“Not a single empty office”

You may be surprised to hear that office rents in Beijing now outstrip those in New York.

That’s according to property broker Cushman & Wakefield, which says it costs $130 per square foot to rent top-grade office space in the Chinese capital, compared to $120 in midtown Manhattan.

Prime office rents in Beijing’s central business district rose 75% last year (the previous year they increased 48%). Vacancy rates in Beijing are also said to have fallen to a record low of 6.3%. Zhang Xin, chief executive of SOHO China, went so far as to claim in a speech at Hong Kong’s Foreign Correspondents’ Club that “there is not a single empty office building in Beijing”.

So why is Beijing office space so popular? The Shanghai Daily reported this week that four leading cities (Shanghai, Beijing, Guangzhou and Shenzhen) are dominant in commercial property terms – holding a combined share of more than 85% of total transaction value nationally over the past five years.

Beijing landlords have further factors in their favour. Demand for premium space is coming largely from Chinese financial institutions and state-owned companies, which usually headquarter in the capital. Multinationals seeking to establish a presence in China have added to the competition for prime locations, wanting to be closer to decisionmakers. Current office shortages can also be traced back to a number of real-estate projects being withdrawn from the development pipeline, says David Faulkner, Colliers International’s executive director of valuation and advisory services. Originally, this was to avoid conflicting timetables with the construction of venues for the 2008 Olympic Games. Immediately afterwards, the global financial collapse further delayed or derailed projects.

The more bullish industry insiders now expect Beijing rentals to go up another 30% in the months ahead. “With a single-digit record low vacancy rate and not much quality supply foreseeable in the coming years, we expect Beijing and Shanghai to maintain the landlords’ market position in 2012,” says Andy Zhang, China managing director for Cushman & Wakefield.

Unsurprisingly, property developers are excited by the upward trend. SOHO China’s Zhang told the Financial Times: “The office [sector] has never been as hot as it is now. Rental has gone up so much… the market is calling for more office buildings.”

Residential property in Beijing is a different story. In the first quarter of this year, prices were down more than 10% in annualised terms, with the average price of new homes in the capital at Rmb12,326 per square metre at the end of March, compared to Rmb14,147 at the beginning of 2011, says the Beijing Real Estate Association.

Market conditions are probably not going to improve anytime soon.

“The market is still quite price-sensitive, and as restrictions on home purchases remain in effect, we are not likely to see a rebound in both sales and prices,” says Zhang Dawei, marketing director of Centaline Group in Beijing.

That also looks like a trend that is being felt more widely. Data from the National Bureau of Statistics showed that prices for newly-built homes fell in 46 of the 70 cities reviewed in March. All first tier cities have now reported declines for six consecutive months.

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