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A Quarterly Overview of Beijing Residential Market (Q3, 2004)

Market Review

We are in a golden season for the residential market, and this quarter saw very active transactions. In sum, market rents were stable overall with a slight decline in vacancies. Demand for serviced apartments remained strong and rentals went up slightly. For leasing apartments, some landlords lowered their asking rentals to attract tenants resulting in lower vacancies. Since few luxury villa projects came onto the market this quarter, and because of strong demand, the luxury market remained stable.

A new document issued by the Ministry of Land and Resources is expected to have a great effect on the market in the long run. Document No. 71 says the land use rights for land used by businesses must be transacted publicly through tender offerings beginning from August 31 onward.

Supply

In the luxury leasing market, very few new projects were launched this quarter. New supplies mainly involved the gradual transfer of new units in the latter phases of earlier launched projects to individual owners, such as Blue Castle International Apartments and Seasons Park. The overall new supply of apartment units was lower than the previous quarter.

As for villas, very few projects were completed in the third quarter. The supply of luxury villas remained stable.

On the sales front, fewer luxury apartment projects came onto the market than in the second quarter. On large-scale projects, developers have selectively released new offerings allowing gradual absorption.

Rental Prices and Vacancies

Strong seasonal factors coupled with solid demand resulted in a very positive market, driving luxury residential rents to increase by 1.1 percent. The average rate of vacancies dropped by 2.2 percent to 18.4 percent.

Positive economic growth in China prompted multinational companies to send additional expatriate employees to Beijing. Strong demand has boosted rents for serviced apartments, which rose by 2.9 percent, with rents for high-end serviced apartments rising from US$26.60 per month per square metre (sq.m) to US$27.30/month/sq.m. The overall vacancy rate for serviced apartments remained steady.

As for leasing apartments, some developers and landlords have reduced their asking rents slightly in order to attract new tenants. Projects which have increased their occupancies included the Seasons Park and Blue Castle International Apartments. Rents for leasing apartments in this quarter dropped by 3.7 percent to an average of US$14.90/month/sq.m, while the average vacancy rate dropped to 21.3 percent.

Demand and supply for high-end villas has been stable when compared to the other two residential categories. Expatriates relocating to Beijing with their families particularly preferred projects with well-established communities located in close proximity to international schools.

High-end villa vacancies have remained low compared to other residential categories. The effect of the peak season has further driven the average vacancy rate down to 12.3 percent.

Sales

Prices for high-end residential properties remained stable. According to DTZ Research, Beijing's high-end residential index remained stable at 96.2.

Project locations and market positioning remain major factors for investors to consider when investing in a project. Projects with good locations and aggressive marketing campaigns achieved good sales performances. The Beijing Central Business District (CBD) remained one of the hottest spots for investors with average price rising by 3.97 percent.

Market Outlook

For serviced apartments, strong economic performances and further liberalization of the market will continue to attract foreign investment. The number of expatriates in Beijing is expected to increase. As the supply of serviced apartments managed by internationally renowned companies remains relatively limited in Beijing, rents for such apartments in the next quarter will remain stable.

More luxury residential properties for lease will be completed and enter the market next quarter. Competition between projects and arrival of winter will further add pressure to rents. Many individual owners and developers have already considered lowering their asking rents in the hope of attracting more tenants to help build up the occupancy and appeal of their projects and to allow room for rent appreciation in the future.

The luxury villa leasing market is expected to remain stable because demand, mainly family households, tends to be strong and steady. As a result, rentals and vacancies are expected to remain stable in the next quarter.

For the luxury residential sales market, it is believed that there is still room for price increases for projects with good locations and successful marketing strategies. As more long-term investors are active in Beijing's luxury residential market, projects with good locations will have a strong potential for capital appreciation. With the enactment of Document no. 71, land transactions will be more transparent and competition among developers is expected to intensify. However, the final effects of the document's enactment will not be felt for some time to come.