Overdrive in Oriental Manhattan
 — Business Booms in Beijing’s CBD

Karen Fang stares fondly at the ancient coal-fired furnace keeping her hutong-based office warm on a chilly February afternoon. She is the Chief Operating Officer of the G2 Studio, a self-styled “creative collective” of five expats working on a wide range of multimedia projects. Despite the desire of the G2 team to remain in their current “inspirational” location, changes to property regulations mean that the company will soon be uprooting to Wanda Plaza, a recently-completed monolithic complex of glass, steel and concrete in Beijing’s Central Business District (CBD), dubbed the new “oriental Manhattan”.

In June 2006 a new law came into effect which effectively prohibits the registration of offices in Beijing’s residential buildings. The specific use of every property bought since this date has to be stated in the purchase agreement, and also appears on the ownership certificates. Businesses such as G2, who rented their hutong property before June, do not currently have a problem, but will be unable to legally renew their contract. While this measure will ultimately come down to a matter of enforcement, it is always advisable to be in compliance with the law, and the new regulation has resulted in an increased number of businesses flocking to areas such as the CBD.

By the time of the Olympics next year, Beijing will have finalized construction of five of its tallest buildings. The new tower blocks, all in the CBD, are the result of a municipal plan to make the area Beijing’s center for finance, telecommunications and media, and a magnet for multinational companies and foreign investment. “The CBD will become the largest office market in Beijing by 2008,” says Anna Kalifa, head of research in Beijing for Jones Lang LaSalle real estate. “There will be a high concentration of easily accessible entertainment venues, shops and amenities.”

Seventy percent of the foreign-funded enterprises in Beijing are already located in the CBD, along with 65 percent of the capital’s white collar workers and 80 percent of the city’s high-level returnee managers. Clustered in the urban maze are 95 percent of Beijing’s multinational offices, 90 percent of Beijing’s foreign banks, and eight of Beijing’s ten largest hotels. Against the background of China’s 2001 World Trade Organization entry, financial institutions such as foreign-funded banks and insurance companies have blossomed in the CBD, and their employees are eager consumers of the retail businesses sited in the World Trade Center area.

In Beijing today there are about 5.4 million square meters of prime office space, or office space that is rated either Grade A or Grade B. However, thanks to the capital’s recent construction boom there is now an unprecedented amount of space flooding the market. In January 2007 alone, an extra 550,000 square meters was completed, and experts estimate that by the end of this year a colossal 1.8 million square meters of additional space will be available for rent or purchase. This would mark a 6-fold increase over 2006.

The ever-growing glut of high quality office space in Beijing means that by the first quarter of 2008, the market is likely to favor tenants over landlords, instead of the current landlord-oriented situation. Although the rent of their new office will be double that of the present hutong location, Karen Fang says that G2 never seriously considered buying over renting. “At the moment we just don’t have the cashflow, and with the market the way it is, it doesn’t make sense to make such a big investment anyway,” she explains.

Prospective buyers of office space should always perform a buy versus lease analysis to see whether their money would have a better return from re-investment in the business or from property purchase. As a small yet rapidly expanding company, G2 certainly doesn’t need to be crippled by a large property downpayment. By opting to rent a fairly large office space (140 square meters), the company is also wisely allowing for future expansion as turnover and time dictate.

Foreign businesses should certainly not equate the spectacular growth in Beijing’s residential property market with conditions in the commercial sector. At present, the second-hand market for prime office space is virtually non-existent in Beijing, and as such it is not uncommon for investors in commercial property to witness sharp declines in the value of their purchase as it ages. The average net effective office rental on gross floor area for prime CBD office space is now about 95 RMB per square meter per month, which gives an annual rental yield below 4.5%. This figure will continue to drop as more wholly-owned, professionally-managed properties enter the market.

Although the direct impact of the Beijing Olympics on the office market will be small, the information and communications infrastructure developed for the Games is expected to attract and benefit firms. “The quality and quantity of new office buildings coming onto the market over the next 18 months will be good news for tenants,” says Anna Kalifa. “We expect this will cause a “flight to quality”, as tenants who are currently in lower grade office buildings choose to upgrade. The large supply of new space means rents will face downward pressure in the CBD area.”

According to Jones Lang LaSalle, Beijing’s corporate occupiers should start thinking about the right real estate strategy now, in order to maximize savings on office space in line with the city’s Olympic timetable. One expert comments, “Restrictions may apply to office moves and improvements during the Olympic period (June to September 2008), so tenants may face limited options. If expanding or relocating in 2008 and 2009, landlords may expect rent increases again due to the limited new supply during this period.”

Despite their reluctance to relocate, now would seem to be the perfect time for Karen Fang and G2 to be exchanging Bohemian hutong for corporate CBD. Falling rental prices, high-tech, high-spec infrastructure, and a diverse range of distinguished corporate neighbors mean that the company will soon be centered at the very heart of a thriving business environment. Who knows, maybe they can even find space in one corner of their gleaming new office for a trusty old furnace.

-end-

Stats Box

* 339,000 sqm of new commercial property were added to the market in 2006.
* Average vacancy in 2006 - 12.9%.
* Over 550,000 sqm of new property were added in January 2007.
* Total supply of new office space in 2007 estimated at 1.8 million sqm (an increase of roughly 600% on 2006).

CBD -