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					Office sector briefing
Beijing, China July 24, 2009

“Grade ‘A’ office rents have recorded their third consecutive quarter-on-quarter fall and are now 18.8 per cent off their peak. Rents are expected to fall by a further 5 to 10 per cent over the remainder of the year”

Effective Grade ‘A’ office rents fell 5.7 per cent in the second quarter to an average of RMB150 per sq.m. per month, down 16.1 per cent since the start of the year 311,000 sq.m. of leasable space was added to the market in the second quarter, bringing year-to-date new supply to 752,000 sq.m., already 18 per cent more than for the whole of last year Net take up was 87,181 sq.m. in the second quarter, only 6.3 per cent lower than in the first quarter Several large scale projects have delayed handover dates to 2010
Image: World Finance Center, CBD

This supply / demand disparity drove the citywide vacancy rate up by 2.3 percentage points to 21.8 per cent while the CBD’s vacancy rate rose to 29.6 per cent Older office developments are expected to come under increasing pressure as new, higher specification projects compete for the same tenants The municipal government has issued a preferential policy package to attract multinational companies to establish regional headquarters in the city

Savills Research
www.savills-china.com

Office sector briefing
Overview
Though Beijing’s residential market has stolen most of the headlines in the property news recently due to a resurgence of demand, the city’s commercial market remains in the doldrums as record new supply pushes the overall vacancy rate up to 21.8 per cent, the highest rate seen in over a decade. Effective Grade ‘A’ office rents fell 5.7 per cent in the second quarter to an average of RMB150 per sq.m. per month. All submarkets recorded their second consecutive quarter-onquarter fall in rents with Lufthansa Area (10.6 per cent fall), CBD (7.5 per cent fall) and East 2nd Ring Road (7.0 per cent fall) registering the largest decreases. In an attempt to promote economic growth and expand its tax base the Beijing municipal government initiated an incentive package to encourage multinational companies to establish their regional headquarters within the city. Additionally, a western expansion of Beijing Financial Street (BFS) and an eastern expansion of the CBD are expected to further drive these areas, though it will be some time before they have any noticeable impact. Selected New Supply, Q2/2009
Project World Finance Center Oriental Media Center Tower C Financial Street Center Raffles City Grade Int’l ‘A’ ‘A’ ‘A’ East 2nd Ring Road Submarket CBD CBD CBD CBD Leasable Area (sq.m.) 178,000 45,000 50,000 38,000

Source: Savills Research & Consultancy

Vacancy
The citywide vacancy rate rose by 2.3 percentage points in the second quarter to 21.8 per cent, 1.7 percentage points higher than the previous vacancy peak in the fourth quarter of 2002. Grade ‘A’ Leasable Office Supply, Net Take-Up, and Vacancy Rate, 2000 - Q2/2009
Leasable Supply (LHS) 1,200,000 sq.m. Net Take-Up (LHS) Vacancy Rate (RHS) 30%

1,000,000

25%

Supply
Five new office projects were launched onto the market in the second quarter adding 311,000 sq.m. of leasable space. One was of International Grade ‘A’ standard, three others were local Grade ‘A’ standard while the fifth was a Grade ‘B’ office project. Supply in the first half of 2009 rose to 752,000 sq.m., 118 per cent of the total supply for the whole of 2008. Additional supply was introduced to the leasing market as COFCO Group vacated 28,000 sq.m. with their move to the recently completed COFCO Fulinmen Tower. World Finance Center (pictured on front page), developed by Henderson Land, is the first International Grade ‘A’ office project to be completed since China Central Place Tower 3 at the end of 2007. The twin tower development has a typical floor plate area of 4,600 sq.m., standard floors have a clear ceiling height of 2.75 m and raised floors of 190 mm while trading floors have a clear ceiling height of 3.3 m and raised floors of 300 mm. A number of banking and finance companies have shown interest in the project, drawn by its central location and high quality specifications.

800,000

20%

600,000

15%

400,000

10%

200,000

5%

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q2/2009

0%

Source: Savills Research & Consultancy

New supply in the first half of the year is already equivalent to the average annual supply seen in the market over the last four years, putting tremendous upward pressure on vacancy rates. With supply set to continue increasing in the second half of the year it is likely that the citywide vacancy rate could rise to above 25 per cent by the end of the year. Net take-up in the second quarter remained stable at 87,181 sq.m., down slightly from 93,022 sq.m. in the first quarter. This puts demand in line with the ten year historical average for second quarter net take up and is a strong indication of the health of the market despite the global financial turmoil. Over half of the large leasing transactions (units of more than 1,000 sq.m.) tracked by Savills in the second quarter involved companies from the finance, energy, transportation, media and IT industries, more than 50 per cent of which were domestic companies.

Over 200 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.

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Office sector briefing
Despite the recent economic slowdown, foreign firms continue to invest time and money in China in anticipation of China becoming one of the first to recover from the recent downturn. Selected Office Transaction, Q2/2009
Company DNV Mizuho Bank Project Prosper Center World Finance Center Submarket CBD CBD BFS Lufthansa Transaction Area (sq.m.) 4,000 3,000 4,600 4,000
120 100

Rent
Effective Grade ‘A’ office rents fell by 5.7 per cent in the second quarter, the third consecutive quarter-on-quarter decline. Rents are now down 18.8 per cent from their peak in the third quarter of last year, with the city’s average rent now standing at RMB150 per sq.m. per month. Grade ‘A’ Office Rental Indices Q1/2000 - Q2/2009
Prime CBD 180 160 140 Q1/2000 = 100 BJ Finance Street ZGC Overall

Credit Suisse Financial Street Founder Securities Center Olympus Ping An IFC

Source: Savills Research & Consultancy

District Comparison, Rent vs Vacancy Rate, Q1/2009 & Q2/2009
Q1 Rent (LHS) Q1 Vacancy Rate (RHS) RMB per sq.m. per month Q2 Rent (LHS) Q2 Vacancy Rate (RHS) 50% 45% 200 40% 35% 150 30% 25% 100 20% 15% 50 10% 5% 0 CBD E. 2nd Ring Rd BFS Lufthansa CBD Vic E. Chang An ZGC Others 0%

Source: Savills Research & Consultancy

250

The largest rent corrections over the last three quarters were recorded in the CBD, CBD’s Vicinity and Lufthansa area, which have fallen on average by 23.4 per cent since the peak (all three areas have vacancy rates in excess of 20 per cent). It is no coincidence that Zhongguancun, with a vacancy rate of just 4.5 per cent, has recorded the lowest drop in rents at just 10.6 per cent in the last two quarters.

Market Outlook
The Chinese economy is showing signs of recovery though economists and government officials are quick to point out that there is a long way to go before full recovery. National GDP growth rose to 7.9 per cent in the second quarter, up from 6.1 per cent in the first quarter while residential sales have witnessed an astounding recovery in transaction volumes with loan values rising to RMB7.37 trillion by the end of June. The government compiled Purchasing Manager’s Index (PMI) has remained above 50 per cent (indicating an expansion of manufacturing activity) for four months since March. Economic analysts have seized upon this recent improvement in economic indicators and are now upgrading previous forecasts for the economy. Predictions still vary, but at the upper end of the range is Goldman Sachs with forecasts of 8.2 per cent for 2009 and 10.8 per cent for 2010, while at the lower end, the EIU forecasts growth of 7.2 per cent and 7.6 per cent in the same years.

Source: Savills Research & Consultancy

CBD (8.3 points to 29.6%), East 2nd Ring Road (up 7.7 points to 28.3%) and East Chang’an Avenue (up 5.4 points to 16.3%) recorded the largest vacancy increases with new supply pushing vacancies up to historical highs. These large vacancy rates are expected to stay for the next two years as supply continues to come onto the market at a rapid rate. Minor falls were recorded in CBD Vicinity, ZGC Area and Lufthansa as no new supply came onto the market in these areas and demand continued apace. With four business districts now recording vacancy rates in excess of 20 per cent, competition between not only landlords but also district governments has increased. District governments are offering new tax incentives to qualified companies which move to their area, increasing the local tax base. All these changes are increasingly shifting the market in favour of the tenant.

Over 200 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.

3

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

While the citywide vacancy rate rose by 2.3 percentage points in the second quarter, four sub-districts recorded a vacancy increase while four recorded falls.

80 60 00 01 02 03 04 05 06 07 08 09

Office sector briefing
Surveys by leading human resources companies Manpower and Hudson Recruitment, indicate an improvement in hiring prospects. Manpower highlighted growth prospects in the finance, insurance & real estate; services; and wholesale & retail trade sectors. Results indicate that there is the possibility of increasing demand as companies in these sectors look to recruit. Future Grade ‘A’ Office Supply, 2009E - 2011E
Prime CBD BJ Finance Street Other Areas sq.m. East 2nd Ring Road Lufthansa Area CBD's Vicinity ZGC

Despite a citywide vacancy rate of 21.8 per cent and a significant volume of new supply expected to come onto the market over the next six months, the overall vacancy rate is expected to stabilise around 25 per cent as more projects get delayed, rents fall further and demand starts to recover. Effective Grade ‘A’ office rents fell by 16.1 per cent in the first half of the year as landlords repositioned themselves to the changed market. While the majority of the rent correction is believed to have passed, continuing supply issues and elevated vacancy rates will continue to place downward pressure on the market, where rents are expected to fall a further 5 to 10 per cent by the end of 2009.

1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0

2009 E
Source: Savills Research & Consultancy

2010 E

2011 E

Forecasts for Grade ‘A’ leasable office supply in 2009 have been downgraded as a number of projects, including China World Trade Tower 3 and International Finance Center (West Tower), have postponed completion dates. New supply in 2009 is now expected to be 1.2 million sq.m., down from our previous expectation of 1.6 million sq.m.

For further information, please contact:
china
Randall Hall
Chief Executive Officer, China

beijing
Joan Wang
Associate Director, Research & Consultancy

address
Savills Property Services (Beijing) Company Limited

+8621 6391 6688 rhall@savills-sh.com

+8610 5925 2288 jqwang@savills-bj.com

beijing
Matt Brailsford
Deputy Managing Director

2101 East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District research & consultancy, asia pacific Beijing 100022, China T: +8610 5925 2288 Simon Smith F: +8610 5925 2299
Senior Director

+8610 5925 2002 mbrailsford@savills-bj.com

+852 2842 4573 ssmith@savills.com.hk

corporate website
www.savills-china.com

This document is prepared by Savills for information only. Whilst reasonable care has been exercised in preparing this document, it is subject to change and these particulars do not constitute, nor constitute part of, an offer or contract; interested parties should not rely on the statements or representations of fact but must satisfy themselves by inspection or otherwise as to the accuracy. No person in the employment of the agent or the agent's principal has any authority to make any representations or warranties whatsoever in relation to these particulars and Savills cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. This publication may not be reproduced in any form or in any manner, in part or as a whole without written permission of the publisher, Savills. © Savills (Hong Kong) Limited. 2009.

Savills Research
www.savills-china.com

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This document is prepared by Savills for information only. Whilst reasonable care has been exercised in preparing this document, it is subject to change and these particulars do not constitute, nor constitute part of, an offer or contract; interested parties should not rely on the statements or representations of fact but must satisfy themselves by inspection or otherwise as to the accuracy. No person in the employment of the agent or the agent’s principal has any authority to make any representations or warranties whatsoever in relation to these particulars and Savills cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document. This publication may not be reproduced in any form or in any manner, in part or as a whole without written permission of the publisher, Savills. © Savills (Hong Kong) Limited. 2009. (VII/09)


				
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