February 7, 2017, Beijing
– CBRE, the world’s leading commercial real estate services and investment firm, announced today the results of its latest research report Beijing Property MarketView, 2016 Review & 2017 Outlook. According to the report, Beijing office market, retail, logistic, business parks and capital market show below characteristics:
i. Office: A total GFA of 416,602 sq. m. to Beijing office market in 2016, 5.1% up on a y-o-y basis, while pushed up overall vacancy rate y-o-y to 7.6% by year-end. In 2017, the market is expected to become more balanced as vacancy rates rise and tenants are presented with more options.
ii. Retail: Total supply doubled that of 2015 and achieved 801,540 sq. m. in 2016, while the overall vacancy rate fell to 4.5%, a historically low record. Sports, Kids’ entertainment and education, lifestyle, are expected to became the new demand drivers in 2017. Overall vacancy rate is expected to keep low.
iii. Logistic: Total new supply in 2016 was recorded at 166,374 sq.m., outpaced by net take-up which achieved 174,489 sq.m. in the same period. Vacancy rate as such declined 0.5 ppt y-o-y to 0.9% at year-end. A similar level of new supply, mostly located in emerging areas with good accessibility, is expected to deliver to the market in 2017.
iv. Business Parks: Total new supply in 2016 achieved 202,411 sq.m., and the vacancy rate rose 1.8 ppt y-o-y to 9.8% at year-end. 2017 is likely to see a supply peak for the recent 3 years.
v. Capital Market: Beijing remained one of the most sought-after investment market around China. Office remained the dominant investment target and accounted for 63% of the total transaction values in 2016.
I: PRIME OFFICE SECTOR IN BEIJING
Office market turns to demand-supply balance
• Seven newly completed projects added a total GFA of 416,602 sq. m. to Beijing office market in 2016, 5.1% up on a y-o-y basis. Supply increase provided more options for tenants and drove up overall demand, while pushed up overall vacancy rate y-o-y to 7.6% by year-end and intensified the competition among landlords, particularly in eastern submarkets;
• Domestic financial and TMT giants continued to expand and became the demand engine. These large-sized and reputable tenants were favored by landlords, after a wave of closures of P2P lending firms and consolidation of domestic VC-backed TMT firms. Manufacturing and Energy enterprises continued to decentralize or downsize their office sites;
• Total net take-up was recorded at 317,655 sq. m. and rose 21.1% y-o-y in 2016. Domestic companies became a significant engine for new leases. In contrast, foreign occupiers prioritized strategies on enhancing utilization of existing office spaces and controlling cost;
• Rental polarization widened between eastern and western submarkets. Due to P2P and small TMT firms surrendering spaces, landlords in CBD and Wangjing provided rental incentives to attract and retain large tenants, while Financial Street and Zhongguancun continued to be undersupplied and raised rentals;
• In consideration of attracting a highly skilled labor force, occupiers started to place a premium on working environment beneficial to staff wellness and interaction, and are increasingly receptive to use of Activity-Based Workplace and office standards such as LEED and WELL;
New supply in non-core submarkets in 2017 and in the CBD Core Area in 2018 are expected to exert pressure on landlords. Meanwhile, strong take-up is expected as result of pent-up demand from historical supply shortage. The market is expected to become more balanced as vacancy rates rise and tenants are presented with more options.
II: PRIME RETAIL SECTOR IN BEIJING
Vacancy rate hits record low
• Total GFA of the seven newly completed projects doubled that of 2015 and achieved 801,540 sq. m. in 2016, 82% of which located in southern districts, easing prime supply shortage in these areas. Although large in size, most new projects achieved almost full occupancy upon opening. Overall vacancy rate fell to 4.5%, a historically low record;
• Performance gap between department stores and shopping malls widened. Some department stores closed or transformed, while shopping malls maintained an upward momentum. International retailers were keen to seek for spaces among mature malls in core areas. Decentralized malls operated by experienced developers increased rents gradually after gaining solid foot traffic. Average Shopping Mall Ground Floor rent as such grew by 2.2% y-o-y on a like-for-like basis;
• Luxury retailers focused on maintaining and upgrading existing stores, while Affordable Luxury and designer brands continued to enter prime locations. Although most traditional Fast Fashion stores hit saturation, emerging brands (e.g. Abercrombie & Fitch and Topshop) debuted in Beijing.
• Large-scale F&B groups decelerated their expansion for traditional brands and launched sub-brands in response to shifts of consumer needs. Light F&B sector featuring relatively small size and high price was expanding;
• Retail stores containing experience elements became a tide. For example, Sportswear retailers expanded store areas as an experience center. Kids’ toys and clothing retailers allocated spaces for entertainment and education use. Lifestyle sector, which combines household goods & books store with café, became a new demand driver in 2016.
• Experienced developers with solid tenant resources and effective marketing strategies managed to realize asset value appreciation, and started to expand footprints by establishing joint ventures with underperforming malls aiming at repositioning and tenant-mix adjustment;
In 2017, four projects are expected to deliver, all operated by reputable developers. Three of them are located in core areas and attractive for international brands which are seeking for large-size spaces to open flagship stores. Overall vacancy rate is expected to keep low.
III. LOGISTICS SECTOR IN BEIJING
• Total new supply in 2016 was recorded at 166,374 sq.m., outpaced by net take-up which achieved 174,489 sq.m. in the same period. Vacancy rate as such declined 0.5 ppt y-o-y to 0.9% at year-end.
• Driven by 3PL, e-commerce and consumer goods tenants, new projects hit full occupancy shortly after completion. Landlords took advantage of strong leasing activity to adjust tenant mix and raise rents. Average asking rent increased by 2.5% y-o-y on a like-for-like basis;
• Demand from small-sized online retailers shrank, while large-scale logistics occupiers are increasingly dominating leasing demand and gaining bargain power, which means landlords are likely to find it more difficult to raise rents in future, even though vacancy rate to remain tight;
A similar level of new supply, mostly located in emerging areas with good accessibility, is expected to deliver to the market in 2017, while in mid- and long- term new supply is expected to tighten due to restrictions on logistics development in order to upgrade Beijing’s economic structure;
Policy uncertainty is the most significant risk for logistics sector and hinder developers and investors expanding footprints in Beijing, which will benefit some neighboring logistics parks in cities like Tianjin and Langfang. However, tenants, particularly those demanding on delivery speed and quality, will continue to seek for spaces in Beijing to serve for the local market.
IV. BUSINESS PARKS IN BEIJING
• Total new supply in 2016 achieved 202,411 sq.m., 70% of which located at northern submarkets such as Z-Park and Dongsheng Science Park. Driven by strong leasing demand for these two submarkets, overall net take-up totaled 117,430 sq.m.;
• Vacancy rate rose 1.8 ppt y-o-y to 9.8% at year-end, with polarization among each submarket. Z-Park, Shangdi and BEZ remained undersupplied, while vacancy rates in some other submarkets increased due to market volatilities;
• Average rent for overall market increased by 1.0% y-o-y at year-end on a like-for-like basis, driven by rental growth in Z-Park, Shangdi, Beiqing Road and BEZ;
• Electronics, software development, new energy and biomedical became demand engines in 2016. With the change of Beijing’s economic structure and development of new sectors such as big data, artificial intelligence and cultural creativity, high-tech and high value-added industries are expected to further dominate demand for business parks.
2017 is likely to see a supply peak for the recent 3 years. New projects are located at BEZ, Beiqing Road and Shunyi Area, among which BEZ is the most promising for leasing demand, where developers are likely to wholly sell the properties to end-users. As land supply for office development in downtown areas will become increasingly scarce, business parks with good infrastructure are expected to provide more office space to occupiers, and to be increasingly favored for independent and built-to-suit office environment and relatively lower rents.
V. CAPITAL MARKET
• Thanks to strong market fundamentals relatively to other cities, Beijing remained one of the most sought-after investment market around China. While investment opportunities for prime properties in core locations remained tight, due to strong holding power by owners;
• Office remained the dominant investment target and accounted for 63% of the total transaction values in 2016. Due to lack of investable assets in downtown areas, office buyers are shifting interests to emerging business locations (e.g. Lize and Tongzhou) and business parks;
• Retail and hotel investment activities picked up. Investors chased for value-added properties with the intention to convert to office buildings or plan for large-scale reconstructions and repositioning;
• Partly due to historically low interest rates and restrictions on outbound investment by central government, domestic capitals increasingly flew to gateway cities such as Beijing, compressing yields for both office and retail in 2016. While foreign investors were relatively more conservative, reflected by domestic and foreign buyers accounting for 98% and 2% of the total transaction values in 2016, respectively.