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Beijing Office Market Review
2006/10/13
Third Quarter 2006
Strong Economy Fuels Steady Office Market
Overview
From January to August, Beijing’s economy continued to grow steadily at a high speed. Ten percent growth or more was reported in investments, consumption and production, and all this took place while US$2.98 billion in foreign-direct investment was actually used, a year-on-year growth of 30.9 percent.
On August 19, the People’s Bank of China announced an interest rate increase of 0.27 of a percentage point for its benchmark one-year loans and deposits.
Driven by a strong economy, the Beijing Grade-A office market continued to perform well. Average rentals and prices increased slightly compared with that of last quarter, and vacancy rates continued to decrease.
Demand
Leasing
The office leasing market was still very active the third quarter of 2006 (Q3). Take-up increased noticeably if compared with that of the second quarter (Q2) to 185,000 sq.m. Because of strong demand, average rentals increased by 1 percent from Q2 to 223 yuan/month/sq.m (based on net floor area). In terms of sectors, as the liberalization of Chinese financial market deepened and widened, a thriving financial industry continued to fuel demand in the market. In addition, the IT industry was also very active with many high-tech firms signing contracts to lease large spaces. The Central Business District and Financial Street were the most active areas in Q3. Because of their prime locations and high-quality buildings, new projects in these two districts remained popular, which was reflected in decreasing vacancy rates. In the Zhongguancun area, because some of the new projects were pre-sold before completion, take-up in this area increased. In Q3, the average vacancy rate decreased to 15.3 percent, down 1.5 percentage points from Q2.
Sales and Investment
Satisfying performances in the sales market during the first half of 2006 prompted developers to increase prices despite a large increases in supply expected in the next six months. Average asking prices continued to go up in Q3 to 21,081 yuan/sq.m, up 6.2 percent compared with that of Q2.
On July 24, the central government announced its Circular on Curbing and Administrating Foreign Investment to Regulate Real Estate Market, which brought the Chinese Government’s macroeconomic control of foreign capital to the real estate market. As foreign investors prudently absorbed the new guidelines, Beijing office sales market cooled. Fewer investment transactions took place during the quarter; demand came mainly from purchases of domestic enterprises.
Rental, Price and Vacancy
Supply
Delays in the completions of several projects postponed a predicted supply peak. In this quarter, only two projects actually entered the market, Sinosteel Plaza and New Logo, both in Zhongguancun, adding about 145,000 sq.m of new office space. The total stock of Beijing Grade-A Office is now about 4.4 million sq.m.
Outlook
Trends in Beijing economic development during the past six months indicate that economic growth will likely exceed 10 percent. Steady economic growth and further liberalization of all markets will bring strong and stable demand and a very promising future for the Grade-A office market in Beijing.
In the short-term, however, the rental market will experience downward pressures because of a surge in supply in the near future. According to DTZ’s research, supply in the next six months will exceed 1.25 million sq.m. New supply in the CBD, at Financial Street and along the East Second Ring Road and in the East Chang’an Avenue/Jianguomen areas is estimated to be 533,000 sq.m, 409,000 sq.m, 125,000 sq.m, and 160,000 sq.m. Although demand will remain strong, it will be difficult for the market to absorb such a huge amount of new office space in a short time. An influx of new supply will intensify market competition. Consequently, the downward trend in the Beijing Grade-A office market will continue. However, with supply of top ranked projects that can satisfy the high-end clients remaining limited, rentals of such projects are expected to remain steady.
In the sales market, facing the new policies, foreign investors now may spend more time in making their decisions. In the short run, demand will come mainly from domestic institutions and investors. It is therefore estimated that the asking price for Grade-A office market in Beijing will continue its stable but increasing trend.
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