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Greater incentives required to support Grade A office market in Beijing

Landlords of various property types face similar market conditions.  However, their confidence and rental and sales strategy vary.

In view of the financial turmoil and its subsequent adverse impact on various industries, the Grade A office sector will face more problems in the next two years.  The outlook is also based on the future supply of new offices and the shrinking demand in the market.

Preliminary statistics released by Colliers International showed that there were only two new office buildings completed in 4Q 2008.  Due to low expectation in absorption, the occupancy rate continued to rise. In 4Q, the occupancy rate increased by 1.27 percentage points to 15.26%.  With the increase in supply, the vacancy rate may exceed 16.71% recorded at the end of 2007, which will be the historical high level for the past 5 years.

However, Colliers noted that some of the Grade A offices with sound management have not yet fallen to a difficult situation.  Although some major tenants have moved out from some premium Grade A office to other Grade A buildings, the impact was relatively mild. 

  • Relocation of some major tenants has not caused the rental of premium Grade A office to drop drastically.
  • As there were new tenants taking up the space left by relocation, the market did not see a sudden increase in the occupancy rate of those premium Grade office buildings.
  • Landlords are more careful in leasing their properties.  They are more responsive to face the market challenge by re-positioning and setting new target tenants.
  • But general Grade A offices and new buildings are facing a different situation.  Some of those buildings need to reduce rental, or to include more benefits at a practical level, such as a longer rental-free period, in order to attract new tenants.

If the Beijing government authorities adopt similar incentive schemes as Shanghai's to encourage MNCs to establish their headquarters in the city, to stimulate the local economy or to support foreign corporations and big local companies, there will be an increase in demand for properties.  Such measures will also set a clear direction for a healthy development of the commercial property sector in the Chinese capital.

It is widely predicted that the financial crisis will cause MNCs to shelf or suspend their expansion plans.  Therefore, there will be a change in the mix of tenants in Grade A offices. Chinese companies are expected to take up a more important role to increase productivity.

Future rentals will go up or down?

Preliminary data shows:

  • Landlords of mature office buildings will not ask for a high rental, but the chance of lowering it is not high either.  Big tenants may relocate their offices, but the premium Grade A office space will be replaced shortly, which will stabilise both the rentals and the occupancy rate, especially for those premium Grade A office buildings in the CBD.
  • Landlords of new buildings tend to offer more incentives to compete for new tenants so as to improve the cash flow.
  • According to Colliers International's data in 4Q 2008, four of the six Grade A office districts in Beijing saw rental fall, including CBD, Finance Street, Chaoyangmen area (including East Second Ring Road) and Lufthansa area.

Office Sales Market

According to John Wong, Director of Investment, compared with last year, investors hope to purchase quality properties at a price below the market level, so as to achieve higher yields to balance the risks involved.

But overall attitude remains cautious.  In order to minimise possible risks, investors are more interested in properties that will bring in cash income, and premium buildings that are located in core office/retail districts.

  • Investors remain optimistic over the commercial property market in Beijing and other major cities.
  • Price and rental pressure remain.  Mature buildings will face less pressure in rental and have stronger cash flow.  And banks will be more willing to lend credits to those property types.
  • Properties in the CBD have a higher long-term investment value and risk resistance, and they will be easier to dispose of when needed.

Greater Government Support Required for a Healthy Development of the Office Sector

In line with other industries, the office sector in Beijing will face a tough year of 2009. New supply of office space is expected to reach 710,235 sq m in 2009, and 343,385 sq m in 2010. Even without the financial turmoil, the great supply in 2009 will cause a lot of pressure on office rental.  Colliers predicts that the CBD and Chaoyangmen area (including East Second Ring Road) will see very tough competition, with no exception to premium quality office buildings.

Prior to 2008, there was relatively lower supply of Grade A office buildings, leaving few choices for tenants.  But now and in the near future, there will be a great supply of quality buildings. There are more choices for expansion or relocation, which give tenants a stronger position to negotiate on rental. Subsequently, a landlord-oriented market will turn into a tenant-oriented market.

Lately, many major cities in Mainland China have announced policies to stimulate business and capital inflow.   If the Beijing government further revises its strategies or incentives to encourage business development in the capital, it will help reduce the negative impact the financial turmoil has on the commercial property market in Beijing.