Office hubs in Beijing turn into ghost towns

Source : Straits Times - 10 Apr 2009

The once bustling office hubs of the Chinese capital are starting to look like ghost towns.

As the global economic slowdown bites into the budgets of multinational corporations (MNCs), some major firms located in the prime office districts of Beijing are scaling back or moving to cheaper locations.

Vacancy rates have passed 17 per cent - a five-year high - forcing some property developers to slam the brakes on their projects.

There are at least three half-built projects in limbo - as developers worry about cash-flow problems and fear that a glut will depress rentals further and wipe out their profits, said one property consultant who declined to be named as his clients are involved in these projects.

Rental rates for office space have dropped as much as 7 per cent in the fourth quarter last year and are still falling.

Jones Lang Lasalle’s Beijing research head Denis Ma told The Straits Times that rentals could fall by about 20 per cent this year.

Indeed, a check with three sales agents showed that overall average office rentals in Beijing, which had hit about US$37 (S$56) per square metre a month at the start of last year, are returning to ‘early 2007 levels of US$34 or even less’.

Analysts note that it is the oversupply of new commercial space that is weighing on the market, rather than weak demand.

Over the past three to four years, 500 million square feet of commercial real estate had been built in Beijing alone - more than all the office space in Manhattan.

Property developers had rushed to build projects ahead of a rule last year banning major construction to reduce pollution before the Beijing Olympics.

But the current glut presents a golden opportunity for some tenants to upgrade.

Mr Li Hong, 43, who heads the Beijing operations of a small European trading firm, had just ordered all his staff to pack up and abandon the office - for good.

‘I guess we have the economic crisis to thank for this,’ he said, referring to the company’s plans to vacate their cramped premises in a ‘Grade C’ office building to move to a bigger, swankier office.

Eight months ago, amid the property market boom fuelled by the Beijing Olympics, he inquired about leasing space in newer office buildings, but was rebuffed as his budget was ‘far below the asking price for even the smallest unit’.

Then a month ago, he got a lease offer for a spacious unit in a brand new ‘Grade A’ building in the Central Business District (CBD) - at 80 per cent of his budget.

‘Grade A’ offices have the highest quality finish to the internal furnishings and also boast of greater architectural detailing on the exterior of the building. ‘Grade C’ offices - the lowest grade - have lower quality internal decorations and design of the building is basic.

Mr Li went to take a look and found the ‘Grade A’ building - like many others around it - ‘half empty’.

‘My agent blamed it on the economic crisis and the office space glut. That’s good news for us. It’s time to move,’ he said.

Other beneficiaries are cash-rich local developers, like Soho China’s chief executive Zhang Xin, who are looking to buy commercial property whose prices have plunged 50 per cent from the 2007 peak.

Ms Zhang told FinanceAsia.com recently that Japanese and American funds holding prime location commercial properties in Beijing and Shanghai are looking to sell ‘because they don’t see the market coming back over the next two years’.

Still, Beijing’s long-term city plan is to continue to build more.

Another 2.33 million square metres of new office space will be completed this year, expanding the market by a further 27 per cent, said Jones Lang’s Mr Ma.

Plans to build a gigantic 19 square kilometres second CBD in west Beijing - roughly the combined size of Toa Payoh, Bishan and Ang Mo Kio new towns - are also apparently still going ahead. The first phase of construction is expected to start in 2013.

Analysts say that in the longer run, China’s strong growth will boost demand, with foreign companies flocking back after the crisis.

Jones Lang LaSalle’s Beijing managing director Julien Zhang noted: ‘Occupancy at an aggregate level has continued to grow, underscoring the importance of Beijing as a leading business centre, not only in China but also within the region.’