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Looking Back, Looking Ahead Beijing Real Estate 2005-2006

BB Dec. Property

Looking Back, Looking Ahead

Beijing Real Estate 2005-2006

Residential Sales Market

Sales of residential properties in Dongcheng, Xicheng, Chaoyang, and Xuanwu districts led the residential real estate market in Beijing in 2005.

But governmental policies affecting land use, finance and taxation seem to have led to a reduction in total unit sales, to a level lower than that of 2004. Still, housing prices remained firm or increased in 2005, and analysts believe Beijing's very active real estate market will continue on a steady pace in 2006 because of factors such as the upcoming 2008 Beijing Olympic Games.

The market is, in fact, still engaged in a historic transformation that affects both supply and demand for and the pre-sale of residential properties.

Reviews of market reports and growth rates are mixed in their take on the residential market because of differences in statistical samples and in the methods used by various city departments to analyze the market, but, in our opinion, the difference in reported growth rates appears to be related to locations and status. In general, the growth of residential property in Dongcheng, Xicheng, Chaoyang, Haidian, Chongwen, and Xuanwu was stronger than that of projects in other districts. This was especially true of residential projects located within the Fourth Ring Road, which experienced the highest increases in sales prices.

In 2006, it is anticipated that the new supply of residential property in Dongcheng, Xicheng, Chaoyang, Haidian, Chongwen, and Xuanwu will decrease because of a limited supply of land. This will result in a shift of attention to Fengtai, Tongzhou, Changping and other newly developing suburban areas. Despite this, several large-scale residential projects are slated to open in the Jinsong Lu area and elsewhere in Chaoyang District as well as in areas between the East Fourth Ring Road and the East Fifth Ring Road. Still, a substantial increase in growth is not anticipated in 2006, even though demand is expected to be strong because Beijing is the capital of China and is hosting the 2008 Olympics. The balance between demand and supply is expected to remain steady and allow healthy development in the residential sector in 2006, but prices are expected to continue to rise. Analysts also believe the rapidly developing second-hand housing market will help fill the vacuum left by a lack of new housing openings in 2006, especially in Beijing's six inner-city districts. This will also keep new housing prices from skyrocketing.

Luxury Residential Leasing Market

In 2005, Beijing experienced a rapid increase in the supply of luxury residential properties, especially with luxury apartments. This drove up the vacancy rate and lowered rental prices. The increase in supply exerted competitive pressure on old top-end properties, resulting in landlords being forced to undertake large-scale renovations or to decrease their rents. This trend was also seen in the villa and serviced-apartments sectors, but, because of a low level of new supplies in these sectors of the market the effect on vacancy rates and rental prices was not very strong.

In 2006, the luxury residential leasing market is expected to slow, because it will take time for the market to absorb 2005's considerable new supply;vacancies are expected to increase and rentals should decline. The growth in demand for serviced-apartments is expected to remain consistent with that of supply, and this sub-market will be stable in 2006. CBRE Research predicts that the performance of the villa market will rank somewhere between that of luxury apartments and serviced-apartment. As for the villa market in 2006, the growth of supply will be a little higher than that of demand, exerting pressure on rentals and vacancies. However, CBRE Research anticipates that rentals of top-end projects in the luxury leasing market will remain stable in 2006.

Retail Market

Since the full opening of China's retail sector in December 2004, the market has seen an increasing rate of inflow of major overseas retailers. Fears of being a late-comer in the market have accelerated some overseas players' China entry strategies. The liberal market-opening measures taken at the end of 2004 endowed foreign retailers the full freedom to set up wholly owned subsidiaries; foreign franchisers were accorded equal legal treatment with local competitors and geographical limitations on the establishment of retail operations were lifted. This policy has had an important effect on the Beijing prime retail market and it is anticipated that this influence will continue in 2006. Multinational and local hypermarkets, and large-scale electrical appliance stores, home-furnishing centres, luxury goods retailers and food and beverage retailers rapidly expanded their businesses in Beijing. Because of a limited new supply in retail space, rental rates for prime retail space increased and vacancy rates were low.

CBRE Research predicts that local and overseas retailers will continue to pour into the Beijing marketplace and that the demand for prime retail space will rise. As far as supply is concerned, with the planned release of several retail projects such as those at the Fortune Plaza in the CBD, the LG Twin Towers along Chang'an Avenue, the Shopping Centre of China Central Place, and the Seasons Shopping Centre on Finance Street, retailers will have a wider variety of options. As a result, the tight supply in 2005 will be alleviated in 2006.

Office Sales Market

The Beijing prime office sales market was very active in 2005. Large-scale transactions were reported in the CBD, Zhongguancun and Finance Street. In terms of the profile of office buyers in the three major office hubs, international institutional investors were the major players in the CBD and surrounding areas. In Zhongguancun and along Finance Street, demand sparked by State-owned corporations dominated the office sales market. It is worth mentioning that EXCEL was the first foreign investor in the sector market of Finance Street. A sales price of US$2,000–$2,500 per square metre was considered reasonable by buyers and developers. Although the new supply of 2006 will exert pressure on this sales price, the room for any price adjustment is limited because of the cost to developers.

In 2006, new office supplies will be centralised in the CBD and along Finance Street. Since this new supply is expected to peak in the next two years, the rental market will be under downward pressure, which will influence the investors' analysis of return rates. As a result, any upward change in prices is not likely to be accepted by investors. The sale price of prime office space will remain steady. In terms of demand, strong economic growth in Beijing and its increasing worldwide exposure as an international metropolis will provide support for continually growing demand.

Office Leasing Market

With the completion of a series of prime office projects including Gateway, NCI, Fortune Plaza, LG Twin Towers, and Jingbao Plaza, large corporations have more options when making their expansion and relocation plans. In 2005, the Beijing office-leasing market had a high level of activity. SONY, Epson, Fuji-Xerox, PWC, GE, and Standard Chartered Bank were among the large corporations that relocated or expanded their offices in 2005. A new phenomenon appeared in the office-leasing market with a two-tiered split between grade-A and grade-B office availability. Grade-A office developments in Beijing have experienced increased demand and extremely low vacancy rates and have not been affected by competition from new supplies. Rents in these developments have continued to grow steadily, while vacancies have plummeted to near zero. In contrast, the grade-B office market (and grade-A new supply) have been aggressively seeking anchor tenants with attractive rentals and incentives. Vacancies in the grade-B office market are trending upward, in stark contrast to the upper-tier of the market.

In 2006, the two-tiered split is expected to become more evident. The demand for grade-A office space will grow, but new supplies will be limited. This will result in a higher take-up and steady rentals. Influenced by a large amount of new supply in 2006, rental prices in the grade-B office-leasing market are likely to fall. New office projects will attract tenants from the old ones, causing a rising vacancy rate. Generally speaking, as a result of China's opening, the demand for prime offices will show a rising trend.

Investment Market

As a result of the steady growth of Beijing's economy, the current macroeconomic environment, strong property market conditions and continued speculation on a renminbi currency appreciation, investment interest has remained at high levels in the capital city. In 2005, Beijing received a strong influx of investment capital into office, retail, hotel, and high-end residential sectors, while several foreign institutional investors and developers are building up their assets so as to pool them for the future creation of real estate-related funds to offer investors the opportunity to increase their exposure to China's investment property market. Beginning with investments in single projects, foreign players are now seeking to work with major domestic developers on a long-term basis to build up the size of their portfolios. It is anticipated that Beijing's real estate market will see a high level of interest from overseas investors. More institutional investors will invest in properties in Beijing to strengthen their worldwide portfolios, to disperse investment risks and to achieve higher return rates.

Second-tier Cities

The property markets of some of China's faster developing second-tier cities have not escaped the attention of big property market players in recent years. Cities such as Shenyang, Nanjing, Chengdu, Chongqing, Tianjin, Dalian, Qingdao, Ningbo and Hangzhou have experienced rapid economic growth over the past decade and deeper involvement in these cities is seen as a natural progression for investors in all sectors, including real estate. The gross-domestic-product and foreign-direct-investment rates in these cities have steadily grown to robust levels with spending in some cities surpassing that of Shanghai or Beijing. Infrastructural development and urbanization in these cities is, in many instances, is more rapid than that of China's leading urban centres. The smaller cities often offer investment incentives to attract investment and some have ample land resources. The potential for real estate capital appreciation is considered much larger than in Beijing or Shanghai, which have been the focus of major developments and investments. In 2004, China reportedly had 49 cities with populations of more than 1 million people. In the future, these cities will become the focus of domestic and foreign developers' expansion plans. It is anticipated that the residential and retail market will be two of the most active sectors in these cities.