When Hong Kong property developer Swire Pacific announced plans to build a retail-focused, hotel-office project in Beijing, it was just a drop in the deluge of grade A office space entering the Chinese capital. According to research by Jones Lang LaSalle (JLL), a whopping 20% of Beijing’s current grade A office space was completed in 2007.
But what made Swire Pacific’s project notable was its location – far from Beijing’s commercial core.
Northeast of the city’s central business district (CBD) in Chaoyang district, the area lies at the heart of a commercial sprawl that is home to an increasing number of multinational corporations (MNCs).
“Our target tenants would be MNCs that already have substantial office space in the Lido and Wangjing areas,” a Swire spokesperson said.
Beijing’s CBD, located near Guomao along the east Third Ring Road, emerged from municipal plans drawn up in 1993, and is now home to a range of grade A office developments, including the China World Trade Center, Beijing Yintai Center and Fortune Plaza. Office space accounts for about 50% of the area’s existing infrastructure, and by the end of 2007, roughly 150 international financial firms had established a presence there. About 60% of the companies in the area operate in the service sector.
While the CBD has long been planned as Beijing’s foremost international business hub and gateway to the world, evolving demand is pushing developers to explore new locations.
“There is frustrating lack (of space) in the CBD’s best buildings,” said Ren Rong, CEO of Harvest Capital Partners, one of the investors in Fifth Square, an office building in Dongcheng district. “Tenants are becoming more dynamic and flexible in their approach to locations.”
The change is evident on Financial Street, a 35-block area near the city’s Second Ring Road, west of Tiananmen Square.
The completion of the Taikang International Center and Excel Center late last year marked the arrival of Financial Street as a credible alternative to the CBD. Tax incentives are likely encouraging foreign financial firms to move to the area, which is home to investment banks such as Goldman Sachs and UBS. The central bank and securities regulator are also based there, as are China’s major commercial banks.
“Financial Street has started to attract international businesses just over the last few years,” said Henry Wu, a leasing specialist at Colliers International. “It will be very strong in the future.”
Other areas of Beijing are also emerging. Motorola left the CBD in favor of Wangjing in 2004, and Tsinghua Science Park in Zhongguancun has drawn MNCs like Microsoft.
At the Beijing Economic and Technological Development Area (BDA), in Yizhuang, about 16.5 kilometers out of Tiananmen Square, the office space offers companies a different feel from the hustle of downtown, attracting technology-intensive, low-polluting enterprises.
“For a large multinational, [moving to the BDA] enables them to go into more of a campus-type setting,” said Ben Christensen, head of research at JLL. “[But], the main factor is lower cost and more available space.”
Those factors are encouraging small- and medium-sized enterprises (SMEs) to look outside the CBD as well. Money is a consideration for these smaller Chinese companies, which largely cancels out the prestige value of an address in the CBD. In the cheaper, less central areas, they can even afford to buy rather than lease property.
“[The office we had been leasing] was US$28,500 per year – too expensive,” said Alfred Tian, president of CBU Info Resources, a trade publisher and business consultancy that recently moved to the Kunsha Center, a relatively new office building in Beijing’s Chaoyang district. “We bought [this property] for US$285,000, and the office space is almost the same size.”
The company, which has rights to the property for 70 years, is part of a growing trend in Beijing’s office property market: strata titling, or the division of building space into separate titles, allowing firms to invest in portions of projects.
“Domestic firms drive demand for strata titling,” Christensen explained. “There’s a huge spectrum of Chinese companies, and smaller firms are buying space in lower-quality buildings.” But, the majority of local companies are still leasing, he added.
Demand for strata titling is connected to both take-up and pace at which buildings are completed. Temporary halts are common for construction sites due to funding issues. Such uncertainties are driving many foreign companies in the opposite direction – away from lower-quality properties.
“A ‘flight to quality’ from older buildings to the new generation of Beijing [properties] is leaving large vacancies in projects where developers have not been responsive to tenant demands for better management, upgraded services and facilities,” said the Fifth Square’s Ren.
According to JLL, office vacancy rates in Beijing were at 16.2% in the final quarter of 2007, compared to 1.9% in Shanghai’s Puxi area.
However, with demand still outstripping supply in Beijng, it’s no surprise that there will continue to be new office options opening up across the city.
“The CBD does have its edge over other districts in Beijing,” said the Swire spokesperson. “But while multinationals continue with their business expansion in China, market forces will ensure eventual equilibrium on the quality, quantity, choice of location and rent level that meets the requirement of companies.”
Areas to watch
Zhongguancun – This area in Haidian district in northwest Beijing is attracting Chinese and multinational high-tech firms that want to be close to the research hubs of Tsinghua University and Peking University.
Financial Street – Located west of Tiananmen Square, close to the Second Ring Road, this emerging district is home to the People’s Bank of China and the China Securities Regulatory Commission. Generous tax incentives have encouraged a number of investment banks such as Goldman Sachs to open offices here. This has also driven the development of a number of high-end hotels such as the Westin Beijing and InterContinental Beijing.
Beijing Economic and Technological Development Area (BDA) – This state-level economic development zone is located 16.5 kilometers southeast of the city center and provides easy access to the port at Tianjin. Many logistics companies have set up shop here. A wide range of high-tech firms have also been drawn to the quieter, campus-like setting that the BDA offers.