Thursday, 8 December 2011

Landlords call shots in Beijing office squeeze

Lease prices will keep rising as corporate demand is far outpacing supply, brokers say

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Guanyu 道 said...

Landlords call shots in Beijing office squeeze

Lease prices will keep rising as corporate demand is far outpacing supply, brokers say

Peggy Sito
07 December 2011

Cheung Kong executive director Justin Chiu Kwok-hung will never forget his first sight of the number of new grade A office towers rising above the Beijing skyline when he visited the capital city just before the opening of the Olympic Games in 2008.

“It will take 20 years to get them occupied,” he thought.

Three years on, and Chiu confesses his pessimistic prediction was wrong.

“They are all occupied, and it is now difficult to find new office space in Beijing,” said Chiu, who was speaking at a real estate conference in Hong Kong two weeks ago.

Like many industry players, Chiu has watched with amazement as Beijing’s grade A office market rebounded from a brief lull in demand and returned to strong growth.

“When the global financial crisis broke out in 2008, many companies put their expansion and relocation plans on hold, pushing up office vacancy rates in the city to more than 20 per cent,” said Mark Sullivan, a director at property consultancy Knight Frank and the head of its Beijing office.

But demand came back last year as the economy was bolstered by Beijing’s economic stimulus package and the global economic recovery. Beijing’s grade A office market has since been boosted by strong demand from multinational firms and domestic financial firms.

The net occupancy of office space consequently more than doubled to more than 1.2 million square metres last year from 2009, with new supply of just 500,000 square metres coming onstream.

This year, the net take-up is estimated at 600,000 square metres, but supply will amount to slightly above 300,000 square metres, according to Knight Frank.

The mismatch between demand and new supply has resulted in a 6.6 per cent fall in the overall vacancy rate of the grade A office market to a new low of 4.8 per cent, with all sub-markets seeing declines in their vacancy rates.

“Supply is very tight,” said Sullivan, and the market has switched from favouring tenants to putting landlords in a strong bargaining position.

Michael Chen, a senior executive at a Beijing-based wind power generation firm, said he agreed with the assessment.

Chen, who was helping his boss to find a new office in Beijing, said rents had been surging in the city.

“Rents in our area have doubled since we signed our first lease in the first half of 2009,” said Chen. “When we first moved into our office of 470 square metres in Three Ring Road East, we were paying 210 yuan (HK$257) per square metre per month. Now the asking rate is closer to 400 yuan.”

Domestic and foreign firms in the finance, energy, and consulting sectors have been the main drivers of demand for grade A office space, particularly in the central business district (CBD), according to Knight Frank.

According to the Beijing Statistics Bureau, there are 15,246 foreign firms with offices in Beijing, and 4,476 foreign firms registered in Beijing.

Strong demand for office space has pushed up rents sharply: average rents in Beijing in the third quarter rose 10.72 per cent to 226.93 yuan per square metre per month from the second quarter, according to property consultancy DTZ.

Mark Price, a senior DTZ director and the head of business space for Greater China, said he expected rents would rise another 10 per cent in the last quarter.

Indeed, Knight Frank’s Sullivan said the strong increase in rents was set to continue for the next two years.

“Looking forward, though China’s economic growth may slow, it will remain the world’s most robust economy. Demand in the grade A office market is expected to remain steady in the following several quarters, but supply will remain limited until 2014,” said Sullivan.

He said new office space supply, mainly in the CBD, would jump to 1.2 million square metres in 2014 and 2015, compared with new supply of 362,327 square metres next year, and 347,472 square metres in 2013.