Savills World Research Beijing Briefing Sales and Investment April 217 SUMMARY Image: Chang an Centre, Shijingshan district Cashed up developers are actively acquiring underperforming assets with the intention to upgrade, while secondary land resources remain sought-after. Grade A office capital values registered an average of RMB74,6 per sq m by the end of /217, down 1% quarter-on-quarter (QoQ). As average rents in the Grade A office market held rather stable, Grade A office gross reversionary yields remained at 5.39%. The en-bloc sales market saw a large amount of activity during the quarter, with seven deals concluded for an aggregate consideration of RMB5.7 billion. The first-hand, strata-title office market saw a total supply of 54, sq m in /217, down 81% QoQ and 22% year-on-year (YoY). Due to weak demand, total transaction area dropped by 67% QoQ and 28% YoY to 246,3 sq m during /217. The market witnessed a large volume of residential-titled land supply released in the first quarter of 217, in particular for plots designated for policy housing. Fourteen land plots transacted in /217, of which seven were positioned for residential usage. Total transaction volume reached RMB21.58 billion during the period, down 34% QoQ and 3% YoY. Investors have begun to turn their eyes towards value appreciation opportunities arising from urban regeneration and the redevelopment of existing projects. Jack Xiong, Savills Research & Consultancy savills.com.cn/research 1
Briefing Beijing sales and investment April 217 Market news The Beijing Municipal Commission of Housing and Urban-Rural Development announced stricter guidelines relating to the management of commercial and office development projects on 26 March. The guidelines see new commercial and office projects that are currently under construction no longer eligible for sale to individuals. Further, projects on the second-hand market are also now only eligible for sale to qualified companies, public institutions, social organisations and individuals. Additionally, for individuals to be eligible to purchase commercial/office projects, they must own no home in Beijing and have paid personal income tax or social insurance in the city for five consecutive years. Loans for purchasing commercial housing have also been suspended and warnings extended that real estate agencies that break the rules will be punished. Market commentary The first-hand, strata-title office market saw a total supply of 54, sq m in /217, down 81% QoQ and 22% YoY. Due to weak demand, total transaction area dropped by 67% QoQ and 28% YoY to 246,3 sq m during the period. Total consideration decreased by 72% QoQ and 25% YoY to RMB7.25 billion during the quarter. Average transaction prices registered GRAPH 1 First-hand, strata-title office sales, /26 /217 3 25 2 15 1-5 6 7 8 9 1 11 12 13 14 15 16 17 GRAPH 2 First-hand, strata-title office supply and transaction by area, 28 /217 ' sq m 2,5 2, 1,5 1, 5 Traditional Emerging 28 29 21 211 212 213 214 215 216 17 GRAPH 3 Grade A capital values and yields, /27 /217 RMB per sq m 8, 7, 6, 5, 4, 3, 2, 1, Capital value (LHS) Gross yield (RHS) 7 8 9 1 11 12 13 14 15 16 17 16% 14% 12% 1% 8% 6% 4% 2% % RMB29,5 per sq m, down 15% QoQ, however up 4% YoY. The en-bloc sales market saw a large amount of activity during the quarter, with seven deals concluded for an aggregate consideration of RMB5.7 billion. The demand stemmed from investors strong appetite for secondary land resources through equity purchases of land-owning companies. Additionally, investors also showed a growing appetite for acquiring underperforming assets already operating in the market, with the intention of upgrading them to sell or to operate themselves for a greater yield. The market witnessed a total of 14 land plots transacted during the quarter, seven of which were designated for residential usage. All of the transacted plots, excluding the one plot designated for policy housing, fell under the new land auction rules. The new rules specify that once a land plot has reached its maximum ceiling price, the bidding process will move onto the next stage, where buyers bid by increasing their allocation of wholly- 2
Briefing Beijing sales and investment April 217 owned space, to a maximum limit now set at 7% ownership. The total transaction consideration of the 14 deals reached RMB21.58 billion during the quarter, representing a decline of 34% QoQ and 3% YoY. Office sector All grades The first-hand, strata-title office market saw a total supply of 54, sq m in /217, down 81% QoQ and 22% YoY. Due to weak demand, total transaction area dropped by 67% QoQ to 246,3 sq m during the quarter, down 28% YoY. Total consideration decreased by 72% QoQ and 25% YoY to RMB7.25 billion by the end of the quarter. Average transaction prices registered RMB29,5 per sq m, representing a decline of 15% QoQ, albeit up 4% YoY. Suburban areas remained the most active in terms of transaction volume during the quarter, with the drive being led by the Fangshan and Daxing districts. Having ranked in first place for the last two GRAPH 4 First-hand, strata-title retail sales, /26 /217 16 14 12 1-8 6 4 2 6 7 8 9 1 11 12 13 14 15 16 17 TABLE 1 Major first-hand, strata-title office projects in /217 Project Chang an Centre ( 泰禾长安中心 ) Grand Royal Canal ( 通州富力中心 ) Central Park Plaza ( 中央公园广场 ) Location Shijingshan Tongzhou Chaoyang Developer Tahoe Group R&F Properties Smart Hero Group area (sq m) 2,2 12,5 3, Average Price (RMB/sq m) 48,6 48,6 15,7 TABLE 2 Major strata-title retail projects in /217 Project Noble Center ( 诺德中心 ) Sci.& Tech. Villa ( 天恒旭辉 7 号院 ) The World Commerce Center ( 世界侨商中心 ) Location Fengtai District Daxing District Tongzhou District Property type Office / Retail Podium Residential / Retail Podium Office / Retail Podium Developer Beijing China Railway Noble CIFI / Tian Heng Group Shimao Property / Fuwah International Group area (sq m) 9,4 3,2 3,4 Average Price (RMB/sq m) 58, 51,5 7,6 savills.com.cn/research 3
Briefing Beijing sales and investment April 217 consecutive quarters in terms of total market area transacted, the Tongzhou district was surpassed by the Fangshan district during the period. The Fangshan district accounted for 17.7% of total area transacted, while Tongzhou represented 17.3%. Grade A office market Grade A office capital values registered an average of RMB74,6 per sq m by the end of /217, down 1% QoQ. As average rents in the Grade A office market remained rather stable, Grade A office gross reversionary yields held at 5.39%. Retail sector The first-hand, strata-title retail market received 19, sq m of new supply in /217, a decline of 87% QoQ and 88% YoY. Meanwhile, total transaction area reached 236, sq m, down 47% QoQ, albeit up 12% YoY. Total consideration registered RMB6.4 billion with an average price of RMB27,2 per sq m. En-bloc investment market The en-bloc sales market saw a large amount of activity during the quarter, with seven deals concluded for an aggregate consideration of RMB5.7 billion. Faced with a scarcity of land resources and increasing prices, institutional investors continued to look for alternative ways to access opportunities in the market. During the quarter, there was particularly strong interest in development site acquisitions through equity purchases, including: Vanke Group acquired the Honglingjin Bridge Project in CBD Vicinity for a total consideration of approximately RMB1,215 million. The deal transacted at an average transaction price of RMB21,8 per sq m, which saw Vanke obtain a 6% equity share in the project. COFCO Land acquired a 49% equity share in Plot HIJ, Sunhe GRAPH 5 En-bloc investment volumes, /27 /217 5 45 4 35 3 25 2 15 1 5 *Historical data in 214-216 has been updated. Village, Chaoyang for RMB64 million. The deal transacted at an average transaction price of RMB12,4 per sq m and will see COFCO partner with CITIC-CP Asset Management. Investors have also shown a growing appetite for acquiring underperforming assets already operating in the market, with the intention of upgrading them to sell or to operate themselves for a greater yield. For example: 27 28 29 21 211 212 213 214 215 216 17 GRAPH 6 En-bloc investment volumes by property type, 27 /217 5 45 4 35 3 25 2 15 1 5 Office Retail Apartment Service Apartment Hotel Complex 27 28 29 21 211 212 213 214 215 216 17 *Historical data in 214-216 has been updated. Natural Apex, a subsidiary of the Jingrui Group, purchased a 1% equity share in a company which owns 6 units in the Beijing Sanquan Serviced Apartment building in Lufthansa for RMB643 million, which it plans to refurbish. Aoyuan Property Group purchased a 1% equity share of a company that owns a commercial/residential project in the Fengtai district for a total of RMB658 million. The average transaction price of the deal was RMB5,5 per sq m. 4
Briefing Beijing sales and investment April 217 Limited land supply and the enforcement of cooling measures by authorities has seen it become increasingly difficult for investors to gain access to first-hand land resources via auctions. As a result, the market has recently seen more investors look at a variety of opportunities on the second-hand housing market through various financing structures. Deals of interest included: Sunac China Holdings agreed to acquire a 6.25% stake in real estate agency Lianjia for RMB2.6 billion, by subscribing to the company s new share issuance. As part of the transaction, Sunac will appoint a director to the board and begin cooperation with Lianjia, also known as Home Link. Metro Land Corporation and Lianjia signed a Cooperation Framework Agreement to set up a platform company with a registered capital of RMB5 million. According to the agreement, both parties invested RMB25 million each for a 5% share in the company, which will focus on urban renewal projects in the city. Nine of the new land plots were reserved for policy housing, totalling 41, sq m and approximately 42% of the total residential land supply during the quarter. The move signifies the authorities desire to adjust market imbalances through the supply side through restructuring, and further enforcing the message that housing is for living, not speculative investment. The market witnessed a total of 14 land plots transacted during the quarter, seven of which were designated for residential usage. All of the transacted plots, excluding the one plot designated for policy housing, fell under the new land auction rules. The new rules specify that once a land plot has reached its maximum ceiling price, the bidding process will move onto the next stage, concerning the proposed level of allocation for wholly-owned space, of which the maximum limit is now set at 7% ownership. Total transaction consideration of the 14 deals reached RMB21.58 billion during the quarter, representing a decline of 34% QoQ and 3% YoY. GRAPH 7 Land transaction volumes, /28 /217 25 2 15 1 5 28 29 21 211 212 213 214 215 216 17 Market outlook City-wide restrictions on commercial property buyers issued in late March look to restrict individuals from purchasing new commercial properties, as well as raising the requirements for individual buyers of second-hand properties. The measures fundamentally reduced the liquidity of these assets and have raised the risk profile of investing in these types of properties. As a Land market As outlined by authorities, land supply will continue to decrease in 217, thus marking the sixth consecutive year of reductions. Land supply designated for residential use was reduced by half compared to 216, while low-income housing remained at the same level. Meanwhile, the land supply for policy housing increased, which is in line with the government s aim to stop the appreciation of housing prices. The land market has seen a faster pace of supply allocated to both residential and policy housing usage in 217. The first quarter of 217 saw 17 land plots, totalling 1.6 million sq m, designated for residential use, already accounting for greater than 4% of the total annual supply level and 1.4 times the level of supply allocated to residential land in 216. TABLE 3 Major en-bloc transactions, /217 Project Jianan Building ( 迦南大厦 ) Sanquan Apartment (6 units) ( 三全公寓 6 个单元 ) Buyer Aoyuan Property Jingrui Holdings Seller Beijing Hande Culture Development Co Ltd Individual Location Fengtai Chaoyang Purchased area (sq m) 13,34 6,661 Sales volume (million) 658 643 Unit price (RMB per sq m) 5,5 96,461 savills.com.cn/research 5
Briefing Beijing sales and investment April 217 result, it is expected that transaction volumes in the first-hand, strata-title market will be restrained, while prices will come under downward pressure. The progression of China s urbanisation drive has seen the city shift from only outwardly expanding to also looking at inward upgrading, in order to enhance urban capability and adaptability. Meanwhile, the reduction of land supply has continued to plague the city s inventory level and, as a result, investors have begun to turn their eyes towards value appreciation opportunities arising from urban regeneration and the redevelopment of existing projects. It is expected that urban regeneration projects will become a hotspot in the investment market in 217. Due to the limited availability of quality land, and soaring land prices, developers will begin to transform their business models, changing their role from heavy asset model developers to light asset service providers. More developers will set their sights on the existing market for investment opportunities in the future. TABLE 4 Major land transactions, /217 Plot Location Planned GFA (sq m) Usage Consideration () Buyer Mentougou 216-33 Mentougou 18,851 Residential / Retail 6.33 Pinggu 216-32 Pinggu 151,6 Residential 1.73 Metro Land / Shokai / Poly Real Estate Group / Longfor / Sino-Ocean Beijing Capital Land / Longfor / Poly / SHOKAI Fangshan 217-1 Fangshan 75,691 Residential / Retail / Education 2.33 China Overseas Property / SHOKAI / Poly / Longfor Fangshan 217-2 Fangshan 53,579 Residential 1.81 CIFI / Gemdale Chaoyang 217-6 Chaoyang 46,166 Residential / Business 2.25 China Resources / China Merchants Group / Zhengqi Please contact us for further information Research Agency Research & Consultancy Investment James Macdonald Director +8621 6391 6688 james.macdonald@savills.com.cn Anthony McQuade Senior National Director +861 5925 22 anthony.mcquade@savills.com.cn Jack Xiong Director +861 5925 242 jack.xiong@savills.com.cn Eason Yan Director +861 5925 299 eason.yan@savills.com.cn Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 7 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. 6