TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities CBRE RESEARCH TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities

TRANSFORMATION 06 AND PART ONE CHANGES OPPORTUNITIES OF 12 JING-JIN-JI CITY CLUSTER PART TWO OPPORTUNITIES

Series 2: Explore Opportunities from Beijing Urban Renewal Activities

CBRE RESEARCH

2 | CBRE RESEARCH CBRE RESEARCH | 3 TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities

Introduction

In order to fulfill Jing-Jin-Ji coordinated development strategy, consolidate foothold in the strategic positioning of capital city, and build an international metropolis with economic efficiency and habitable living conditions, Beijing Municipal Government has introduced and implemented a number of plans and measures that have a major impact on the future development of the city, which target to decentralize non-capital functions of Beijing, transform the mode of urban develop- ment, improve the urban governance system and effectively ease "big city diseases". The transforma- tion of urban functions will promote the change of urban space to meet the new demand of economic and social activities. Therefore, urban renewal has gained intensive attention from developers and investors.

Government plans and policies, economic laws of real estate market development and the evolution of finance and technology are the important factors influencing urban renewal. In the paper, it will take all of them into account and explore the development direction of urban renewal of Beijing under the dual action of government supervision and market allocation of resources.

CBRE RESEARCH | 5 TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities Positive and Negative List

Changes The “Positive and Negative List of the Use of modes must be in line with the industrial development Construction Projects” issued in March 2018, further of the government. defined the renovation types of land and property use that were restricted or encouraged in various regions. Qualitative change: It is found that (Figure 2) many types of land and This will play a vital guiding role in the future direction property will have less participation in market Development and use The New Master Plan of urban renewal in Beijing. Under the implementa- orientation, and the land and property use of spaces to be strictly tion of the list, the inventory scale of various types inclined to government orientation will be regulated of properties in different regions will be changed. adjusted. In practice, the government provides more The "Beijing Municipality Master Plan (2016–2035)" five new towns; one region is an ecological conserva- preferential policies such as fast-track approval, tax (hereinafter referred to as the "New Master Plan") tion area consisting of Mentougou, Pinggu, Huairou, According to the use of the land, all the property Quantitative change: and financial incentives for the encouraged issued in September 2017, showcases a basic Miyun and Yanqing. The new master plan also defines forms mentioned in the list can be classified into four Scale of land and adjustment activities. On the other hand, the approval framework of the urban development in China's Demand side: the functions of each administrative district (Figure 1). categories: commercial, industrial, residential, of some adjustment activities are restricted or capital city to 2035. properties to be Defining the administrative/public, which have different levels of prohibited to ensure the effective implementation of It is worth noting that the new master plan defines the restricted for functional positioning participation in market forces. Traditionally, the market the policies. The new master plan clearly defines the strategic development ideas of scale reduction of construction commercial use, of the city and each orientation for commercial and residential land use is positioning as the center of China's politics, culture, land, in which the reduction of intensive land use, encouraged for district the most obvious, providing the greatest degree of In addition, the government has successively issued a international exchanges, and technological innovation efficient utilization of existing land resources and technological and freedom for developers and investors to determine the series of policies on the development, use, renewal and the spatial layout plan. The central city includes buildup of greenbelt area are the key guidelines public use Supply side: development and disposal models; administrative/- and conversion of various types of land and the capital core functional area composed of particularly emphasized on the central city. The public land use is allocated by the government, with properties. The series of policies are the supplement Dongcheng District and Xicheng district, as well as the CRE development construction land is expected to reduce from 910 little opportunity for market participation; for the and provide guarantees of implementation for the four districts of Haidian, Shijingshan, Chaoyang and focus shi‘ing from square kilometers to 860 square kilometers by 2020, industrial land use, its development and disposal new master plan. Fengtai, which are the core areas to assume the incremental market to and by 2035 it will be reduced to about 818 square capital functions of Beijing; Tongzhou district, is now stock market kilometers, while other areas focus on intensive playing the role of Beijing's municipal subsidiary sustainable development. This means that the new Figure 2: Change of Property & Land Use Encouraged in Each District by The Government administrative center in the eastern suburbs, will be supply of commercial real estate in the emerging Source: CBRE Research Q2 2018 the new seat for Beijing municipal government regions will be under control, and the core assets Commercial/Residential Industrial Administrative/Public departments to promote the coordinated development of mature regions will become increasingly scarce. Market Government of the eastern part of the city; two axes, the central On the other hand, urban renewal and inventory Orientation Orientation axis and Chang'an Avenue will be further extended to property renovation will become the key ideas to improve the distribution of national political, cultural resolve the contradiction between supply and and diplomatic functions; multi-points are made up of demand in local areas. Shunyi, Daxing, Yizhuang, Changping and Fangshan Wholesale Factory/Logistics Before

Figure 1: Functional Positioning of Each District Capital Core Source: CBRE Research Q2 2018 Functional Area Central Government Office & International Technological Senior Housing Administrative District Politics Culture Exchange Innovation Office/Retail/Business Park Submarket After Amenities / Pre-school Education

Capital Core Functional Area Financial Street/Xidan/Wangfujing/ (Dongcheng/Xicheng) East 2nd Ring Road Northwestern Central City Zhongguancun/Shangdi/Z-Park/ (Haidian/Shijingshan) Beiqing Road/New Shougang Area Out of Wholesale/Retail/ Factory/Logistics 3rd Ring Road Office/Hotel

Northeastern Central City Before (Most of Chaoyang) CBD/Lufthansa/Olympic/Wangjing/BEZ Southern Central City Lize/Nanyuan-Dahongmen Central City (Fengtai/Southern Chaoyang) Out of (Out of Capital Core 3rd Ring Road ZGC Policies Areas Sub-Center (Tongzhou) Canal Business District Functional Area) Leased Apartment Technological Innovation / Pre-school Education / After Senior Housing Public Culture Shunyi Capital Airport Economic Zone

Daxing New Airport Economic Zone Retail/Office/Hotel Yizhuang BDA Before Wholesale Factory/Logistics Changping Future Science City Sub-Center/ New Towns/ Fangshan Eco-conserving Eco-Conserving Districts Districts Eco-conserving Districts New Towns Pinggu: Integrated logistics port to service for the capital Technological Huairou: International exchange, technological and cultural development zone After Resort Hotel / Catering / Innovation / Agricultural Advanced Compulsory Education / Others Yanqing: International cultural, sports, tourism, tourism, technological innovation Entertainment Senior Housing Technology Manufacturing Public Culture / Healthcare development zone

6 | CBRE RESEARCH CBRE RESEARCH | 7 TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities From the analysis of the new master plan and its related Impact of Master Plan and Regulations policies, a basic prediction of the increase and decrease of the scale of various types of land and properties in the future may As the capital of China and one of the megacities, the be concluded under the government planning framework (Figure demand side of various commercial real estate sectors in 3). At the same time, the government will step up intervention Beijing will keep up the momentum; increment of supply and regulation of the development and utilization of urban side is limited by the implementation of the urban planning Short-term: space in Beijing, especially in the central city. The further and policy in the above-mentioned cities, which is expected suppression of speculation in the real estate market is another Office, logistics, to exacerbate the situation that the current office, important signal conveyed to the public through the policy. residential and logistics, residence and investment are in short supply in short term; but in the long run, changes in other external investment sector to be undersupplied market variables will diminish the shortage of supply and achieve dynamic balance through the structural Long-term: evolution of demand and supply. Supply and demand to During the process, it poses a huge opportunity to develop- achieve dynamic ers and investors, but the requirements for their development balance through and investment models will become much higher. The structural evolution following part gives a future outlook of the above-mentioned major sectors in the urban renewal of Beijing by combining with various market variables.

Figure 4: Four Major Supply and Demand Contradictions Beijing CRE Market to Face in Short-term

Source: CBRE Research Q2 2018

Supply Side Demand Side Future Trend

Office development to be Beijing’s positioning to drive See Page 10-11 restricted in the central city up office demand

Consumption growth to push Logistics development to be up Beijing’s guaranteed See Page 12-13 Figure 3: Future Change of Space Supply under The New Mater Plan restricted in the whole city logistics demand Source: CBRE Research Q2 2018

Capital Core Functional Area Central City Sub-Center/New Towns/Eco-Conserving Districts New supply to decline and The Millennials to be keen sales price to remain high to live in accessible See Page 14 Large-scale Retail Out of 3RR N/A for commodity apartment locations in the central city Large-scale Office Out of 3RR N/A

Wholesale Market The government to tighten Urban renewal activities to regulation on land and See Page 15

Commercial Apartment for Lease N/A N/A attract investors and developers property sales Hotel N/A Out of 3RR

Factory/Logistics

Technological Innovation N/A Industrial

Senior Housing

Apartment for Sales Within 4RR N/A

Residential Residential Public Service Facilities

Government Office & Amenities Central Gov N/A Beijing Municipal Government

Public Culture

Healthcare Within 5RR

Incl. Primary & Pre-school Education Middle School

Administrative/Public Vocational/Higher Education Within 5RR

8 | CBRE RESEARCH CBRE RESEARCH | 9 TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities Opportunities

Office Trend: Elastic Demand to Spill Over, Rigid Demand to Promote the Upgrade of Stock

Demand for new office buildings in Beijing central city Upgrading of the tenant structure in the central city Office Trend: Retail Spaces to has been rising in recent years. Although the new will inevitably require higher quality of the existing Convert for Office Use supply in the past three years has picked up in both office buildings both in hardware and software. More core and emerging areas, the new projects have been and more landlords will upgrade the existing Scare supply in Beijing central city and upgrading of quickly absorbed after entering the market, which has properties in order to cope with the market pressure. Supply Side Office development to be restricted in the central city building products has resulted in increasing rentals. remained overall vacancy rates below 8%. So, the At present, more than half of the quality office Tenants will pay more attention to the utilization of contradiction between supply and demand is still buildings in Beijing central city have been over 10 office space, so the activity-based workplace strategy Demand Side Beijingʼs positioning to drive up office demand prominent. In the future, the four "centers" will years since its completion. The office tenants survey will become more and more popular. On the other continue to create additional office demand, conducted by CBRE in late 2017 showed that hand, the removal of non-capital functions from especially from the TMT industry which is based on high-profile tenants are less satisfied with elevators External Variable Activity-based workplace to popularize Beijing is part of a greater strategy to strengthen technological innovation. Although the development and sanitation facilities, property and security meetings, exchanges, and cross-organizational and incentive programs of the other two office management of Beijing office buildings than that of collaborations in the central city, while other types of Future Trend Retail spaces to convert for office use demand engines, finance and professional services, other markets, which indicates that there will be huge working activities will be decentralized. Office workers are not mentioned in the new master plan, the room for improvement in existing office buildings do not have to relocate to the peripheral areas, but positioning of the four "centers" is closely linked to the in Beijing. the commuting between central and outer areas will development of financial and professional services occur more frequently in order to accomplish different *Source: China Office Occupier Survey, CBRE Research, Q1 2018 Figure 6: Major Renovation Projects (Single-owned, Office GFA over 20,000 sq.m.) sectors, for which Beijing is still highly attractive office types of activities, so it is necessary to have multiple destination. With the completion of "International Source: CBRE Research Q2 2018 office locations to manage different activity Exchange Center" and the implementation of China's scenarios in different localities, which will be more Supply Side Office development to be restricted in the central city Belt and Road Initiatives, it is expected to witness a conducive to the popularity of activity-based rebound in office leasing demand from foreign-fund- workplace strategies. To achieve this strategy, tenants ed financial services, service agencies and interna- Demand Side Beijingʼs positioning to drive up office demand could re-design and plan their own office space or tional organizations in Beijing central city. use a third-party joint office. External Variable Fringe locations to undertake spillover demand From an objective point of view, the two factors in As such more temporary, flexible and shared office regard to the rising office demand in the central city space will be needed in the central city. And Future Trend Aged properties upgrade to increase in the central city and the restriction of government on the office supply demand for this kind of office space will be will accelerate the spillover of the office occupiers increasingly situated in the traditional retail from the central city. The next five years will be the facilities, which will also carve out a niche for the delivery period that witnesses the completion of Figure 5: Contents and Relevant Office Leasing Demand of The Four “Centers” small-scale retail properties in the central city suffering infrastructure in Beijing and neighboring areas (see Source: CBRE Research Q2 2018 from the shift of shopping behaviors and outmigration the first part of the special report for details). The of residents in Beijing. The retail properties with development scale and quality of many emerging Content Relevant Office Leasing Demand service facilities, ample public spaces and parking Stock by office submarkets and business parks are also Development Status 36% 37% 27% spaces, convenient subway connectivity will perfectly expected to get mature. These factors will be Company functions that need to Completed U/C Proposed meet the needs of working activities in the central city. communicate with government and conducive to the decentralization of office demand. Politics Government administration “The retail to office conversion” in the central city has Users who are more price sensitive and have demand regulators, e.g. decision-making / public relations of financial, media and law firms thus become a hotspot of urban renewal in Beijing. In for large office space, or request for self-used office recent years, about eight retail properties with a buildings will be more likely to relocate to the Figure 7: % of Coworking Space Outlets Located in Retail Properties Decision-making / creative functions of building area of over 20,000 square meters have Historical relics / education / Source: CBRE Research Q2 2018 peripheral areas of Beijing. The decentralization of the Culture cultural, media firms and private education been transformed into office buildings. Retail cultural & creative industries overall market will create opportunities for the tenant institutions properties are also the preferred location for Beijing Shanghai Guangzhou Shenzhen upgrading in the central city. Users who continue to Coworking Space in Beijing. 30% of the Coworking set up or expand their office space in Beijing central Diplomacy & foreign affairs / Decision-making / investment functions of Space outlets are located in retail properties, far MNCs, outbound investment and exchange Retail city must be the enterprises, departments, or International international conference & exhibition functions of Chinese companies, 30% 3% 4% 2% higher than all the other cities in China. It is expected Exchange / transportation hub / embassies / business activities that need to maintain close international organizations, professional that traditional retail properties will provide more international organizations services for foreign business and investment communication with the government and Office 56% options for office activities in the future, becoming regulatory agencies, or meet, exchange, collabo- Decision-making / R&D / investor an important complement to traditional office Technological Headquarters / R&D centers for rate with different organizations, and are able to relations functions of internet / high-tech buildings in which leasable space is scarce. Innovation global high-tech companies Industrial bear the burden of higher rental costs. companies 14%

10 | CBRE RESEARCH CBRE RESEARCH | 11 TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities Logistics Trend: Retail Facilities to Convert for the Last Mile Logistics Use in the Central City

Under the policy of restricting logistics supply in boundaries between retail and logistics facilities will Beijing, the large-scale logistics facilities in the central become increasingly blurred. Service models such as city have suffered from stagnation. However, demand automated supermarkets, self-service lockers, pick-up for delivery service time and quality will increase with in shops or direct delivery, third-party logistics pick-up the development of online shopping, demand for the or logistics distribution stations will become a variant Last Mile logistics service will continue to rise; and of logistics facilities to provide services for the Last with the rapid development of cities and increasingly Mile and Self Storage needs. However, this develop- expensive space resources, Self Storage demand will ment trend must be based on resolving fire hazards emerge to meet the four major living scenarios - and traffic congestion, in order to dispel the core death, divorce, density and dislocation. These market concerns of the government about the development of variables will stimulate logistics demand in the densely logistics facilities in the central city, which will further populated central city area. promote the application of high-tech tools such as artificial intelligence, automation, etc. in the field CBRE believes that such demand will gain some of logistics. foothold in retail properties which were originally wholesale markets, community-based shopping centers and department stores as well as residential public service facilities built under the encouragement of government. This means that the

Logistics Trend: Infrastructure and Technology to Promote the Supply Side Logistics development to be restricted in the central city Upgrade of Stock Demand Side The Last Mile and Self Storage logistics demand to rise

As regional logistics service has always been a Therefore, there will be substantial room for External The boundaries between retail and logistics facilities to non-capital function that Beijing needs to phase out, improvement. As estimated by CBRE*, intelligent Variable become blurred there have been few logistics land transactions in warehouses can not only improve operating efficiency

Beijing in recent years, with insufficient new supply on by 3-10 times and reduce labor costs by 75%-85%, Future Trend Retail facilities to convert for logistics use the market. At the end of 2017, the cleanup of but also cut down warehousing costs by 50% by low-end logistics facilities by the municipal govern- making full use of high-altitude and channel space ment significantly drove up relocation activities from and maximizing storage density; under the trend of express delivery service tenants and further intensified consumption upgrade, the rising demand for fresh the contradiction between supply and demand. The food and high-end drugs will also push forward the *Source: Greater China Market Outlook market has witnessed full occupancy and a cumulative development in the cold-chain logistics segment. 2018, CBRE Research, Q1 2018 increase of 15% for the past three quarters. Under the stipulation of the new master plan, the strict restrictions on the scale of logistics supply will Supply Side Logistics development to be restricted in the whole city continue.

Demand Side Beijingʼs guaranteed logistics demand to rise Under the gradual improvement of infrastructure, especially the expressway network, the regional External Inter-city infrastructure and logistics technology to develop logistics function is expected to relocate to the Variable emerging logistics hubs in the Jing-Jin-Ji city cluster (see the previous section of the special report for Future Trend Logistics facilities upgrade to increase in the whole city details), which will give way to the growing demand of guaranteed logistics and high-tech industry functions in Beijing. The high rents and upgrading of tenant Figure 8: Stock % of Multi-Storey Warehouse structure will also pose higher demands on intensifica- Source: CBRE Research Q2 2018 tion, refinement and specialization of existing logistics facilities. It is believed that multi-storey warehouses, Beijing Shanghai Guangzhou Shenzhen Chengdu intelligent warehouses, cold chain warehouses, etc. will be the future direction of upgrading of the Multi-Storey 31% 50% 68% 66% 45% existing logistics facilities in Beijing. At present, the current stock of multi-storey warehouses in Beijing accounts for 31%, which is far lower than that of other Single-Storey Tier 1 and even some Tier 2 cities (Figure 8). 69%

12 | CBRE RESEARCH CBRE RESEARCH | 13 TRANSFORMATION AND OPPORTUNITIES OF JING-JIN-JI CITY CLUSTER Series 2: Explore Opportunities from Beijing Urban Renewal Activities Residential Trend: Existing Properties to Convert to Long-Leased Apartments

The new master plan clearly defines the restrictions on The Co-living model provides a broader perspec- 1. Shi’s in spatial operations: the residential supply within the areas of the 4th Ring tive for long-leased apartment operators who The administrative, public and industrial land and Road in Beijing. In terms of the land market, the target at the mass market, which can not only property have clearly defined the scope of usage and Beijing government has tightened sales housing land increase space utilization to achieve a balance end-users, which will encourage developers and sales for years. On the other hand, the government between reducing the operating cost and improving investors to seek more in-depth cooperation with has added residential land supply with the require- the living environment, but also explore revenue government, public and industrial occupiers. The ments of public rental housing, etc. It is proposed in sources by developing value-added supporting cooperation is not only from construction and the new master plan that retail, office and hotel services for tenants, such as socializing, leisure, transformation of space, but also from the entire buildings out of the 3rd Ring Road are encourage to entertainment, and working. At the same time, profit process of asset management and space operations. upgrade to rental apartments. As a result, long-leased margins of niche markets on the long-leased Therefore, the sustainable development can be apartments have thus become a popular investment apartments such as senior housing and student achieved in the administrative, public, and industrial sector in Beijing in recent years, offering cost-effective apartments can be boosted because of close ties to facilities by maximizing their market value; living options for entrepreneurs and white-collar healthcare and educational services. In addition, workers who want to live in the central with easy incentives for asset-backed securities, especially in 2. Shi’s in of profit model: access transport system yet have difficulty in affording first-tier cities, clearly proposed by the govern- The traditional profit-making mode dominated by housing prices. ment, could allow operators to make direct financing property sales has reached a bottleneck. Developers through REITs, etc., so that financing leverage can be and investors will discover more profit-making models Low yields has always been a major obstacle to the minimized and the profit margins of operators can be while paying more attention to the return on property further development of long-leased apartments. further enhanced. rent, such as the development of value-added services Therefore, providing value-added services to tenants to create the community value of end-users, or role that is intended to diversify profit-making approaches CBRE predicts that in the next few years, hotels with transformation to industrial investors, industrial and to increase bargaining power has become the declining profitability, underused retail and industrial resource platform operators, construction or property key factor for developers and investors to prosper the Investment Trend: Investors to properties, residential land and the various types of management service providers; long-leased apartments market. In the case of Transform Modes of Participation long-leased apartments will provide another renewal serviced apartments that target the high-end market, it in Beijing Urban Renewal opportunity in Beijing central city. On the other hand, 3. Shi’s in financing: is because of its hotel-style service to tenants that it the evolution of long-leased apartment mode will also The traditional heavy-asset investment and develop- has a higher yields than other long-term leased raise the threshold for market access. The government has stepped up its intervention and ment model has been challenged by the regulatory of apartments. The declined supply and strong demand control over the sales of various types of land and government such as deleveraging policies and have caused the result that average rentals gained a property to ensure that the use of urban space in property sales restrictions. The gradual liberalization CAGR of 5% since 2010. It is believed that with the New supply to decline and sales price to remain high for Beijing conforms to the functions of the capital and of government's approval of asset-backed securities fierce competition of high-end talents, there will be an Supply Side commodity apartment the development goal of high value-added industries, will further encourage developers and investors to increasing demand for employers to lease convenient which will challenge developers and investors relying seek lower leverage and more transparent direct The Millennials to be keen to live in accessible locations in and comfortable serviced apartments for senior Demand Side the central city on traditional incremental development model. financing channels. The dual supervision imposed by employees so as to attract and retain top talents. The However, Beijing’s solid market fundamentals and the the government also puts higher demands on urban inventory commercial property situated around External The government to incent development of long-leased large number of expected investment opportunities renewal planning and investment decision-making. Variable office submarkets and business parks of Haidian apartments created by urban renewal will continue to attract and Chaoyang District in which high-tech Residential and hotel properties to convert to mid-to-high investors and developers. It is the fact that only with Future Trend enterprises, and around international schools in end long-leased apartments the participation of market forces can urban space Shunyi District are most suitable for transforming resources be most effectively optimized. into serviced apartments. Therefore, CBRE believes that the implementation of the new master plan will not restrict the momentumn for market forces such as developers and investors to participate in the urban renewal of Beijing in the long run but will transform their modes. They are mainly reflected in the following points:

The government to tighten regulation on land and Supply Side property sales

Demand Side Urban renewal activities to attract investors and developers

External Urban renewal activities to call for participation of market Variable forces

Future Trend Investors to transform modes of participation

14 | CBRE RESEARCH CBRE RESEARCH | 15 For more information about this regional report, please contact:

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