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A Q3-2004 Overview of the Beijing Office Market

Market Review

From January to September, Beijing's gross domestic product was valued at 297 billion yuan (US$35.88 billion), a one-year increase of 13 percent. A reported 1,016 projects used foreign capital from January to July, an annual increase of 32.6 percent. Utilized foreign investment rose by 56.4 percent to US$18.6 billion.

The Grade-A office market in Beijing moved upward in the third quarter. Four Grade-A office buildings were completed this quarter in the Zhongguancun and Asia Games Village areas. Take-up (rentals and leases) increased by about 100,000 square metres (sq.m) this quarter. The average rent of a Grade-A offices rose 1.4 percent to US$25.20 per month per sq.m (based on net floor area). Most of new supply was located in Zhongguancun, with no new projects reported in the sub-markets of eastern Beijing. The average vacancy rate increased to 13.4 percent from 9.5 percent last quarter, because a large supply came on the market in a relatively short time.

Supply

China Electronics Plaza, Raycom Infotech Park C, Yingu Mansion in Zhongguancun and Celebrity Plaza in Asia Games Valley came on the market this quarter raising total Grade-A offices available in Beijing to 3.18 million sq.m.

Demand

Although take-up declined in the third quarter from second-quarter reports, it was still above the average of last year's take-up per quarter. Further opening of China's property market and rapid GDP growth in Beijing spurred strong demand. Because of a lack of new supply and a low vacancy rates in the CBD, Financial Street and Lufthansa areas, demand was dampened. Even though the overall take-up dropped this quarter, take-up in the Zhongguancun, East Chang'an-Jianguomen and East Second Ring Road areas continued to increase. In Zhongguancun, well-designed and well-managed office buildings remained highly sought despite pressures stemming from a large supply.

Rents and Sale Prices

Rents this quarter increased in eastern Beijing because of strong demand. This was most evident in Chaoyang's CBD where rents increased by 5 percent over the previous quarter. Rents in the Lufthansa, East Second Ring Road, and East Chang'an-Jianguomen areas increased by 2.8 percent, 2.8 percent and 2.3 percent. But the average rental rate in Zhongguancun dropped by 2.1 percent because of a large supply in the area. Overall, the average achievable rent increased by 1.4 percent to US$25.20 per month per sq.m (based on net floor area).

On the sales front, the average asking price of Grade-A offices rose by 2.4 percent to US$2,145 per sq.m.

Vacancies

Because of a surge in new supply, DTZ's survey indicates that in Beijing the average Grade-A office-vacancy rate increased to 13.4 percent in 2004's third quarter. About 75 percent of new supplies were located in Zhongguancun, where the vacancy rate soared to 33.2 percent. Vacancies for average offices in eastern Beijing declined to 3.8 percent this quarter because of an absence of new supply.

Market Outlook

Estimates indicate that demand for office space will continue to grow because of the overall strength of the economy and increased business activity, including that expected to result from implementation of World Trade Organization agreements over the coming two years.

In the next six months supply is expected to be bolstered by the completion of new projects in Zhongguancun and Financial Street, including the Zhongguancun Financial Center, Winland International Center (for lease only) and Xinsheng Plaza (for sale only) projects, and will likely increase competition in these areas. But rents in these areas are expected to remain stable. In the East Chang'an-Jianguomen area, NCL Tower will come onto the market by the end this year, and this will add approximately 48,000 sq.m of office space. Rentals in the CBD are expected to increase steadily in the coming months because of strong demand.