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Property regulations that came into effect in June 2006 prohibit the registration of business offices in residential buildings in Beijing. So Fang and her “creative collective” of five expatriates, who specialize in multimedia productions, will soon move to Wanda Plaza in Beijing’s “oriental Manhatten.”

Because of the new property regulations, the specific use of every property bought since June 2006 must be stated in purchase agreements and on ownership certificates. Businesses such as G2, who rented their hutong offices before June, do not have an immediate problem, but they would likely be unable to renew their rental contract when the time comes. While this measure will ultimately come down to a matter of enforcement, most business leaders consider it advisable to comply with the law. And, as with other companies, moving to the CBD was a rational choice for G2 for several reasons, but especially because of its work in multimedia.

By the time of the 2008 Olympic Games, Beijing will have completed the construction of five of its tallest buildings. The new tower blocks, all in the CBD, resulted from a municipal plan to make the district Beijing’s centre for finance, telecommunications and media, and a magnet for multinational companies and foreign investment.

Anna Kalifa, head of research in Beijing for Jones Lang LaSalle real estate, said, “The CBD will become the largest office market in Beijing by 2008. There will be a high concentration of easily accessible entertainment venues, shops and amenities.”

Seventy percent of the foreign-funded enterprises in Beijing are already located in the CBD, along with 65 percent of the capital’s white-collar workers and 80 percent of the city’s high-level overseas-returnee managers. Clustered in the CBD’s urban grid are 95 percent of Beijing’s multinational offices, 90 percent of Beijing’s foreign banks, and eight of Beijing’s ten largest hotels. Against the background of China’s 2001 World Trade Organization entry, financial institutions such as foreign-funded banks and insurance companies have blossomed in the CBD, and their employees are eager consumers of the retail businesses sited in the World Trade Center area.

There are about 5.4 million square metres of prime office space rated Grade A or Grade B in Beijing today. However, thanks to the capital’s recent construction boom, an unprecedented amount of space is flowing onto the market. In January 2007 alone, 550,000 square metres of space was added. By the end of 2007, 1.8 million square metres of additional space will be available for rental or purchase, a sixfold increase over 2006, according to market observers.

With this amount of high quality office space available in Beijing in the first quarter of 2008, sources said, the market is likely to favour tenants over landlords, instead of the current landlord-oriented situation.

Although G2’s new office rent will be double that of its present hutong location, Fang said G2 never seriously considered buying over renting. “At the moment we just don’t have the cash flow, and with the market the way it is, it doesn’t make sense to make such a big investment anyway.”

Experts interviewed assert that a prospective buyer of office space should always perform a buy-versus-lease analysis to see whether their returns to investment would be better with a property purchase or reinvesting in their business. As a small yet rapidly expanding company, G2 certainly doesn’t need to be crippled by a large property down payment. By opting to rent a fairly large office space (140 square metres), the company is also wisely allowing for future expansion as turnover and time dictate.

Foreign businesses should certainly not equate the spectacular growth in Beijing’s residential property market with conditions in the commercial sector. The second-hand market for prime office space is virtually non-existent in Beijing, and, as such, it is not uncommon for investors in commercial property to experience sharp declines in the value of their purchases as they age. The average net effective office rental on gross floor area for prime CBD office space is now about 95 yuan (US$12.40) per square metre per month, which gives an annual rental yield below 4.5 percent. This figure will continue to drop as more wholly owned, professionally managed properties enter the market. 

Although the direct effect of the 2008 Beijing Games on the office market will be small, the information and communications infrastructure developed for the Games is expected to attract and benefit firms. “The quality and quantity of new office buildings coming onto the market over the next 18 months will be good news for tenants,” Kalifa said. “We expect this will cause a ‘flight to quality’ as tenants of lower grade office buildings choose to upgrade. The large supply of new space means rents will face downward pressure in the CBD area.”

According to Jones Lang LaSalle, businesses should begin developing real estate strategies to get office space at a savings in line with the city’s Olympic timetable. One expert said, “Restrictions may apply to office moves and improvements during the Olympic period (June to September 2008), so tenants may face limited options. If expanding or relocating in 2008 and 2009, landlords may expect rent increases again due to the limited new supply during this period.”

Despite their reluctance to relocate, now is the perfect time for Fang and G2 to move from their Bohemian hutong to the CBD. Falling rental prices, a high-tech and efficient infrastructure, and a diverse range of distinguished corporate neighbours mean that the company will soon be centred at the very heart of a thriving business environment that includes a significant and compatible media business presence.