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Rentals Up, Sales Stable

The leasing market regained its bounce after the lull of the holiday period in the second quarter (Q2) of 2007. Many deals that had been under consideration or that were still in the throes of negotiation were sealed during this period, with plenty of large-area contracts among those deals. This quarter’s take-up came in at 251,000 square metres (sq.m), making it the third consecutive quarter above the 200,000 sq.m mark.

IT and finance industries continued to serve as mainstays of the leasing market. An extension of business portfolios at many IT firms has seen an aggressive expansion into all major business districts, no just the Zhongguancun area as in the past.

The medical industry’s presence was especially remarkable, with many large-area contracts signed by medicine or medical instrument companies. Advertising, press and fashion companies were also well represented .

With limited supply this quarter, strong demand resulted in average rental costs rising again to 222 yuan/month/sq.m net, a 0.6 percent increase. Vacancy dropped by 2.1 percent to 11.2 percent. However, it should be noted that rentals dropped in less active districts, such as along the East Second Ring Road and in Zhongguancun.

An active leasing market influenced the sales market. There was also competition from headquarters office premises in suburbs that are developing rapidly. But the sales market was still quiet, with fewer transactions recorded this quarter. Average sales prices were stable at 22,700 yuan/sq.m GFA (gross floor area).

In comparison with the surge of supply in sales properties across the city, potential projects in the Lufthansa area remained scarce, which helped them to attract investors. The Ping’an Insurance Group invested in 100,000 sq.m of office space in the Modern Pacific International Centre, which was the fifth en-bloc investment purchase by domestic insurance companies recently. Domestic insurance companies rose strongly in the recent investment market in the absence of foreign capital, which was temporarily under restriction.

Supply in this quarter was stable, compared with the surge of last quarter. New completed area measured 165,000 sq.m. In the Financial Street area, the former International Financial Town Tower A and Tower B changed project names, to China Life Center and Beijing Bank Tower, on entering the market. In the CBD, Gemdale Plaza Tower B was the only project completed. Completion dates for other projects were again postponed.

Our research has shown that grade A office supply throughout 2007 should exceed 2.1 million sq.m GFA, yet actual completed area in the first half only reached 474,000 sq.m. Developers benefited from this limited actual supply in the grade A office market, in terms of favourable average rental costs, and high occupancy rates. But more pressure will be felt in the market in the second half of 2007 and even the beginning of 2008.

Supply will be above 1.6 million sq.m for the second half of 2007 and 0.96 million for the first half of 2008. The CBD accounts for 52.6 percent of this supply, Financial Street for 17.0 percent and the East Second Ring Road area for 16.5 percent.

Although we cannot rule out the possibility of delays for some projects, most supply will enter the market before the second half of 2008, considering the opportunities presented by the Olympic Games.

The development of the office market is integrated with the growth of the city’s economy, with the recent boom in the leasing market also reflecting Beijing’s rapid development. The influence of the approaching Games is shown not only in the city’s changed outlook, but more importantly, in the acceleration of economic growth.

From this point of view, a short-term surge of supply will not cloud long-term prospects for the grade A office market. Despite the prospect of short-term downward pressure, rental prices have promising potential in the long run. Similarly, sales prices will also increase evenly.