Vacancies in grade A offices in Beijing rose to within touching distance of historic highs in the final quarter of last year.
The rise in the vacancy rate to close to a five-year high came despite the first cut in office rentals in the capital since 2006, and given the supply-demand imbalance, landlords should brace for further challenges in the coming two years.
With fresh supply due on the market this year, the vacancy rate is likely to rise further to a five-year high and surpass the previous peak of 16.71 per cent.
Somewhat less affected are well-managed premium grade A office premises, although there have been individual cases of major tenants downgrading from premium grade A offices to grade A premises.
Two trends are discernible from the data so far collected.
First, the loss of certain big tenants will not lead to a slump in rents for premium grade A offices.
Second, the replenishment of new tenants is keeping the vacancy rates of certain premium grade A properties stable.
Responses so far vary from owners of older and more recent projects. Some have already cut rentals; others might follow with lower rents and inducements such as a rent-free period and other preferential treatments.
From a wider strategic perspective, it may benefit Beijing to follow the Shanghai municipal government’s recent promulgation of a set of “regulations to encourage multinational companies to set up regional headquarters” and use innovative ideas and more effective preferential policies to lure foreign and large domestic enterprises into setting up their headquarters in the capital city.
There are silver linings in the gloom.
United States investment bank Morgan Stanley leased an additional 2,000 square metres during the quarter, expanding its office space at Fortune Resource International Center to 5,000 sq metres.
Despite such one-off examples, however, the tenant profile in Beijing offices is set to change and mainland entities may play a more productive role in the coming year or two.
As for the immediate direction of rents, early signs are that in existing projects landlords will not be seeking increases, but neither are they likely to sharply lower rents any further after cuts were made in the final quarter.
In cases where major tenants have been lost in premium grade A office properties, new tenants are likely to be found with little difficulty.
Beijing’s grade A office market is likely to remain weak and rents in some districts and for newly completed premises will probably fall more sharply, thus enlarging the overall drop in rents.
So where are the buyers and at what price will they buy?
Colliers International director of international investments John Wong believes that investors are now looking for quality properties that are offered at prices lower than the market average and those that can generate attractive returns and lower their investment risks.
Although in a better position to bargain at the moment, many are still adopting a wait-and-see attitude, weighing potential cash returns from options located in leading commercial and retail markets to minimise risk in the next two years.
While cautious, they remain optimistic about the long-term demand for commercial properties in Beijing and other key mainland cities and their strategy suggests that mature properties will find investors and tenants under current market conditions.
Meanwhile, the commercial property market is still growing. A mainland accounting firm bought 2,500 sq metres of office premises in Financial Street, Beijing, for 33,500 yuan (HK$38,060) per square metre in the final quarter, while a government authority bought 5,000 sq metres of space on the same premises for 33,000 yuan per square metre.
Many state-owned enterprises can buy office property now because they had obtained approvals to do so before the global financial crisis.
And they are confident commercial properties can appreciate in the long term.
Such government support will be needed for the healthy development of the market, since overall this year will be a challenging year for private enterprises.
It has been estimated that 710,235 sq metres of new office space will be supplied this year and 343,385 sq metres next year.
Even if there had been no global financial crisis, this sharp increase in supply - partly due to late completions of some projects - will add pressure to the already highly competitive leasing market.
As such, we expect keener competition in the central business district, Chaoyangmen (2nd East Ring Road included) and even premium grade A office premises.
Before last year, tenants had fewer grade A offices to choose from. But now and in the near future, the market is becoming more positive for tenants, and they will ask for more favourable conditions, thus dividing the market segments and broadening the diversity of demand.
Under these circumstances, the Beijing office sector will look to the government for more support.
Since other mainland cities have introduced new policies to draw businesses and investors, the Beijing municipal government should do likewise and review its relevant policies to help lessen the impact of the financial crisis on the market.
Carlby Xie is an associate director and head of research and advisory of Colliers International’s North China division
1 comment:
Beijing Office Sector Seeks Aid
Carlby Xie
14 January 2009
Vacancies in grade A offices in Beijing rose to within touching distance of historic highs in the final quarter of last year.
The rise in the vacancy rate to close to a five-year high came despite the first cut in office rentals in the capital since 2006, and given the supply-demand imbalance, landlords should brace for further challenges in the coming two years.
With fresh supply due on the market this year, the vacancy rate is likely to rise further to a five-year high and surpass the previous peak of 16.71 per cent.
Somewhat less affected are well-managed premium grade A office premises, although there have been individual cases of major tenants downgrading from premium grade A offices to grade A premises.
Two trends are discernible from the data so far collected.
First, the loss of certain big tenants will not lead to a slump in rents for premium grade A offices.
Second, the replenishment of new tenants is keeping the vacancy rates of certain premium grade A properties stable.
Responses so far vary from owners of older and more recent projects. Some have already cut rentals; others might follow with lower rents and inducements such as a rent-free period and other preferential treatments.
From a wider strategic perspective, it may benefit Beijing to follow the Shanghai municipal government’s recent promulgation of a set of “regulations to encourage multinational companies to set up regional headquarters” and use innovative ideas and more effective preferential policies to lure foreign and large domestic enterprises into setting up their headquarters in the capital city.
There are silver linings in the gloom.
United States investment bank Morgan Stanley leased an additional 2,000 square metres during the quarter, expanding its office space at Fortune Resource International Center to 5,000 sq metres.
Despite such one-off examples, however, the tenant profile in Beijing offices is set to change and mainland entities may play a more productive role in the coming year or two.
As for the immediate direction of rents, early signs are that in existing projects landlords will not be seeking increases, but neither are they likely to sharply lower rents any further after cuts were made in the final quarter.
In cases where major tenants have been lost in premium grade A office properties, new tenants are likely to be found with little difficulty.
Beijing’s grade A office market is likely to remain weak and rents in some districts and for newly completed premises will probably fall more sharply, thus enlarging the overall drop in rents.
So where are the buyers and at what price will they buy?
Colliers International director of international investments John Wong believes that investors are now looking for quality properties that are offered at prices lower than the market average and those that can generate attractive returns and lower their investment risks.
Although in a better position to bargain at the moment, many are still adopting a wait-and-see attitude, weighing potential cash returns from options located in leading commercial and retail markets to minimise risk in the next two years.
While cautious, they remain optimistic about the long-term demand for commercial properties in Beijing and other key mainland cities and their strategy suggests that mature properties will find investors and tenants under current market conditions.
Meanwhile, the commercial property market is still growing. A mainland accounting firm bought 2,500 sq metres of office premises in Financial Street, Beijing, for 33,500 yuan (HK$38,060) per square metre in the final quarter, while a government authority bought 5,000 sq metres of space on the same premises for 33,000 yuan per square metre.
Many state-owned enterprises can buy office property now because they had obtained approvals to do so before the global financial crisis.
And they are confident commercial properties can appreciate in the long term.
Such government support will be needed for the healthy development of the market, since overall this year will be a challenging year for private enterprises.
It has been estimated that 710,235 sq metres of new office space will be supplied this year and 343,385 sq metres next year.
Even if there had been no global financial crisis, this sharp increase in supply - partly due to late completions of some projects - will add pressure to the already highly competitive leasing market.
As such, we expect keener competition in the central business district, Chaoyangmen (2nd East Ring Road included) and even premium grade A office premises.
Before last year, tenants had fewer grade A offices to choose from. But now and in the near future, the market is becoming more positive for tenants, and they will ask for more favourable conditions, thus dividing the market segments and broadening the diversity of demand.
Under these circumstances, the Beijing office sector will look to the government for more support.
Since other mainland cities have introduced new policies to draw businesses and investors, the Beijing municipal government should do likewise and review its relevant policies to help lessen the impact of the financial crisis on the market.
Carlby Xie is an associate director and head of research and advisory of Colliers International’s North China division
Post a Comment