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A Quarterly Overview of the Beijing Office Market (4Q2004) A Q3-2004 Overview of the Beijing Office Market A Quarterly Overview of the Beijing Residential Market A Quarterly Overview of Beijing's Office Market A Quarterly Overview of Beijing Residential Market(4Q2004)

A Quarterly Overview of Beijing Office Market

Market Overview

From January to July 2005, the Beijing economy continued to grow steadily. Major indicators for investment, consumption, and production all indicate the city is experiencing more than 10 percent growth. During the same period, 1,134 new projects utilizing foreign capital were signed, a year-on-year growth of 14.3 percent. The actual use of foreign capital reached US$2.28 billion, a year-on-year growth of 27 percent.

On July 21 2005, China reformed its exchange-rate regime by moving to a managed, floating exchange-rate regime based on market supply and demand with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted to 8.11 yuan per US dollar.

In September, the China Banking Regulatory Commission (CBRC) issued a notice (No. 212) to strengthen control over the operations of real-estate-investment trusts (REITs). Developers who wish to finance their projects through REITs are now subject to tighter measures: (1) Developers must hold all four permits required for the development; (2) they must invest in more than 35 percent of a project using their own capital in the development; and (3) they must qualify as second-class developers or higher. The policy has lifted REITs to the highest level of government control since their introduction.

The Beijing Grade-A office market continued to remain strong during the second quarter of 2005. Average rents experienced a slight increase of 0.4 percent to US$27.20 per month per square metre (sq.m), based on net floor area.  In terms of supply, the Global Trade Center (Phase I), Gateway Plaza and Xinmao Building were completed this quarter and added approximately 243,000 sq.m of office space to the market. Because most of the office space was pre-leased before project completions, take-up increased significantly this quarter to 199,000 sq.m. The average vacancy rate rose to 12.4 percent.

Supply

Three new projects, the Global Trade Center (Phase I), Gateway Plaza and Xinmao Building, entered the market this quarter bringing total Grade-A office stock supplies in Beijing to 3.61 million sq.m.

Demand

The office leasing market this quarter was more active than that of last quarter. In terms of sectors, IT comprised the major source of demand for Grade-A office space. Major transactions were equally distributed among all submarkets in Beijing. Being the most modernized district in Beijing, the CBD and its East Chang’an Avenue/Jianguomen areas attracted many renowned domestic and international enterprises. The major selling points of new projects such as Gateway Plaza and the Global Trade Center were their high quality and convenient accessibility. They have attracted many key clients to their projects. 

In the sales market, demand came mainly from State-owned enterprises and government agencies. The China Banking Regulatory Commission purchased the west wing of the Xinmao Building, about 54,000 sq.m. Furthermore, CERNET Corporation bought the entire SP Tower Block B. Although more foreign investors have shown interest in investing in the office market after the appreciation of RMB, they will need more time to finalize their decisions. Demand streams in office sales market are still coming from domestic enterprises and investors. 

Table 1: Major Leasing Transactions in the Third Quarter of 2005

Table 2: Major Sales Transactions in Q3, 2005

Rents and Prices

The average rent for Grade-A offices increased marginally this quarter. DTZ’s survey indicates that the average achievable rent for Grade-A office during the third quarter of 2005 was US$27.20 per month per sq.m (based on the net floor area), with an increase of 0.4 percent compared to the previous quarter. In terms of districts, rents in the CBD, Lufthansa and Financial Street areas were the highest, averaging US$31.60 per month per sq.m, US$28.80 per month per sq.m, and US$28.30 per month per sq.m (based on net floor area). Average rents in the East Chang’an Avenue/Jianguomen, Zhongguancun and East Second Ring Road areas were US$26.80 per month per sq.m, US$23 per month per sq.m and US$22.90 per month per sq.m (based on net floor area). Compared to the Second quarter, rentals in the Lufthansa and East Second Ring Road areas rose 2.8 percent and 2.5 percent. Their changes were the highest among all submarkets. Rentals on Financial Street, in the CBD and East Chang’an Avenue/Jianguomen areas remained almost unchanged, with small variances of 0.5 percent, 0.1 percent and -0.4 percent respectively. However, because of high rental pressures from new supplies last year, the rentals in Zhongguancun continued their download trend of the last two quarters, dropping another 1.2 percent this quarter.

On the sales side, the average Grade-A office asking price remained nearly unchanged at US$2,324 per sq.m, a 1.3 percent increase from last quarter.

Vacancy

Although a large amount of supply, 243,000 sq.m, entered the market this quarter, the vacancy rate in the Grade-A office market did not increase significantly. A great amount of space was already pre-leased before project completions. DTZ’s survey indicates that the Grade-A office vacancy rate during this quarter was 12.4 percent, up 0.4 percentage point from the last quarter. Among the submarkets, the vacancy rate in Zhongguancun remained the highest, at 23.7 percent, though there was a drop as some projects have successfully attracted new tenants. Vacancies in the CBD, Lufthansa, East Chang’an Avenue/Jianguomen, East Second Ring Road, and Financial Street maintained the same level as last quarter at 11.2 percent, 9.7 percent, 9.2 percent, 7.5 percent and 3.8 percent.

Market Outlook

Beijing’s economy has retained its double-digit growth rate of the past seven years. If the economy continues its growth trend in first half of 2005, growth this year will exceed 10 percent. Steady economic growth and market liberalization will continue to act as the backdrop for Beijing’s Grade-A office market.

Nevertheless, rentals of Grade-A offices will encounter downward pressure because of a surge in supply over the next two years. According to DTZ’s survey, the total supply in the fourth quarter of 2005 will exceed 900,000 sq.m. This number represents one-fourth of the existing stock. New supplies on Financial Street, in the CBD and Zhongguancun, and along East Chang’an/Jianguomen avenues and the East Second Ring Road areas will amount to about 400,000 sq.m, 200,000 sq.m, 130,000 sq.m, 80,000 sq.m and 60,000 sq.m. Rentable area in the CBD, Zhongguancun, East Chang’an/Jianguomen avenues and the East Second Ring Road will increase sharply, with the exception of Financial Street. Many projects in Financial Street were bought by State-owned organizations and companies for their own use.