Big rental churn looms on office realty in Beijing

Pedestrians walk past an office building in Beijing's Central Business District. [Photo/Agencies]

There is no let up in the rental uptrend in top-grade office spaces in Beijing's key areas and some in fact became costlier in the second quarter of this year, which could force prospective as well as existing tenants to look for cheaper alternatives in other areas, industry analysts said.

According to Jones Lang Lasalle, a real estate services firm, popular locations in Beijing for Grade A office spaces include Central Business District or CBD, Olympic Park, Wangjing and East Chang An Avenue.

They have seen four new Grade A projects that added 2.7 million square meters to the capital's office space supply in the second quarter, taking the total to 102 million sq m.

Ping An Trust Co Ltd, a subsidiary of Ping An Insurance Group, has bought a shopping mall in northeast of Beijing for 1.25 billion yuan ($184 million) in April.

According to JLL, Ping An Trust may convert the mall into an office complex, potentially adding 1 million sq m more of gross floor area to the market.

Additional supply in Beijing's suburban areas such as Olympic Park has increased the choices available, which could encourage some tenants in prime localities to relocate.

In such a scenario, high rents in CBD may drop, sometimes significantly, JLL said in a research note.

Eric Hirsch, head of markets of JLL in Beijing, said high rents and emerging alternatives will likely stoke a rethink among property owners, potentially resulting in cheaper offices in prime locations.

"Some 78 percent of newly added offices have been rented out already in the second quarter," said Zhang Ying, general manager of JLL, North China region. "After the new projects are finished, Beijing will see more Grade A offices in suburban markets. The property owners there may offer discounts, bringing rare opportunities for tenants to avail top-quality offices at cheaper rents."

Savills, a real estate consultancy, predicts that supplies will grow by 3.37 million sq m in the second half of this year. The boom in supply could well leave about 8 percent of the overall office space vacant.

Although the emerging markets may drive down rents in prime locations, the average rent of top-grade office space in Beijing may stay stable, given the strong demand in key financial and technology districts such as Zhongguancun.

"The increasing rents in such areas will level up the average rental price pulled back by CBD, and the demand in Financial Street and Zhongguancun will keep heating up," said Hirsch.

According to Cushman & Wakefield, another commercial real estate services company, rents in Zhongguancun have increased by 13.8 percent year-on-year in the second quarter as the country pushes through the Made in China 2025 strategy, attracting more companies and research institutions to move in to the tech hub.

"Strong demand, coupled with limited office availability, has caused rents to rise," said Sabrina Wei, head of research at Cushman & Wakefield in North China.