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A Quarterly Overview of the Beijing Office Market (4Q2004)

Market Review

From January to November 2004, there were 1,637 newly contracted projects utilizing foreign capital, a year-on-year growth of 32.1 percent. Actual use of foreign investment was valued at US$2.74 billion, a year-on-year growth of 41 percent.

In the fourth quarter, average achievable rents grew by 4.4 percent to US$26.3/ month/square metre (sq.m) (based on net floor area). NCI Tower, located on Jianguomenwai Dajie, was the only grade-A office building completed in the quarter.  On the demand side, take-up dropped slightly compared with the previous quarters at  76,000 sq.m. The average vacancy dropped by 0.9 percent to 12.5 percent.

Supply

NCI Tower was completed at the end of December 2004, bringing the total grade-A office stock in Beijing to 3.23 million sq.m and partly relieving a shortage of new supply around the CBD.

Demand

Beginning on December 1, 2004, foreign banks are allowed to provide renminbi currency services to Chinese enterprises in Beijing as part of China's commitment to open up its financial sector. Some qualified foreign banks are seeking new office space to strengthen their business. The further improved open policy to foreign insurance companies results in strong demand of this industry. Network and software related companies were another active source of demand.

This quarter, take-up along East Chang'an Jie and in the Jianguomen area was highest among the main sub-markets. Being adjacent to CBD, the area has always been a preferred choice for companies in the service sector such as insurance and banking. Availability in the CBD is very limited and tenants will have more choices along East Chang'an Jie and Jianguomen. In addition, rents on East Chang'an Jie and Jianguomen are relatively lower than those in the CBD. Hence, more transactions were recorded in this quarter.

In the CBD, the limited availability of completed projects prompted prospective tenants to focus on office buildings, which will soon be completed. For instance, PricewaterhouseCoopers pre-leased about 19,000 sq.m in Fortune Plaza’s Tower A. Meanwhile, take-up softened in the Zhonguancun sub-market, where grade A office tenants are mainly multinational or renowned domestic technology companies.

The sales and purchase market was rather active during the fourth quarter of 2004. Morgan Stanley purchased the north tower at R&F Twinstower located on the East Third Ring Road for investment purposes. Gateway Plaza, a grade-A project in the Lufthansa area, to be completed in the first half of 2005, shifted its market strategy from selling to leasing, indicating an optimistic attitude of some developers about the Beijing office market. Other major transactions include: China National Machinery & Equipment Corporate (Group) and Zhongwu Ideal purchased Towers A and B of China Electronics Plaza in Zhongguancun; China Power Investment Corporation and China Telecom bought the south and north towers of Yingchuang Centre in Financial Street.

Table 1   Major Leasing Transactions in Q4, 2004

Table 2   Major Sales Transactions in Q4, 2004

Rents and Sale Prices

In Eastern Beijing and Financial Street, new grade-A office supplies for lease was less than 60,000 sq.m in 2004. Most of the new supply entered the market near year’s-end, leading to significant take-up of existing stock. In 2005, new projects will enter the market in the second quarter. As a result, rentals for most projects increased during the fourth quarter. DTZ's survey indicates that the average achievable rent for grade-A office space in the fourth quarter was US$26.3 /month/sq.m (based on net floor area), an increase of 4.4 percent compared to the previous quarter. Rental growth in the CBD and at Lufthansa was more significant than other areas which recorded increases of 7.6 percent and 4.6 percent. The growth levels in Lufthansa, East Chang'an Jie and Jianguomen, Financial Street and Zhongguancun were 3.8 percent, 3.3 percent, 2.9 percent and 2.9 percent.

The average grade-A office asking price remained stable at US$2,144 sq.m this quarter.

Vacancy

Although new supply in 2004 was more than in the previous two years, demand was strong and average vacancy rates dropped to 12.5 percent, down 2.3 percentage points from 2003. East Chang'an Jie/Jianguomen was the only sub-market that recorded a slight increase in vacancy rates because of new supply from NCI Tower. In other sub-markets, vacancies in the CBD, Lufthansa, East Second Ring Road, Financial Street and Zhongguancun, were 3.1 percent, 8.5 percent, 7.1 percent, 7 percent and 30 percent, a marginal drop from that of the previous quarter.

Market Outlook

Two project in the CBD, Fortune Plaza Tower A and Full Tower, with approximately 140,000 sq.m will be completed in the first half 2005. Central International Trade Centre, a selling project, will be completed in the second half of 2005. In the Lufthansa area, Gateway Plaza will enter the market during the second quarter of 2005. The sub-markets of East Chang'an Jie/Jianguomen and the East Second Ring Road will experience a surge in supply of 500,000 sq.m. Rentals in East Beijing are expected to encounter downward pressure in the second half of 2005. In Financial Street, Winland International Financial Centre will be completed providing 46,000 sq.m of office space before mid-2005. Other projects in the area will add about 250 000 sq.m. About half of the space has been sold. In the Zhongguancun area, Zhongguancun Financial Centre and SP Tower will be completed in 2005, which is expected to increase pressure on occupancy lev