralised precincts in this quarter.
Chart 1: Overall Beijing Office New Supply, Net Absorption and Vacancy Rates 1

125,27853.2% 20,000 5,0001,900

Chart 2: Beijing Office Rents by Sector and Submarket 2

sqm |
600,000 500,000 400,000 300,000 200,000 100,000 0 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 30% 25% 20% 15%

RMB psm per month |
350 300 250 200 150

10% 5% 0%

100 50 0 CBD East Chang East 2nd Ring An Av enue Financial Street Lufthansa Zhongguancun AGV Others

New Supply |

Net Absorption |

Vacancy Rates |

Grade A Office Rents | Overall Average Rent |
Source: Research, Colliers International Beijing

Grade B Office Rents |

Source: Research, Colliers International Beijing

The upward trajectory of the overall rents remained unchanged across the board during 4Q11, underpinned by the low vacancy rate and landlords' strong stance. The overall average net effective rent of the Beijing office property market grew by 8.34% q-o-q, or 40.25% y-o-y, to RMB217.07 psm per month by end-4Q11. Against the backdrop of demand shifts from Grade A to Grade B properties, as well as a sufficient amount of expansionary and renewal activities undertaken by existing and prospective occupiers, the Grade B sector outperformed the Grade A sector during this quarter, with its q-o-q rental growth logging nearly one percentage point higher than the other's. The q-o-q rental growth in the Lufthansa submarket was the most aggressive, posting at 9.57% q-o-q, while that of the rests ranged from 4.51% to 9.30%.

2011 8.34% 40.25%217.07 9.57%4.51%9.30%

One en bloc sales transaction was concluded in Beijing's office property investment market in 4Q11. Guangyao Dongfang Group, a Shandongbased domestic real estate developer and investor, purchased the Jin Yu Building, which is located in the West Third Ring Road, for a total consideration of RMB1.36 billion. The project has a total GFA of 98,000 sqm and is designated for strata-title sales by Guangyao Dongfang after the acquisition.

2011 ----13.6 98,000

The Knowledge Report | 4Q 2011 | OfficE | | Beijing Beijing

Given the growing uncertainties in the external economic environment and domestic policy dilemmas, China's economy is forecasted to slow down in 2012, with the country's GDP being projected by many economic research institutes to expand by approximately 8% to 8.5% y-o-y. Notwithstanding this, China should remain an engine to facilitate the growth of the fragile world economy, therefore, enticing more overseas and domestic enterprises to continue upholding their expansion plans in China/Beijing. Demand for quality office space should be sustained, as evidenced by several MNCs' already large scale expansion plans in Beijing, including Deloitte, GE, Google and Fujitsu. In view of this, Colliers International projects an optimistic outlook for Beijing's office property market in 2012. Due to the postponements of some projects and limited commercial-usage land plots acquired in core areas during the global financial crisis period, a possible supply vacuum of Grade A offices in conventional submarkets is expected in 2012. However, several Grade B buildings and projects in suburban business park areas will be launched onto the market. With an upgraded quality and competitive rental quotations, these non-Grade A developments should become a more affordable alternative for many costcautious occupiers. The tune that the market will continue to be landlord-favoured should slate a strong confidence for landlords to bump up rents. Nevertheless, transaction levels will be subdued by limited space available for letting; in addition, current rents are approaching many large-scale corporations' threshold. Colliers International forecasts that the rent growth should be easing compared to 2011, with the y-o-y growth rate ranging from 10 to 15%. The CBD and Financial Street submarkets should continue to be the most expensive office areas, and some emerging submarkets should be able to capitalise on the opportunity to implement a significant uplift in rents. The investment activities in Beijing's office property market should continue to stay at a high level in 2012, especially in the latter half, as a looser monetary policy is expected. In line with the stable rental growth, capital values of the majority of office properties in Beijing is expected to continue to increase, on the back of the limited number of tradable assets where secure income is keenly sought as a buffer against economic uncertainties.

2012 8%8.5% / 2012

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amanda Gao Managing Director

North China Tel: 86 10 85181633 Fax: 86 10 85181638

carlby Xie Director

Research, North China Tel: 86 10 85181590 Fax: 86 10 85181638


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