“The outbreak of coronavirus suspended leasing activity across sectors and intensified market pressures,” said Julien Zhang, Managing Director for JLL North China. In the office market, the situation weighed on rents, resulting in further declines, as landlords prioritised stability over rent growth. Despite the outbreak, however, investment activity pressed on in the quarter and included the high-profile sale of LG Twin Towers to GIC for around RMB 8 billion. Meanwhile, the retail sector was among those hardest hit from the virus; malls in Beijing remained quiet towards end-1Q20, when retail activity in other major Chinese cities had started to rebound. Leasing activity halted in the industrial market at the height of the outbreak, flattening rent growth in the quarter. In the high-end residential market, sales volumes decreased significantly, as residents self-isolated and preferred to delay purchases.
Grade A Office
Overall leasing demand stalled amid the outbreak of the virus, leading tenants to put plans on hold or scrap them altogether. This led the leasing transaction volume (GFA) to decline significantly, decreasing by nearly 60% q-o-q. The figure was remarkably low even for the first quarter of the year, a traditional low season in Beijing that coincides with Chinese New Year. Although no new projects came online, landlords continued to face huge pressures due to the soft demand.
The situation forced landlords to focus on renewals with more aggressive rent strategies, offering greater flexibility on rent terms. Driven by landlords who reduced rents in late 1Q20 to appeal to more tenants, overall rent growth declined by 1.3% q-o-q. Landlords with large vacancies were generally more open to negotiations, as stabilizing their buildings took top priority.
The full impact of the virus has yet to be realized in the market. As the huge financial costs of the virus are increasingly realized and put added strains on the market, we anticipate both the leasing transaction volume and rents to see further downward pressure in the following quarters. “Companies are increasingly conservative given the uncertain climate,” said Michael Zhang, Director of Office Leasing for JLL Beijing. “That said, we are still seeing cases of forward-looking tenants taking advantage of opportunities to upgrade their facilities at better rents.”
Investments
Investors continued to be highly interested in Beijing and prioritised core assets above all else. LG Twin Towers along Chang’an Avenue was sold by South Korean LG Group to Singaporean sovereign wealth fund GIC for approximately RMB 8 billion. The deal demonstrated the high value that continues to be associated with core assets in the city, further underlining that investors were less concerned with the present situation and more interested in the future of Beijing. The sale of Naga Club in Dongzhimen for RMB 476 million also marked another notable deal closed in the quarter.
Investors remain active to 2020 investment market, despite disruptions from the virus. Even as market activity fluctuated in the quarter, investors remained focused on opportunities. Several negotiations with domestic and foreign investors were still reported to be underway at end-1Q20. “Even throughout the uncertainty and mounting challenges, investors continued to pursue every opportunity in Beijing,” said Michael Wang, Head of Capital Markets for JLL North China. “Domestic self-use investors remain very active, while foreign investors understand well that there is a rare window of opportunity being presented in the market – and this is their chance to get in on the action.”
Prime Retail
Note: Prime Retail refers to the Urban market. *New Supply is inclusive of the Suburban market.
Following store closures and reduced mall hours, Beijing sales dropped drastically due to the virus. Total retail sales growth declined 18% y-o-y in January and February, with F&B sales suffering hugely and dropping 40% y-o-y over the same period. Although fashion retailers were able to leverage online campaigns to help soften the blow, restaurants and experience-oriented retailers struggled to recover sales. With the emergency response level held to a stricter standard in Beijing, the impact of the virus on the market was prolonged in the city relative to most other major cities.
Leasing activity paused, resulting in a less immediate impact on rents in the quarter. Still, as the financial stress of the virus caused rents to dip, growth turned negative in the quarter. Some retailers negotiated lower rents, while others considered closing underperforming stores. There were cases in which landlords responded by providing short-term rent reductions or exemptions. “As sales fall, both retailers and landlords are left in a hard place,” said Ji Ming, Research Manager for JLL Beijing. “Moreover, as further fallout in the market remains likely, we are expecting to see increases to vacancy and added downward pressure on rents in the coming months. In Beijing, where life is returning back to normal at a slower pace compared to other major Chinese cities, retail recovery is expected to take some time.”
Industrial
Demand largely stalled as tenants put plans on hold, as the virus outbreak disrupted logistics networks and impacted markets. Deals that were under negotiation prior to Chinese New Year were delayed indefinitely. Limited demand in the quarter came from traditional demand sources such as 3PLs. The overall vacancy rate held steady in the quarter, as most tenants and landlords refrained from reacting too drastically.
The lack of leasing activity in the quarter led to flat q-o-q rent growth, as landlords were not in a strong position to raise rents given the situation. Some tenants that struggled from lost business due to the virus requested rent breaks, but most landlords were reluctant to provide discounts in the quarter. “The huge costs of the virus are set to weigh heavily on the weakened economic environment,” said Mi Yang, Head of Research for JLL North China. “Ahead of peak supply in 2021, we can now expect demand to remain soft over the near term, and this increased market pressure is likely to expedite further moderation in rent growth.”
High-end Residential
The virus saw buyer demand curbed, hurting sales in the quarter. In the high-end residential markets, sales volumes for luxury apartments and villas were down considerably, by 68.6%y-o-y and 88.2%y-o-y, respectively. Most transactions from the quarter were completed prior to Chinese New Year. Despite the large drop in sales, luxury apartment prices were flat q-o-q, however. Both developers and buyers took on more of a wait-and-see attitude on the market.
People’s Bank of China slightly lowered the Loan Prime rate in February to help boost the economy during these challenging times. The loosening in policy is not expected to be significant enough to stimulate housing demand in the near term, however. “As residents are largely expected to resume regular activities in the second half of the year, we do expect sales volumes to start rebounding later in the year,” said Mi Yang. “Even with the added market pressures from the virus, authorities are not expected to backtrack on previous commitments, and as such, the tight-policy environment is expected to remain in place for the housing market, which should facilitate a gradual recovery.”
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