Market Conditions & Forecast Second Quarter 2001

Executive Summary

Although Beijing's economy appears to be withstanding an adverse impact from the cooling down of the American and European economies, the 2Q clearly indicated that the global slowdown is indeed being felt in the office market. The robust demand experienced by last year's office market is contracting as MNCs begin to yield relocation needs to cost-control initiatives. If net absorption continues at the pace of the first two quarters, total annual take-up for 2001 will finish the year more than 49% lower than the previous year. With the citywide vacancy level at 11.17%, rents appear reluctant to adjust downward with citywide average rents (all grades) only slipping 2.66% in the 2Q to US$24.85. Rents are expected to decrease by an additional 2-3% by the end of 2001.

Market Supply

Beijing's inventory of all grades of office space reached 4,122,559 sq m by the end of the second quarter, with Grade A office space composing 43% of this inventory. Total new office space in 2001 for the city is estimated at 756,000 sq m consisting of 368,000 sq m and 388,000 sq m of Grade A and Grade B office space respectively. Office inventory is expected to reach 4,591,559 sq m by the end of 2001. In 2Q 130,000 sq m of office space came on-line including 70,000 sq m of Grade A offices.

More than 45% of Beijing's total office stock is located in Chaoyang District, which remains the most popular district among MNCs. The Beijing Municipal Government unveiled its blueprint for the city's CBD last year to be located in Chaoyang District. In connection with the CBD initiative, new Prime and Grade A space is expected to continue to grow in Chaoyang with significant new supply anticipated in 2004-2005.

Select Office Building Available for Occupancy in 2001

Chaoyang District's office stock reached 1,901,932 sq m at the end of 2Q 2001. With an estimated additional new supply of 211,000 sq m, Chaoyang's office stock is expected to reach 2,112,932 sq m by the end of 2001. Chaoyang's Grade A office stock remained unchanged 2Q at 842,783 sq m. A total new supply of 111,000 sq m Grade A office space will bring Chaoyang District's stock of Grade A office space to 953,783 sq m by the end of 2001. The Exchange Beijing and China Life Tower, both available for occupancy early 3Q, will contribute respectively 41,000 and 70,000 sq m of Grade A office space to the district. Diyang Building added 30,000 sq m of Grade B office space to Chaoyang in 2Q, and the International Medicine & Medical Appliances Plaza and China International Technology Exhibition Center are each slated to contribute 50,000 sq m of Grade B office space in the third and fourth quarters.

In Haidian District, Cyber Tower added 70,000 sq m of Grade A office space in 2Q. Available space to rent in Cyber Tower is limited, however, as the building had been sold to many individual owners. Prior to this year, office space in Haidian district was all classified as Grade B, but with 107,000 sq m of Grade A office space having entered the market in 2001, and with the first phase of the Legend Technology Park slated to come on-line next year, growth in Grade A office space will continue in Haidian District.