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Office sector enjoys brisk business

By Hu Yuanyuan (China Daily)
Updated: 2009-10-12 08:02

A man is reflected in a window with signs advertising properties for lease at a real estate agent's office in Beijing. While the residential market in general is suffering falling prices and sales, transactions are increasing in China's office space market this year. [Agencies]

Wang Ying, a 38-year old small business owner in Beijing, earlier last month sold two residential apartments in the capital city's Yayuncun neighborhood and bought a 200-sq-m office unit in Shenzhen.

"Compared with the residential sector, which has seen a strong rebound this year, I believe the potential profit margin for the office sector will be much more attractive," Wang said.

Her instincts appeared correct. The price of the office building she bought, which is close to the new headquarters of CITIC Securities in Shenzhen, has appreciated by more than 5 percent within a month.

While the residential market in general still is suffering falling prices and sales, transactions in the office space market are brisk.

Financial institutions, commercial property developers and entrepreneurs from small and medium-sized enterprises are the major buyers.

Industry statistics show office space sold in August totaled 155,500 sq m in Shanghai, up 30.5 percent month-on-month. The transaction volume was 2.32 times that of the same period last year.

SOHO, a Beijing-based and Hong Kong-listed property developer, in August agreed to acquire Donghai Plaza, a 52-story office and retail complex on prosperous West Nanjing Road, for 2.45 billion yuan ($359 million) from the real estate arm of Morgan Stanley.

SOHO Chairman Pan Shiyi said the price for the acquisition, which hovers around 34,000 yuan per sq m, is a bargain compared with the 60,000 yuan to 100,000 yuan per sq m in sales prices charged for nearby residential apartments.

CITIC Securities, the country's largest securities firm, spent 1.4 billion yuan in August for an office building in Beijing after a similar purchase in Shenzhen.

Agricultural Bank of China spent 3.77 billion yuan to buy 37 floors of an office tower in Shanghai in August.

Grant Ji, director of Savills (Beijing), a UK-based real estate service provider, said buyers, especially financial institutions, are mainly purchasing office properties for their own use rather than as investments.

"Since rentals might slip further, the investment returns from the office building for the moment might not be satisfactory," Ji said.

"But it is really good timing to rent office space, as the average rental has dropped by about 15 percent compared to 2007," he added

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Microsoft Corp recently moved its China headquarters to Lei Shing Hong Plaza in Beijing's Wangjing district for a lower rental price.

Companies that move to PE Tower in Beijing's Zhongguancun area can enjoy a 50 percent subsidy on office space leases in the first year. Due to the attractive policy, 90 percent of the tower has been rented despite a high vacancy rate in the capital city's central business district (CBD).

Domestic players

Meanwhile, the makeup of the office investment market also is changing.

According to a report from Jones Lang LaSalle (JLL), an international real estate service provider, domestic players such as insurance companies, State-owned conglomerates and soon-to-be-launched Real Estate Investment Trusts (REITs) are beginning to dominate the domestic investment market as foreign investors are squeezed by the global recession.

"Our continued research into major commercial property transactions indicates that over the last five years, domestic players have dramatically increased their share of the market," said Meggie Qin, head of the Beijing research division at JLL.

In the first half of 2009, foreign capital accounted for less than 10 percent of major investments in commercial property markets, down from nearly 60 percent in 2005.

In the first quarter of 2009, domestic investors accounted for almost 70 percent of such transactions, JLL reported.

Effective October 1, new regulations allowing insurance companies to increase investments in real estate will accelerate the process, said David Hand, head of investments for JLL China.

JLL's report estimated that mainland Chinese insurance companies could potentially acquire domestic real estate worth 236 billion yuan.

Based on current average capital values, this equates to more than twice the value of the Shanghai Grade A office market -- or 165 times the value of the Tianjin Grade A office market.

Ping An Insurance (Group) Company of China Ltd, for example, invested more than 4 billion yuan in domestic real estate in 2007 through its investment arm, Ping An Trust & Investment Co.

David Ng, head of regional property research in the Asian equities division of Royal Bank of Scotland, said investors should pay attention to the growing risks from the policy adjustment.

"Government warnings against price hikes, mortgage tightening, and renewed talk of property taxes and penalties on idle land make it harder to guess the government's property policy for 2010," Ng said.

Zhu Zhongyi, vice chairman of the China Real Estate Association, said recently that it is still hard to predict any upcoming changes in property purchase policies.

"As a number of favorable policies on property purchases will come due at the end of the year, any new change will depend on the market situation at that time," Zhu said.