Beijing Office Shortage Fuels Third-Highest Rents: Real Estate

Apr 08, 2014 3:22 am ET

April 8 (Bloomberg) -- John Wong, who leases offices in downtown Beijing’s new, 61-story Fortune Financial Center, has filled 60 percent of the space in the tower completed in September. He said he’s confident the rest will be snapped up.

Tenants at the tower include financial companies such as HSBC Holdings Plc and DBS Group Holdings Ltd., according to Wong, head of asset management at HKI China Land Ltd., which built the tower known as FFC.

“It’s such a good time,” Wong said in an interview in his office on the second floor of Fortune Mall, which is connected to the FFC by an underground tunnel. “The companies in Beijing still have the urge to expand, the financial sector that we focus on remains healthy, and we face relatively small competition because supply is limited. We have the conditions to choose the clients we want.”

Rising demand and limited supply have doubled office rents in the Chinese capital since 2008, making its Finance Street the world’s third-most expensive behind Hong Kong’s Central and London’s West End, according to real estate broker CBRE Group Inc. The cost of renting offices in Beijing is set to rise further as only half the average annual supply over the past decade is projected to be added in the next three years. Office rents in the city will rise 3 percent to 5 percent in the next two years, CBRE’s Frank Chen estimates.

“Beijing has more upside potential than Shanghai, particularly for the next two to three years,” said Chen, a Shanghai-based executive director at CBRE Research. “The rents are much higher, but they’re just not falling back because supply is so scarce.”

Slow Development

Only one project of 50,000 square meters near Beijing’s central business district is anticipated in the next six months compared with 3 million square meters of new space in Shanghai this year and next, according to CBRE. New office space in Beijing is set to average 270,000 square meters between 2013 and 2015, the broker said.

New supply in the capital, which spreads across six concentric ring roads, hit a peak of 1.25 million square meters (13.45 million square feet) in 2008. The construction boom was due to developers rushing to finish projects ahead of the 2008 Beijing Olympic Games.

Development has been slow to restart while much of the new space has been taken by state-owned enterprises. Between 2009 and 2012, 2.2 million square meters of grade-A offices were completed with only half that amount for lease in the private market, according to an August report by broker Jones Lang LaSalle Inc. Grade A or prime refers to the most stable high- income producing properties.

High Rents

Corporations have rented an average 590,000 square meters a year in Beijing since the Olympics, more than double the 240,000 square meters of new workspace added in the period, according to CBRE. That pushed rents to 413 yuan ($66) a square meter per month in the quarter ended Dec. 31, compared with 250 yuan in Shanghai, according to CBRE.

The restricted supply contrasts with the rest of China, where new office space rose to a record 1.77 million square meters in the last quarter of 2013, CBRE said in a statement Jan. 16. Beijing doesn’t have a lot of spare commercial land in the city center for buildings and many projects were completed in the lead up to the Olympics, CBRE’s Chen said.

“The supply is very tight in the Beijing office market,” Zhang Xin, chief executive officer of Soho China Ltd., the largest developer in central Beijing, told Bloomberg Television March 5.

FFC Project

Closely held HKI China’s FFC project provided the first new office space in Beijing’s CBD in seven quarters, boosting the vacancy rate to 3.9 percent at the end of last year. That was up from a record low 2.3 percent in the second quarter of 2013, according to CBRE.

The vacancy rate for grade-A offices hit a historic high of almost 30 percent in 2009, according to Jones Lang LaSalle.

The capital’s CBD is on the Third Ring Road to the east of the Forbidden City, the 15th-century former imperial palace in the heart of Beijing.

Finance Street, where global investment banks and the nation’s central bank and financial regulators are located, is a 1.2-square-kilometer zone along Beijing’s Second Ring Road to the west of the historic center. It evolved as a competitor to the CBD after the government approved the area’s creation in 1993 as a hub for the national headquarters of financial institutions.

Finance Street

The vacancy rate on Finance Street was just 0.1 percent last quarter with the average rent topping 500 yuan a square meter. That compares to 470 yuan in the CBD, where the FFC is located, according to CBRE. Vacancies stood at 3.4 percent in London’s West End and 4.5 percent in Hong Kong’s Central.

Beijing’s overall grade-A office vacancy rate is expected to remain at around 5 percent due to limited new supply, Zhang Jingjing, associate director and head of research at Knight Frank LLP, said in an e-mailed report. The probability of a significant drop in rents is slim with only slight adjustments likely in the second quarter, he said.

Close proximity to the central government and regulatory agencies makes Beijing a “strategic choice,” with 48 of the 89 Chinese companies on the Global Fortune 500 list basing their headquarters in the city, according to Jones Lang LaSalle. Of 500 Chinese and foreign companies on the list, at least 123 chose Beijing for their China head office, the realtor said.

“Some sectors need to be physically closer to regulators,” said CBRE’s Chen. “Networks, or guanxi, in China play a very important role in doing business.”

Among the new tenants at FFC is DBS, Southeast Asia’s biggest bank, which will move its private-banking operations to a larger area in the new building from Winland International Finance Center at the north end of Finance Street. The landlord of the Singapore-based bank’s current office has already secured a new tenant.

Rent Doubles

A Chinese fund management company will take half of the 2,400 square meters vacated by DBS, according to Kevin Lam, assistant marketing director at Beijing Winland Real Estate Co.

“The price is more than twice what DBS paid” when it renewed its contract in 2011, he said, declining to name the new tenant or disclose the price.

Winland is among the most expensive office buildings in Beijing and charges an average of about 750 yuan a square meter per month for new clients excluding property management fees. That is about triple the rent of 250 yuan in 2005 when the building started leasing, Lam said.

The 100,000-square-meter Winland is home to more than 50 companies, 46 of which are international financial institutions such as Goldman Sachs Group Inc. and UBS AG, he said. Bloomberg LP’s Beijing news bureau is located in the building, which is across the street from the headquarters of the China Banking Regulatory Commission and the China Insurance Regulatory Commission.

Air Quality

Demand for offices in Beijing has remained resilient despite the soaring rents and the city’s air quality, which frequently surpasses World Health Organization limits. The city’s concentration of PM2.5, small particles that pose the greatest risk to human health, was 95 micrograms per cubic meter as of 4 p.m. yesterday, according to the U.S. Embassy pollution monitor. That compares with the recommended day-long exposure limit of 25 by the WHO.

A “healthier environment” was the number one reason for Beijing residents to relocate, surpassing job promotion, according to a survey in January of 5,000 professionals in Greater China and Singapore by recruitment firm MRIC Group.

Soho China is including air purification systems in all its new buildings in Beijing, Zhang said. “It’s actually not that costly,” she said. “This is what everyone should be doing.”

Investor Favorite

For property investors, Beijing is the most favored location for office acquisitions out of 15 major Chinese cities, topping CBRE’s MarketScore list issued Jan. 13. The city, followed by the financial center of Shanghai, enjoys low risk and stable expected returns, and stands out in indicators including historical rental growth, vacancy and future development pipelines, CBRE said.

While investment demand is strong, supply of properties for sale is limited. In the five years through 2012, only 61 sales of office buildings and business parks worth at least $5 million were recorded in Beijing, compared with 107 transactions in Shanghai, Jones Lang LaSalle said in an August report.

Posco, South Korea’s biggest steelmaker, bought a site in Wangjing, a burgeoning commercial district in the city’s northeast, in 2012, and developed it into a soon-to-be-completed 145,000-square-meter office and commercial complex.

“Many well-known multinational companies have approached us and clearly indicated an intention to lease” space in the building, which is scheduled to be completed by year-end, Sung- Sig Youn, leasing director in Beijing for the Pohang, South Korea-based company, said in an e-mailed statement.

Beijing Appeal

HKI China, a unit of Hong Kong-based HKI Group that develops office buildings and villas in Beijing and other Chinese cities, has capped the proportion of FFC leased to core clients that typically take larger amounts of space at lower rents to about 35 percent of the total and will focus on industry leaders that can add value to the building, Wong said.

HKI China in February signed an agreement for seven floors with a combined 18,000 square meters to be used as the China headquarters of Samsung (China) Investment Co., a unit of South Korea’s Samsung Group.

Beijing, which targets 7.5 percent growth this year, is expected to become the world’s fifth-largest city economy in 2025 after Tokyo, New York, Shanghai and Los Angeles, jumping from the 26th in 2010, according to Jones Lang LaSalle.

“Since the day I joined CBRE, I was asking this question: if rents are this high in Beijing, why not move your office to Shanghai?” said CBRE’s Chen who joined the company in 2012. “I’ve hardly seen that happen during the past two years. Beijing has its appeal.”

--With assistance from Bonnie Cao in Shanghai.