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Beijing Office Market Review Second Quarter, 2006

Market Review

Beijing's economy continued to boom from January to May 2006, with industrial production, investment and foreign trade growing rapidly. The utilization of foreign capital in the tertiary industry grew with heavy concentrations in the IT and business services sectors; real estate investment grew by 18.l percent year-on-year to 48.1 billion yuan (US$6.02 billion).

Office investment came to just 5.8 billion yuan (US$726 million), reflecting a year-on-year decrease of 10.6 percent.

The Beijing grade-A office market remained stable in the second quarter of 2006. Average rents increased slightly to 221 yuan (US$27.70) /month/square metre (sq.m, based on net floor area). In terms of supply, Capital Tower in the Central Business District (CBD) added approximately 95,000 sq.m of office space to the market. As for demand, take-up increased significantly this quarter, reaching 142,000 sq.m. Demand remained strong with an average vacancy rate that fell to 16.8 percent. (See Chart 1.)

Supply

This quarter, the first investment of Capitaland in Beijing, Capital Tower, came onto the CBD market. It provided almost 95,000 sq.m of new office space in Beijing and increased the total stock of grade-A offices there to 4.28 million sq.m. (See Chart 2, 3.)

Rental Market

The office leasing market held steady and was similar to that of the last quarter. This quarter was, however, more active when considering take-up, which totalled 142,000 sq.m. In terms of sectors, there was no let up from financial firms as they continued the expansion seen in the first quarter. The expected complete liberalization of this sector stimulated foreign and domestic related companies to accelerate their expansion programmes in Beijing. Consequently, Financial Street recorded the highest take-up among all submarkets in this quarter. Another district with a high take-up, Zhongguancun, attracted IT enterprises based on its advantageous location and available, skilled employees.

Sales and Investment Market

A demand for sales was sparked mainly by domestic enterprises this quarter. Because of its prime location and the high quality of its buildings, large numbers of firms were drawn to the CBD, although most of them took only individual whole floors or large-area units. The Chang’an Xingrong Center on Financial Street, which came on the market last quarter, was much sought after by financial firms. The rapid growth rate of large and medium domestic companies is generating a continuous and steady demand for Beijing office space.

Beijing office investment continued active in the second quarter. Because of numerous transactions involving foreign institutional investors in the Beijing commercial property market, some domestic investors began to enter this area too. In the second quarter, Phoenix TV and United Win Group, the developer of Palm Springs (a famous high-end residential project in Beijing), jointly bought almost 100,000 sq.m of office space in the Sunny Region, while the Jialong Investment Group, a large private enterprise in Beijing, purchased the entire Tower B of China Electronics Plaza from Lixiang Group. These two deals were different from usual domestic company buy/sale deals as these deals focused more on investment rather than owner occupancy. This was especially the case with regard to the resale of the China Electronics Plaza. This marked the first time that domestic companies invested in a mature project in Beijing. Increasing investments by foreign and domestic investors epitomized the optimistic sentiment that was felt in Beijing office market.

Rents, Prices and Vacancies

Grade-A office rentals increased marginally this quarter. According to DTZ research, the average rent of a Beijing grade-A office rose by 0.7 percent to 221 yuan (US$27.70)/month/sq.m (based on net floor area).

Increases in market activity prompted developers, confident of promising sales prospects, to increase their prices in response to the market. Consequently, the average asking price of a grade-A office in Beijing rose to 19,777 yuan (US$2,476)/sq.m, an increase of 3 percent over that of the first quarter.

With strong take-up, the average vacancy rate decreased to 16.8 percent, down 0.6 percentage points from the first quarter of 2006. Because of the launch of new projects, the vacancy rate in CBD area rose sharply to 19.1 percent. However, the vacancy rate in the Financial Street and Zhongguancun areas decreased to 19.4 percent and 16.9 percent because of the arrival of many owners. Vacancy rates fell in all other areas, except in the Lufthansa area.