Beijing Office Rents on Pace to Surpass Shanghai

Office vacancies in Beijing hit a 20-year low as both domestic and multinational firms expand China operations aggressively. At the current rate, within four years rents in the capital are expected to top those in Shanghai, China’s longtime commercial hub.

The overall vacancy rate declined 2.6 percentage points quarter-on-quarter to 8.3 percent, according to international real estate service provider Jones Lang LaSalle. The biggest decline was seen in the highrise Central Business District.

In Q1 Beijing’s Grade A office vacancy rate fell by 2 percentage points quarter-on-quarter to 5.9 percent, while rents increased 12.6 percent to an average of 241 yuan ($37.20) a square meter ($3.46 per square foot), according to Savills PLC.

Further rent hikes can be expected due to the shortage of available space, said the Savills report. Beijing’s overall rents are on pace to surpass those of Shanghai within four years, said Julien Zhang, managing director of JLL Beijing,

“The expansion of multinational companies’ operations and domestic firms’ leasing of multiple floors were the key drivers of demand,” said Qin Xiaomei, chief researcher at JLL Beijing.

Self-use space, which is owned by the tenant, accounted for nearly 40 percent of all net absorption in the first half of 2011. Demand for such space was particularly strong from domestic firms but multinationals are now also securing self-use space.

The soaring rents on grade-A space has prompted cash-rich state-owned enterprises to buy up prime office buildings, both for own use or as a long-term investments. Foreign institutional investors too have begun buying office space in first-tier cities as well as commercial properties in second-tier cities.

“Most capital (for property investment) now is circulating within the Asia-Pacific area, and China remains number one in terms of the source of the capital and the target for property investment,” said Steve Williams, global advisor of Real Capital Analytics Inc earlier this month at a Royal Institution of Chartered Surveyors forum in Beijing.

In Q1 international purchases of offices, hotels and retail properties jumped 30 percent to $4.8 billion, according to Real Capital Analytics. Fifteen of the top 25 real estate deals by value in the Asia-Pacific region took place in China.

“We see no letup in this trend for the foreseeable future, thus making Beijing a truly compelling investment market,” said David Hand, China investment head at JLL.