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The Knowledge Report Beijing Office Property Market - 1Q 2012
Apr 27, 2012
1Q 2012 | OFFICE
The Knowledge Report
Beijing Office Property Market
Given the positive market sentiment accumulated in the past two years, Beijing's overall office property market staged a fair and stable performance in the first quarter of 2012. The disequilibrium between supply and demand remained unchanged as new completion was limited, leading to a continuous narrowing availability across the board. Although potential demand from both MNCs and domestic enterprises were firm, the leasing market in 1Q12 appeared to be somewhat lacklustre compared to the extremely active year of 2011, which was attributable to seasonality factor, high occupancy rate and, more in essence, the continued growth of occupational cost. The average net effective rent continued to climb, but the growth momentum softened as predicted, associated with the declining transaction volume. The office property investment market was extremely active during the quarter, with several recorded transactions including a few core assets' acquisitions.
Growth China GDP* Beijing GDP* FAI* Utilised FDI* Beijing CPI* Current Bank Rate Tertiary Industry* 8.1% 7.0% 15.2% 18.8% 3.7% 7.05%^ 7.4%
* Data as of end-1Q12 ^ 5-year term lending rate Source: Beijing Statistics Bureau, PBOC
Rents Overall Grade A Grade B CBD East Chang An Avenue East 2nd Ring Financial Street Lufthansa Zhongguancun Asian Games Village Others
Only one new project, Borui Plaza located in the Lufthansa submarket, was completed during 1Q12, adding an office GFA of 45,000 sqm into the market. Meanwhile, one existing development situated in the Wangjing submarket was upgraded to the Grade A sector, while another project in the East 2nd Ring submarket was withdrawn due to the transition to owner-occupancy. Consequently, the total stock of the Beijing office property market (including Grade A and Grade B) was revised to 11.98 million sqm as of end-1Q12.
45,000 ()2012 1,198
Rental values continued to be ramped up by robust demand although growth momentum softened.
Supply Vacancy Rents Capital Values
Although inquiries and inspections in many
The Knowledge Report | 1Q 2012 | OFFICE | Beijing
buildings remained at a high level, the decision making time was obviously prolonged as contract amounts were growing. Meanwhile, landlords of low vacancy rate buildings were rigorous in selecting tenants that were in queue for surrendering spaces. All of these combined led to a slowdown of a certain extent in leasing market, and the net absorption decreased by almost 50% q-o-q to 63,056 sqm accordingly. On the other hand, the overall vacancy rate decreased marginally by 0.39 percentage point q-o-q to 3.86% as of end-1Q12. During the quarter, most large scale deals were concluded in newly launched projects or Grade B buildings that conducted comparatively lower rentals, with the automobile, software, energy, electronics and investment sectors being the main drivers. Representative leasing deals included Daimler's new lease of 9,000 sqm in One Indigo, Autodesk's commitment of 2,000 sqm in Parkview Green, China Jianyin Investment Technology's take-up of 2,429 sqm in China Overseas International Centre, Amazon's occupation of 5,000 sqm in Ocean International Centre and Shell's leasing of 2,800 sqm in Global Trade Center.
Chart 1: Overall Beijing Office New Supply, Net Absorption and Vacancy Rates 1
50%63,056 0.393.86% 9,000 2,0002,429 5,0002,800
Chart 2: Beijing Office Rents by Sector and Submarket 2
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
Encouraged by the unchanging strong market fundamental and the anticipated limited supply in the next two years, many landlords maintained high rental expectations. Nevertheless, constrained by the narrow availability and most companies' operational cost budget, rental increment was apparently lower than the previous three quarters. The average net effective rent in Beijing's office property market grew to RMB227.75 psm per month by end-1Q12, up 4.92% q-o-q or 37.98% y-o-y. By submarket, the CBD and Financial Street areas continued to top the overall market, with rentals reaching RMB264.25 and RMB275.67 psm per month, up 4.48% and 5.91% q-o-q, respectively. In addition, the rent of the Lufthansa submarket increased by 7.03% q-o-q, the largest growth for three straight quarters.
Both overseas and domestic investors demonstrated strong confidence in Beijing's office property market in 1Q12, as evidenced by at least four en bloc sales investment transactions registered in 1Q12. Keppel Land China, a subsidiary of Singapore-based developer Keppel Land Limited, acquired Aether Square located in the CBD's core area. The project has a total GFA of 100,000 sqm, consisting of office and retail components and is scheduled for completion sometime between 2H14 to 1H15. In addition, two projects located in the Zhongguancun submarket, China Electronics Plaza Tower B with a GFA of 60,000 sqm and Metropolis
Tower with a GFA around 35,000 sqm, were acquired by a domestic financial institution for a total consideration of approximately RMB1.6 billion and by New Oriental Education & Technology Group at a cost of roughly RMB1 billion, respectively.
Major indicators show that China's economy is in the midst of a gradual slowdown. Hence, the Central Government reiterates seeking stability while pursuing changes, indicating awareness and confidence to face the challenge. Fiscal policies to spur domestic demand and monetary measures to ease the credit environment, e.g. the further downward adjustment of reserve requirement, are expected over the next six months. Prospects for a soft landing of the Chinese economy remain high, according to the World Bank (April 2012). Against this backdrop, Colliers International views that the stabilisation in Beijing's office property market development should continue in the short to medium term. However, demand from enterprises with higher exposure to external economy may be impaired to a certain extent. The Beijing office property market is expected to receive approximately 298,000 sqm of new space, primarily in the Grade B segment in the residual period of 2012 and the total stock should expand by 2.64% y-o-y to 12.3 million sqm correspondingly. In the meantime, some high quality projects, which will be launched in 2013, will kick off their pre-leasing programmes in 2H12. As a result, the competition between existing buildings and new developments, and even between traditional submarkets and emerging areas, is expected to increase, resulting in a dynamic leasing market. Demand, especially consolidation and expansionary demands, should remain strong, while occupiers will be more financially practical in corporate real estate strategy. The overall vacancy rate should hover at around the current low level or it should see a marginal increase due to the impact of new completions. Meanwhile, the upward trajectory of overall rents should continue albeit with a slower pace. The office sector should continue to be top priority for many investors when considering investing in Beijing's commercial property market. Not only will investors eye the initial yield, but they will also evaluate the potential appreciation of capital values, as well as the secured rental income. Landlords are poised to take advantage of the upswing of the market cycle, which causes more investment opportunities, including core assets in prime location, to loom onto the market. The Beijing office property investment market should remain active in the rest of 2012.
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