Vacancy rate hits 5-year high as global slump and oversupply start to bite
By Grace Ng 10 April 2009
BEIJING: The once bustling office hubs of the Chinese capital are starting to look like ghost towns.
As the global economic slowdown bites into the budgets of multinational corporations (MNCs), some major firms located in the prime office districts of Beijing are scaling back or moving to cheaper locations.
Vacancy rates have passed 17 per cent - a five-year high - forcing some property developers to slam the brakes on their projects.
There are at least three half-built projects in limbo - as developers worry about cash-flow problems and fear that a glut will depress rentals further and wipe out their profits, said one property consultant who declined to be named as his clients are involved in these projects.
Rental rates for office space have dropped as much as 7 per cent in the fourth quarter last year and are still falling.
Jones Lang Lasalle’s Beijing research head Denis Ma told The Straits Times that rentals could fall by about 20 per cent this year.
Indeed, a check with three sales agents showed that overall average office rentals in Beijing, which had hit about US$37 (S$56) per square metre a month at the start of last year, are returning to ‘early 2007 levels of US$34 or even less’.
Analysts note that it is the oversupply of new commercial space that is weighing on the market, rather than weak demand.
Over the past three to four years, 500 million square feet of commercial real estate had been built in Beijing alone - more than all the office space in Manhattan.
Property developers had rushed to build projects ahead of a rule last year banning major construction to reduce pollution before the Beijing Olympics.
But the current glut presents a golden opportunity for some tenants to upgrade.
Mr. Li Hong, 43, who heads the Beijing operations of a small European trading firm, had just ordered all his staff to pack up and abandon the office - for good.
‘I guess we have the economic crisis to thank for this,’ he said, referring to the company’s plans to vacate their cramped premises in a ‘Grade C’ office building to move to a bigger, swankier office.
Eight months ago, amid the property market boom fuelled by the Beijing Olympics, he inquired about leasing space in newer office buildings, but was rebuffed as his budget was ‘far below the asking price for even the smallest unit’.
Then a month ago, he got a lease offer for a spacious unit in a brand new ‘Grade A’ building in the Central Business District (CBD) - at 80 per cent of his budget.
‘Grade A’ offices have the highest quality finish to the internal furnishings and also boast of greater architectural detailing on the exterior of the building. ‘Grade C’ offices - the lowest grade - have lower quality internal decorations and design of the building is basic.
Mr. Li went to take a look and found the ‘Grade A’ building - like many others around it - ‘half empty’.
‘My agent blamed it on the economic crisis and the office space glut. That’s good news for us. It’s time to move,’ he said.
Other beneficiaries are cash-rich local developers, like Soho China’s chief executive Zhang Xin, who are looking to buy commercial property whose prices have plunged 50 per cent from the 2007 peak.
Ms Zhang told FinanceAsia.com recently that Japanese and American funds holding prime location commercial properties in Beijing and Shanghai are looking to sell ‘because they don’t see the market coming back over the next two years’.
Still, Beijing’s long-term city plan is to continue to build more.
Another 2.33 million square metres of new office space will be completed this year, expanding the market by a further 27 per cent, said Jones Lang’s Mr. Ma.
Plans to build a gigantic 19 square kilometres second CBD in west Beijing - roughly the combined size of Toa Payoh, Bishan and Ang Mo Kio new towns - are also apparently still going ahead. The first phase of construction is expected to start in 2013.
Analysts say that in the longer run, China’s strong growth will boost demand, with foreign companies flocking back after the crisis.
Jones Lang LaSalle’s Beijing managing director Julien Zhang noted: ‘Occupancy at an aggregate level has continued to grow, underscoring the importance of Beijing as a leading business centre, not only in China but also within the region.’
Defying the real estate gloom, property counters have outperformed the broader stock market in the rally over recent weeks.
While the Straits Times Index has gone up by about 25 per cent since its six-year low of 1,456.95 on March 9, the FTSE Real Estate Index has shot up 31 per cent in the same period. The gains were led mainly by large and mid-sized developers, especially CapitaLand, City Developments (CDL) and Keppel Land, which jumped between 39 per cent and 63 per cent each.
But if would-be investors have not got in on the property stock action yet, it may be too late to do so now, analysts say.
They explain that part of the reason for the strong rebound recently was that the developers were previously oversold, thus making them look attractive despite news early this month that private home prices had plunged in the first quarter by a record 13.8 per cent.
But given the recent run-up in share prices, there appears to be limited potential for further gains for counters such as CapitaLand, Keppel Land and CDL, said OCBC analyst Foo Sze Ming.
The fundamentals of the property market remain flimsy, he said.
Although falling prices spurred a spike in home sales recently, demand was also partly driven by pent-up interest after several months of slowing sales.
'Sustainable demand will still have to depend on the economy, wages and unemployment, which are still looking fragile at the moment,' said Mr Foo.
'With no catalyst in sight for a sustainable recovery in the property market, we prefer to remain conservative.'
Mr Foo favours developers with greater exposure to the mass market, which is still performing better than higher-end private properties as the gap between entry-level condominiums and HDB resale flats narrows.
'Everybody knows the mass market is the one that is supporting the property sector right now,' agreed Mr Donald Chua, an analyst at CIMB-GK Securities.
He added that fundamental problems remain in the real estate market. Transactions of mid- and high-end properties are slow, and the market is still worried over the possibility of defaults as job losses mount and more properties are completed this year.
'If nothing changes on a fundamental basis, I don't think this rally will last,' he said.
DBS analyst Adrian Chua is also taking a cautious stance on the property sector, saying that 'negative newsflow will continue to dog the sector as positive catalysts remain absent'.
'We believe balance sheet strength remains the best defence in the current downcycle,' he said in a report last week, with 'buy' calls on CDL, Wheelock Properties and Wing Tai.
OCBC's Mr Foo also likes financially strong developers such as CDL and UOL Group, he said in a report last Wednesday.
UOL has underperformed in the recent rally, with its share price rising only about 28 per cent since March 9, Mr Foo said.
But the outlook for the property group remains positive and its recent successful launch of Double Bay will likely contribute to earnings through 2013.
CDL's strengths are its 'conservative management, strong balance sheet, diversified operations and low-cost land bank with significant mass market exposure'.
2 comments:
Office hubs in Beijing turn into ghost towns
Vacancy rate hits 5-year high as global slump and oversupply start to bite
By Grace Ng
10 April 2009
BEIJING: The once bustling office hubs of the Chinese capital are starting to look like ghost towns.
As the global economic slowdown bites into the budgets of multinational corporations (MNCs), some major firms located in the prime office districts of Beijing are scaling back or moving to cheaper locations.
Vacancy rates have passed 17 per cent - a five-year high - forcing some property developers to slam the brakes on their projects.
There are at least three half-built projects in limbo - as developers worry about cash-flow problems and fear that a glut will depress rentals further and wipe out their profits, said one property consultant who declined to be named as his clients are involved in these projects.
Rental rates for office space have dropped as much as 7 per cent in the fourth quarter last year and are still falling.
Jones Lang Lasalle’s Beijing research head Denis Ma told The Straits Times that rentals could fall by about 20 per cent this year.
Indeed, a check with three sales agents showed that overall average office rentals in Beijing, which had hit about US$37 (S$56) per square metre a month at the start of last year, are returning to ‘early 2007 levels of US$34 or even less’.
Analysts note that it is the oversupply of new commercial space that is weighing on the market, rather than weak demand.
Over the past three to four years, 500 million square feet of commercial real estate had been built in Beijing alone - more than all the office space in Manhattan.
Property developers had rushed to build projects ahead of a rule last year banning major construction to reduce pollution before the Beijing Olympics.
But the current glut presents a golden opportunity for some tenants to upgrade.
Mr. Li Hong, 43, who heads the Beijing operations of a small European trading firm, had just ordered all his staff to pack up and abandon the office - for good.
‘I guess we have the economic crisis to thank for this,’ he said, referring to the company’s plans to vacate their cramped premises in a ‘Grade C’ office building to move to a bigger, swankier office.
Eight months ago, amid the property market boom fuelled by the Beijing Olympics, he inquired about leasing space in newer office buildings, but was rebuffed as his budget was ‘far below the asking price for even the smallest unit’.
Then a month ago, he got a lease offer for a spacious unit in a brand new ‘Grade A’ building in the Central Business District (CBD) - at 80 per cent of his budget.
‘Grade A’ offices have the highest quality finish to the internal furnishings and also boast of greater architectural detailing on the exterior of the building. ‘Grade C’ offices - the lowest grade - have lower quality internal decorations and design of the building is basic.
Mr. Li went to take a look and found the ‘Grade A’ building - like many others around it - ‘half empty’.
‘My agent blamed it on the economic crisis and the office space glut. That’s good news for us. It’s time to move,’ he said.
Other beneficiaries are cash-rich local developers, like Soho China’s chief executive Zhang Xin, who are looking to buy commercial property whose prices have plunged 50 per cent from the 2007 peak.
Ms Zhang told FinanceAsia.com recently that Japanese and American funds holding prime location commercial properties in Beijing and Shanghai are looking to sell ‘because they don’t see the market coming back over the next two years’.
Still, Beijing’s long-term city plan is to continue to build more.
Another 2.33 million square metres of new office space will be completed this year, expanding the market by a further 27 per cent, said Jones Lang’s Mr. Ma.
Plans to build a gigantic 19 square kilometres second CBD in west Beijing - roughly the combined size of Toa Payoh, Bishan and Ang Mo Kio new towns - are also apparently still going ahead. The first phase of construction is expected to start in 2013.
Analysts say that in the longer run, China’s strong growth will boost demand, with foreign companies flocking back after the crisis.
Jones Lang LaSalle’s Beijing managing director Julien Zhang noted: ‘Occupancy at an aggregate level has continued to grow, underscoring the importance of Beijing as a leading business centre, not only in China but also within the region.’
Rally in property stocks unlikely to continue
Fiona Chan
Apr 12, 2009
Defying the real estate gloom, property counters have outperformed the broader stock market in the rally over recent weeks.
While the Straits Times Index has gone up by about 25 per cent since its six-year low of 1,456.95 on March 9, the FTSE Real Estate Index has shot up 31 per cent in the same period. The gains were led mainly by large and mid-sized developers, especially CapitaLand, City Developments (CDL) and Keppel Land, which jumped between 39 per cent and 63 per cent each.
But if would-be investors have not got in on the property stock action yet, it may be too late to do so now, analysts say.
They explain that part of the reason for the strong rebound recently was that the developers were previously oversold, thus making them look attractive despite news early this month that private home prices had plunged in the first quarter by a record 13.8 per cent.
But given the recent run-up in share prices, there appears to be limited potential for further gains for counters such as CapitaLand, Keppel Land and CDL, said OCBC analyst Foo Sze Ming.
The fundamentals of the property market remain flimsy, he said.
Although falling prices spurred a spike in home sales recently, demand was also partly driven by pent-up interest after several months of slowing sales.
'Sustainable demand will still have to depend on the economy, wages and unemployment, which are still looking fragile at the moment,' said Mr Foo.
'With no catalyst in sight for a sustainable recovery in the property market, we prefer to remain conservative.'
Mr Foo favours developers with greater exposure to the mass market, which is still performing better than higher-end private properties as the gap between entry-level condominiums and HDB resale flats narrows.
'Everybody knows the mass market is the one that is supporting the property sector right now,' agreed Mr Donald Chua, an analyst at CIMB-GK Securities.
He added that fundamental problems remain in the real estate market. Transactions of mid- and high-end properties are slow, and the market is still worried over the possibility of defaults as job losses mount and more properties are completed this year.
'If nothing changes on a fundamental basis, I don't think this rally will last,' he said.
DBS analyst Adrian Chua is also taking a cautious stance on the property sector, saying that 'negative newsflow will continue to dog the sector as positive catalysts remain absent'.
'We believe balance sheet strength remains the best defence in the current downcycle,' he said in a report last week, with 'buy' calls on CDL, Wheelock Properties and Wing Tai.
OCBC's Mr Foo also likes financially strong developers such as CDL and UOL Group, he said in a report last Wednesday.
UOL has underperformed in the recent rally, with its share price rising only about 28 per cent since March 9, Mr Foo said.
But the outlook for the property group remains positive and its recent successful launch of Double Bay will likely contribute to earnings through 2013.
CDL's strengths are its 'conservative management, strong balance sheet, diversified operations and low-cost land bank with significant mass market exposure'.
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