Office Market Quarterly Review (2003 Q4)

In Q4 2003, the economy of Beijing continued to develop steadily. In the first 11 months, Beijings GDP reached RMB 312.06 billion, representing a year-on-year increase of 10.1 percent, a growth rate similar to that of the previous quarter. Some 1,234 foreign-invested enterprises won approval for operation in the Chinese capital, 1.5 percent less than in the previous quarter. Despite that, the amount of foreign capital actually used, or FDI, retained a strong growth of 16.9 percent.

Overall speaking, this quarter s Grade A market remained steady. In terms of supply, three grade A office buildings entered the market. Much of the demand came from the insurance and telecommunications sectors, in which many well-known foreign companies tried to expand their business due to further market liberalization in these industries and huge market potential in China.

Despite slightly strengthened demand, the increase of Grade A office supply in the Chinese capital, especially in Zhongguancun, will be quite significant in the coming year. Due to the take-up pressure, the average asking rent of Grade A offices in Q4 2003 decreased to US$29.83 month/sq.m. (based on net floor space). In comparison to the previous quarter, the average vacancy rate remained stable at 14.8 percent.

Supply

Three projects, namely Shining, Silver Tech Tower and Oriental Plaza C2 entered the market in the fourth quarter, aggregating the stock to 3.14 million sq.m.

Demand

Two years after Chinas entry into the WTO, its effect deepened, especially in the insurance and telecommunications sectors.  According to the WTO agreement, Beijing has opened its market to foreign insurance companies, and their product and service areas will further expand in the near future. In order to seize the opportunities, many well-known foreign insurers started their office search in Beijing and played an active role in this quarter s Grade A office market. Among the important factors influencing their choices is a professional office image in a good setting along with a convenient location. That helps explain why office buildings located along the East Changan Street have become popular. Meanwhile, the telecommunications sector has also attracted many enterprises in the industry, both domestic and foreign. In this field, Beijing has competitive advantages due to its huge consumption potential, an abundant supply of talent and its proximity to policymakers. For example, NTT DoCoMo, the largest mobile telecommunications enterprise in the world, chose to locate at Raycom Info Tech Park A this quarter.

As domestic companies and large state-owned enterprises expand their business, they remain as the largest consumers of large blocks of Grade A office space in the sales market.

Rents and Sale Prices

Beijing will experience a surge in supply in 2004, with new Grade A offices in Zhongguancun and Financial Street expected to reach at least 400,000 sq.m. and 200,000 sq.m., respectively. Knowledge of this, coupled with the new completions in Q4 2003, caused the average rent and price of Grade A offices to drop slightly. DTZ s survey indicates that the average asking rent of Grade A offices in Q4 2003 remained stable but dropped slightly at 1.8 percent as compared to that of Q3 2003 to US$ 29.83 /month/sq.m. (based on net floor space). The rental index was 71.1. The average asking price of Grade A offices was down 3.3 percent from Q3 2003 to US$1,973/sq.m. (based on gross floor space) and the price index was 118.

Vacancy

While as many as three Grade A office buildings entered the market this quarter, the increase in demand from certain industries resulted in a stable average vacancy rate. DTZs survey indicates that the average vacancy rate of Grade A offices in Beijing in Q4 2003 remained largely unchanged at 14.8 percent. By comparing different administrative districts in Beijing, the average vacancy rate in Haidian District increased slightly because of the new supply. On the other hand, the vacancy rates in Chaoyang, Dongcheng, Xicheng, and Chongwen districts dropped slightly due to the strengthened demand.

Market Outlook

2004 will be the third year of Chinas entry into the WTO. As China takes further steps to implement the WTO agreements, increased services will be available, especially in finance, insurance, and telecommunications. As the Chinese economic growth is expected to remain strong and the global economy is widely expected to improve steadily, more foreign companies and organizations will enter the Beijing market and occupy more office space. Demand for office space from domestic companies is expected to remain firm as China s economy continues to grow.

In view of the future supply of Grade A office, the supply in Zhongguancun and Financial Street will increase significantly. Additional Grade A offices in CBD and its vicinity will also enter the market, giving more pressure to the market to digest the new supply.

As a result of strengthened demand somehow offset by the surge in supply, it is envisaged that the averaged rent of Beijing's grade A office will slightly decline in the coming months.

Note: Rental and price indices refer to the levels in Q3 1993 as 100. The existing stock and new supply data are in gross floor areas.