One of the factors behind this transformation is a mixed macro-economic picture. Beijing's GDP totalled Yn44.2bn (US$5.32bn) from January to April 1998, representing an increase of 9.4 per cent compared with the same period last year. Exports increased by 26.8 per cent, appearing to suffer little impact from the Asian crisis.
However, fewer foreign businesses have been attracted to the city, perhaps because of the weak economic prospects in Asia as a whole. While there were 13,670 registered foreign companies operating in Beijing at the end of May 1998, only 259 new companies registered between January and May, a 20 per cent decline on the comparable figure last year. This downfall has impacted on the real estate market and will continue to do so since considerable new office space is expected to arrive on the market in 1998.
`The 'scale of new development under-way throughout the region is striking,' observes Jones Lang Wootton. `In mature markets such as Tokyo, Singapore and Hong Kong, the supply anticipated over the next three years ranges from 2-18 per cent of the existing stock. But in the emerging markets in China, the supply will more than double or in some instances treble the existing stock and this is due to the low existing base.'
During recent years, Beijing prices and rents have been high. While there was a reasonable supply of buildings of average quality, few were up to Western standards.
"The big problem in Beijing is that in the past, nobody was serious about the quality of the buildings, and the companies couldn't be sure that the buildings wouldn't fall down in a few years' time," says Ms Annie Lei, senior researcher at Colliers Jardine Citic Property Management Co. The office market has now shifted from being mostly grade B buildings to grade A buildings with modern facilities such as good management services, efficient air conditioning systems, and modern lifts and escalators.
A more developed market
"We are now coming from an immature to a more developed market," says Mr Vincent Lottefier, director of the Beijing office of Jones Lang Wootton. A total of 25 premium and grade A office buildings are due to be completed during this year, with a total gross floor area of 1.34m sq metres. Total premium and grade A inventory will reach 3.5m sq metres.
This new construction is altering the usual pattern of high prices and rents. Because of the oversupply of office buildings, Beijing has entered a cyclical downturn that will haveconsequences on prices and property pat-terns. The vacancy rate for grade A offices is already 37 per cent and is bound to increase as new supply is completed. "We are nearly sure it will go over 40 per cent before the end of the year," says Lottefier.
Indeed, a price slide has been in existence since mid-1996. According to Jones Lang Wootton, prices had already fallen by 1.8 per cent in the third quarter of last year and by a further 5.4 per cent in December. Annual rents fell by 1.8 per cent in the third quarter and by a further 7.5 per cent to US$556 per sq metre in December. For example, monthly rentals in the China World Trade Center fell from US $100 per sq metre three years ago to around US$50 today. In July, the average monthly net rentals in Grade A office buildings in Beijing stood at US$39.80 per sq metre, down 12.3 per cent on the previous quarter.
This situation offers new opportunities to companies wishing to expand their operations. "Rentals have fallen so much that we might have the lowest rental prices this year, so a lot of companies think it is the right time to move into bigger offices," explains Lei of Colliers Jardine. In recent months, leasing activity has increased strongly, with a net absorption of 20,000 sq metres in the second quarter, still lower than Shanghai with 55,738 sq metres leased. Many lettings were above 1,000 sq metres and tenants included several American-based multinationals, such as Johnson & Johnson and Boeing. These two concluded lease contracts at the soon-to-be-completed Pacific Century Place, a development 95 per cent owned by Mr Richard Li, the son of Li Kai Shing. With modern facilities and a good location in the diplomatic region of Sanlitun, Pacific Century Place has already leased 70 per cent of its main office tower.
Besides this, Nortel leased 3,500 sq metres in Sun Dong An, Xerox 1,850 sq metres in Jing Guang Extension, while Henkel leased 1,800 sq metres in Full Link.
New projects come on stream
However, investments by developers in Beijing more than 80 per cent of them from Hong Kong, Singapore and Malaysia ?have become more complicated since the government effectively stopped approving new projects in 1995.
"Getting a construction licence is proving much more difficult than a few years ago," explains Lottefier of Jones Lang Wootton. "There are no clear regulations and the costs of constructing a building can become very heavy. There are multiple authorisations involved, as well as taxes and the constraint of having to supply a new flat to every member of an expropriated family. This is why rents remain relatively high."
The Onward Science & Trade
Center (119,000 sq metres of office space) was the only project completed during the second quarter of this year. However, CC
many projects are due to be completed before the end of the year, adding 758,600 sq metres of office space to the stock.
Among the most important are Landmark Office Tower (Phase II), Kerry Center, Pacific Century bec Place in Chaoyang, East Gate
Plaza in Dongcheng and Corpo for rate Square in Xicheng district.
The eastern part of Beijing and to a the newly constructed office buildings along Chang' an, such as Cofco and Bright China, are Seri popular locations for foreign companies. Chinese entities prefer the Shay western part of the city, especially Xicheng district. This is where, in . 1993, the State Council and Beijing government approved the development of Financial Street in the West Second Ring Road district as a financial and administrative centre. Several buildings have so far been completed, including Investment Plaza, Pinan Building and Yuetan Building. Tongtai Building, Beijing World Financial Center and Corporate Square are scheduled for completion in mid-1998.
Sixteen finance, securities, insurance and banking corporations have already moved to Financial Street. Citic Bank and Ping'an Insurance are constructing their own buildings while Huatai insurance company has purchased 10,000 sq metres in Corporate Square.
When Financial Street is open by the end of this year, it is set to house the headquarters of eight major Chinese banks. But few foreign companies have been willing to make the move. "Except for Corporate Square with a Singapore investment, the office buildings on Financial Street have huge surfaces but poor technological facilities," observes Lottefier. "They don't match the demands of Western companies."
Plenty of bargains
Actually, few Western companies have purchased any office space in Beijing, since prices haven't fallen at the same pace as rental prices. There are still a few examples of owner occupancy, such as Motorola which has bought 28,000 sq metres at the Onward Science and Trade Center, US pharmaceutical company Pfizer which has purchased 6,000 sq metres at Full Link, Rockwell (4,000 sq metres in the Henderson Center) and BASF (1,700 sq metres at Sunflower Tower).
Another trend has emerged: as the credit crunch and the financial crisis combine, banks are putting more pressure on Asian developers under a heavy debt burden. Many are trying to sell, even at a loss.
Attracted by those new opportunities, large investment companies, mainly North American and European, have come to Beijing since the beginning of the year to probe the market. Says a real estate consultant: "They haven't bought yet, but they know there are good bargains around."
More than 18 months after deciding to reshuffle its administration, the central government is still trying to cope with the practical implications. It is proving a huge task ?until this year, the Chinese bureaucracy at national level consisted of several million cadres, a growing component of the 30 million employees on the state pay roll. The new policy unveiled at the national assembly in March anticipates four million of them leaving the administration during a three-year transitional period.
Nowhere are the changes more visible than in Beijing, the centre of the national administration. Some 15 ministries and commissions are being dissolved to make the government more attuned to a market economy. Official organisations under the axe include the ministries of coal, power, metallurgical industry, electronic industry, chemical industry, internal' trade, posts and telecommunications, labour, radio, film and television, geology and mineral resources, and forestry.
Several ministries are being downgraded under the State Economic and Trade Commission, while four powerful new bodies have absorbed some functions of the defunct departments. They are the State Commission of Science, Technology and Industry for National Defence (Costind), the Ministry of Information Industry, the Ministry of Labour and Social Security and the Ministry of Land Resources. This government reorganisation also affects the provincial level, with thou-sands of local officials being reshuffled.
As stated by Chen Qingtai, vice-minister of the State Economic and Trade Commission, the main objective is, "to separate government administration from enterprise management. In this way, enterprises can become independent legal entities and enter the market, and those enterprises that meet requirements can gradually list."
Today, this seems easier said than done. In many instances, the human cost and the work of reorganising the complex pyramidal net-work of departments, divisions, sub-divisions and bureaux are perceived as a heavy sacrifice to the modemisation of the country.
Many have tried, without much success, to smooth the process. Among them, Wu Jichuan, head of the new Ministry of Information Industry born from the merging ofthe telecommunications and electronics ministries, has appealed in vain to Premier Zhu Rongji to increase the allocated staff of 400 employed by the reshaped organisation. Responsible for the booming information technology sector, the two ministries previously employed 1,000 people.
"The usual pattern," comments an insider, "is that three departments of 50 employees each are being merged into a new entity of 30 people". As a result, 13 new departments at the ministry have been set up, but the divisions under them have not yet been decided.
The same pattern emerges in the aeronautical sector where Avic (Aviation Industry of China) was once prominent in deciding, producing and financing new programmes. The reshuffle involves laying off 150,000 of its employees or one-fifth of its total workforce with a clear split between commercial and administrative functions. Now deprived of managing its own budget which has been placed under the responsibility of Costind, the commission responsible for military and civil projects in space and aeronautics, Avic is having difficulties in defining reorganisation plans. This may have played a part in the decision by Airbus and Avic to give up the joint development of a Sino-European 100-seat airplane.