COLLIERS RADAR BUSINESS PARK | RESEARCH | | 28 MAY 2020

Cassie Gao Senior Analyst| Research | North China +86 10 8541 1184 [email protected]

Lu Ming Director | Research | North China [email protected]

MATURING AND THRIVING Beijing Business Park Market Overview and Outlook COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

Summary & Recommendations R&D 14.3million sq

After more than 20 years of development, expenditure: metres six mature business park submarkets have RMB 18.7 billion The total stock of Beijing’s business park taken shape in Beijing. Shangdi and market, organized across six submarkets: Wangjing-jiuxianqiao, the two most mature This ranks as one of the top R&D spenders in Shangdi and Beiqing Roads in , business parks in Beijing, are considered China. We expect this high spending to elevate Wangjing-jiuxianqiao and Sihui in Chaoyang the best locations for tech companies, the quantity and scale of high-tech companies District, Fengtai on the , and BDA which are the top demand drivers for and employees in Beijing. outside the . business parks. Meanwhile, other submarkets with more diversified industries, RMB130.5 2.1 million such as Beiqing Road, Fengtai and BDA, have also experienced rapid development per sq metre sq m in the past few years. per month 2.1 million square metres (22.6 million square > Tenants: Business park rents are lower feet) of business park space is scheduled to than offices. With improved property By the end of 2019, Beijing’s average business enter the market from 2020 to 2024. We accessibility in business parks and park rent reached RMB130.5 (USD18.6) per expect 2021 to be the year of peak supply, with continuous improvement of supporting square metre per month, decreasing gradually over 1.1 million square metres (12.2million facilities, we recommend that tenants in since a large supply over the past two years. square feet) of new supply entering the market. office markets who are more sensitive to rents to give greater consideration to With fewer tradable assets in core areas, and developers wanting to diversity their revenue business parks. sources, Beijing business parks are attracting more attention from both investors and developers > Landlords: The outbreak of COVID-19 due to their relatively high yields, simple business models and stable rent returns. Especially accelerated the development of online during the pandemic, high-quality projects in the business parks like Shangdi area are more services industries such as online resilient to downside risks. The tenants in these projects are relatively less affected by the education and online medical care. We pandemic. This has pushed business parks in these areas to be a hot spot for investors. recommend landlords seize the The en-bloc sales in Beijing’s business park market have been more active in the last three years opportunity to capture expanding as there were still undervalued projects on the market. We expect more deals by both end-users demand from these industries. and investment institutions when the high-quality projects start entering the market in the next > Investors: We recommend investors pay two years. more attention to business park Source: Beijing Statistics Bureau, Colliers International. Note: USD1 to RMB7.09 as of end Q1; 1 square metre = 10.76 square feet. properties like Shangdi with relatively Rent = Net effective rent (management fees and rent free periods excluded). simple business model and stable returns.

2 COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

OVERVIEW OF OPPORTUNITIES, CHALLENGES AND RECOMMENDATIONS IN BEIJING’S BUSINESS PARKS

Recommendations Opportunities Occupiers > As the average Grade A office rent is more than three times of the average > Upgrade specifications for new developments rent of business parks, price-sensitive office occupiers, especially from > Refurbish existing properties industries supported by favourable policies, are well-positioned to benefit from business parks that offer improved accessibility and upgraded facilities. > Rising subway accessibility: > For technology occupiers, Shangdi should be considered first, since it has – 2019 year-end: 699 km, 23 lines already attracted many anchor tenants from the technology industry. – 2020 year-end: 1,000 km, 28 lines However, due to a low vacancy rate and high rents in Shangdi, tenants can consider other submarkets if they require large spaces on limited budgets. > Favourable policies to attract tenants For example, BDA also attracts artificial intelligence companies with incentive > Industrial agglomeration policies. With a prime location and improved facilities, Wangjing-jiuxianqiao offers good value for tenants who care more about working environment and accessibility. > Occupiers should pay attention to the latest industrial policies and regional planning in each business park in order to make appropriate leasing decisions. Challenges Property owners

> Unbalanced submarkets > With more tenants concerned about their work environment, we recommend landlords upgrade their facilities to meet tenant needs, such as – Submarkets such as BDA and Fengtai are providing canteens and recreation space. In addition, we recommend suffering from high vacancy rates. We expect landlords upgrade existing tenant profiles and secure anchor tenants in order those sub-markets to have large supply in the to attract more potential occupiers after the pandemic. future, while others enjoy strong demand with limited future supply > We recommend investors stay informed about the latest regional planning and related policies in order to adjust their investment strategies and seek > Policy optimal investment opportunities accordingly. Active investment markets – The uncertainties of policies towards property such as Shangdi and Wangjing-jiuxianqiao continue to present attractive transactions options for investors looking for capital appreciation and stable rental returns.

3 COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

BUSINESS PARKS: A DEFINITION RECENT POLICIES RELATED TO Colliers defines Beijing business parks based on four dimensions: BUSINESS PARKS :Table 1: Definition of Beijing business parks:

> There is a lead entity controlling the majority of the Beijing’s > Improve the development and planning, with enough authority management standard to affect the masterplan, positioning and supply 2016.03.28 Thirteenth Five-year plan of Beijing business balance of the area. parks Controlled > There is a lead entity that has the motivation for the continuous improvement of the public Development facilities/services of the area. / Developers' Objective 2017.09.29 > Defined Beijing as China’s Beijing’s technology and innovation master plan centre > Occupiers' tax output and industry positioning will impact the landlord's/seller's preference and the commercial terms directly > The area has clear and executed tax incentives and The proposal to > Set the access criteria, industry subsidies 2017.12.31 accelerate the lease terms, land-use formation of a term and prohibit en Occupiers’ > The area has a clear industry positioning and cluster high-end economy bloc and strata-title Considerations of prestigious enterprises (eg. Top 30 companies in sales of business parks their sector) 2018.03.23 Positive and Negative Lists for > Transform land-use policies > The area is connected by subway or light rail line. And the planned use to support development of the station is within 15min walking distance of developing high-tech and strategic projects industries > There are supporting retail and restaurant in the area Real Estate and > Apart from office and retail, the buildings can support Supporting Amenities production and R&D functions 2018.09.26 Catalogue of > Raise barriers for new prohibited and restricted construction of offices industries in and incubators for start- > Located in Beijing's mature industrial function zone Beijing up companies in central areas of Beijing > Formed a sizable development cluster Location and Size Source: Colliers International Source: Beijing Municipal Government, Colliers International Starting from Beijing's 13th Five-Year Plan in 2016, Beijing is planning the reasonable and healthy development of Beijing's industrial planning through step-by- step policy guidance. In 2017, Beijing redefined its development priorities to help Beijing grow into a national science and technology innovation centre. Starting in 2017, Beijing began to issue specific policies for the development of business parks and guide the development of business parks toward more high- tech industry, while encouraging low-end business parks to carry out industrial upgrading. The government also released a clearer definition of preferred industries through revised Positive and Negative lists that were issued in 2018 and 2019. 4 COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

MACROECONOMIC INDICATORS Figure 3: Average rent and change YOY, 2017-2019 (RMB/ sq m / month, %) The IT and finance industries are the pillars of demand for Beijing office and business parks, as the two combined account for almost 30% of the city’s GDP. 150 Average Rent Change YOY As the technology and innovation hub for China, Beijing’s R&D expenditure 4.7% 6% reached RMB187.1 billion (USD26.7 billion) in 2018, a YOY increase of 18.4%. 145 140 4% Beijing ranks as one of the top R&D spenders among all cities in China, which 134.4 should help to elevate the quantity and scale of high-tech companies and 135 130.5 128.4 2% employees. 130 0% Figure 1: Beijing, contribution of finance and technology industries to 125 0.9% GDP, 2012 and 2018 (%) 120 -2% 115 -4% Finance Finance -2.9% 14% 110 Technology 17% -6% 9% 105 100 -8% 13% Technology Others Others 2017 2018 2019 70% 77% Source: Colliers International 2012 2018 Source: Beijing Municipal Bureau of Statics Figure 4: New supply, net absorption and vacancy rate, 2017-2019 (‘000 square metres, %) Figure 2: Beijing, percentage of R&D expenditure to GDP, 2018 (%) New Supply Net Absorption Vacancy Rate 1,600 22.7% 16.9% 2.2% 4.2% 6.2% 1,400 1,200 China’s Average Shanghai Beijing 1,000 12.9% Source: China Municipal Bureau of Statics 800 BEIJING BUSINESS PARK OVERVIEW 600 400 At the end of 2019, the total stock of Beijing’s business park market was 14.3

million square metres (154.7 million square feet). Affected by the large supply in 200

298 298

1,419 1,419

345 345 950 322 2018 and 2019, the vacancy rate increased from 12.9% in 2017 to 22.7% in 2019. 426 And the rent increased from RMB128.4 (USD18.3) per square metre per month 0 to RMB130.5 (USD18.6) per square metre per month. 2017 2018 2019 Source: Colliers International 5 COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

DEVELOPMENT OF BEIJING’S BUSINESS PARK SUBMARKETS Figure 5: Beijing, major business park locations, rent and vacancy rate, 2019-2020F Total stock (‘000 square metres) Rent (RMB psm per month) Vacancy rate (%)

Wangjing-jiuxianqiao Beiqing Road 2019 1,853 159.7 9.4%

2019 3,298 132.1 16.3% 2020F 1,956 153.6 12.8%

2020F 3,581 127.8 21.0% Major industries: Technology, cultural media, fintech, hi-end manufacturing, R&D headquarters Major industries: Environmental protection, biomedicine and health, technology, new materials Sihui 2019 854 138.3 10.3%

2020F 854 126.9 13.9%

Major industries: Cultural media, movie entertainment, publication and distribution, cultural creative industry

Shangdi Fengtai BDA 2019 2,317 154.6 9.1% 2019 3,320 116.6 34.7% 2019 1,539 75.0 33.0%

2020F 2,341 153.8 9.8% 2020F 3,419 111.9 35.9% 2020F 1,739 71.1 36.2%

Major industries: Major industries: Major industries: Rail transit, military, electronic electronic information, biomedicine Information technology, telecoms, big information, emergency aid and and health, new energy vehicles, High- data conservation, environmental end manufacturing, artificial protection intelligence

Source: Mapbox, Colliers International

6 COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

ACTIVE INVESTMENT MARKET Figure 7: Beijing, business park transactions, proportion by type of buyers and purchase intention, 2018-2019 (%) From 2018 to 2019, Beijing business parks recorded 10 en-bloc transactions, with the majority located in Shangdi and Wangjing-jiuxianqiao. Mature submarkets with solid demand like Wangjing-jiuxianqiao and Shangdi are DOMESTIC INVESTOR INVESTMENT PURPOSE sought-after by investors with the intention of obtaining stable rental returns and future capital gains. From a yield perspective, retail properties has a higher yield but a complex 2018-19 2018-19 business model. Logistics properties have the highest net yield, but the

scarcity of supply has led to limited market transactions in Beijing. Although Source: Colliers International the yield of office properties (including business parks) is lower than retail and logistics, it has a less complex business model and higher resistance to risks. Therefore, we recommend investors look for investment opportunities Figure 8: Major business park investment transactions, 2018-2019 in Beijing business park properties, especially in core areas like Shangdi. Beijing’s business park investment market continues to be dominated by Wangjing-Jiuxianqiao domestic buyers, although international investors are also keen on this Deals 4 market. Notably, the proportion of transactions for investment is rising, Total transaction especially in Shangdi, given steady rent growth, strong demand and finite 1,556 Shangdi amount future supply. From 2018 to 2019, five en bloc transactions have closed in Deals 5 (RMB million) this submarket. Total transaction Figure 6: Beijing, transaction value and GFA by type, 2018-2019 (%) amount 3,350 (RMB million) Office Mixed-use BDA Retail Hotel and serviced apartment Deals 1 Land Business park Total transaction 7% 418 7% amount 8% (RMB million) 13% 31% 36% 12% Source: Colliers International

16% Transaction Figure 9: Beijing investment property net yield, 2019(%) Value GFA Business 3% 12% Property Type Office Retail Logistics Parks 30% 25% Net Yield 4.0% 4.6% 5.2% 4.0%

Source: Colliers International Source: Colliers International 7 COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

FUTURE TRENDS OF BEIJING’S Figure 11: Beijing business park average rent and vacancy rate forecast, 2017-2024F (RMB psm per month, %) BUSINESS PARK MARKET Average Rent Vacancy Rate 160 30% From 2020 to 2024, a total of about 2.1 million square metres (22.5 million square feet) of new supply is scheduled to be delivered, with 55% of that 150 22.7% 27.5% 25% scheduled in 2021. Although the COVID-19 crisis in Q1 2020 temporarily held 25.1% 25.9% 25.1% back demand, we expect market demand to be released as the pandemic 24.4% 140 134.4 20% gradually stabilizes. However, if the scheduled new supply starts entering the 130.5 128.4 127.0 128.5 market in 2021, we expect the vacancy rate of the overall market to reach a 130 16.9% 125.6 123.4 124.8 15% record high of 27.5%. Given our forecast of a sharp drop in supply from 2022, the vacancy rate should have a chance to gradually recover. 120 12.9% 10%

Looking at demand, we expect sectors which are more resilient considering 110 5% the pandemic including healthcare and new infrastructure technology will be the main business park demand drivers in the future. We advise the 100 0% companies located in traditional office areas to consider business parks that 2017 2018 2019 2020F 2021F 2022F 2023F 2024F

offer government support. Source: Colliers International

Figure 10: Beijing business park new supply, net absorption and Figure 12: The distribution of Beijing business park future supply, vacancy rate, 2017-2024F (‘000 square metre, %) 2020-2024F (‘000 square metres) New Supply Net Absorption Vacancy Rate Others, 1,600 Wangjing Jiuxianqiao 27.5% 25.9% 12% 22.7% 25.1% 25.1% 1,400 24.4% 17%

1,200 16.9% 1,000 12.9% 800 Fengtai, Beiqing Road, 19% 600 25%

400

191 191 215 215

200 120

93 93 BDA,

426 426 345 950 322 298 709 190 460 0 264 1,138 1,138 1,419 1,419 Shangdi, 0 10% 2017 2018 2019 2020F 2021F 2022F 2023F 2024F 17%

Source: Colliers International Source: Colliers International 8 COLLIERS RADAR BUSINESS PARK | RESEARCH | BEIJING | 28 MAY 2020

BEIJING AND SHANGHAI BUSINESS PARK COMPARISON

a

Beijing Shanghai Conclusion

Stock (2019, BJ：In the process of industrial upgrading，under huge 14.3 11.5 market supply period million square metres) SH：Has more for-lease business park projects

BJ：Experienced large supply in 2018 and 2019 Vacancy Rate (2019,%) 22.7% 17.9% SH：Vacancy rate stabilized at around 17% since 2013

Average Rent (2019, Unlike the average rent for office market, Beijing and Shanghai 130.5 118.8 per sq metre per month) have the similar level of average rent Software and IT Software and Technology tenants are demand drivers for business parks in Services IT Services both Beijing and Shanghai Medical and Health Electronics BJ: Supportive polices make BJ the headquarters of internet Top three occupiers giants, AI companies and new materials-related companies New energy, new SH: A leap in expansion has occurred among 5G businesses, material, Telecommunication electronics hardware and TMT sectors. Pharmaceuticals are environmental also a main demand driver for Shanghai business parks protection Domestic 51% 91% BJ: A less transparent market, more political impact, more Investment Buyers domestic investors buying for owner-occupation Profile Buying for SH: More transparent and active market for investors, less 49% 96% investment political impact

Source: Colliers International 9 Primary Author: For further information, please contact:

Cassie Gao Tammy Tang Senior Analyst| Research | North China Managing Director | China + 86 10 8541 1184 +86 21 6141 3625 [email protected] [email protected]

Ming Lu Charles Yan Director | Research | North China Managing Director | North China +86 10 8518 1633 +86 10 8518 1593 [email protected] [email protected]

Andrew Haskins Executive Director | Research | Asia +852 2822 0511 [email protected]

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