Temasek Holdings

Foreigners buy Beijing's best

PUBLISHED : Wednesday, 30 March, 2005, 12:00am
UPDATED : Wednesday, 30 March, 2005, 12:00am

The office sector has caught the eye of institutional investors, but the right buildings are in short supply

Foreign investors are returning to the Beijing office market, which has been dominated by mainland investors, and are cherry-picking properties in the central business districts.

Property consultants said many foreign investors were choosing carefully because future supply was large and there were few buildings that had a good tenant mix and generated high rent yields.

Foreign investors started returning to the market in the first quarter of this year.

According to property consultant CB Richard Ellis, overseas institutional investors, which had steered clear of the market since 2000, accounted for about half of the office transactions in Beijing in the first quarter.

These include Singapore government-funded CapitaLand's acquisition of 106,000 square metres in Central International Trade Centre for 1.84 billion yuan; institutional investor Morgan Stanley's acquisition of a tower in R&F Twin Towers from Beijing developer R&F Properties Group for 400 million yuan; and Merrill Lynch's acquisition of a minority share of the Yin Tai Centre for US$30 million.

The property consultant said the last major acquisition of office premises by foreign investors looking for rental returns was in 2000 when Singapore-funded GIC Group acquired the 37,677-square-metre office tower The Exchange, Beijing, in the Chaoyang district.

Andrew Ness, an executive director of research at CB Richard Ellis, said: 'While there have been nine other en-bloc sales of office properties in Beijing [since 2000], virtually all of the buyers have been domestic Chinese corporations and most of them have been large, state-backed entities [such as] State Power, China Longyu Power, People's Daily, China Unicom, China Mobile and Beijing Grain Group.'

There will be a huge increase in office supply in the near future - 13 office developments will provide a total of 1.13 million square metres of office space by the end of the year.

But Mr Ness said many foreign investors expected stable rent returns as more firms looked to expand operations and would need bigger offices.

However, some property consultants said the sudden surge in foreign investment in the first quarter might not be sustainable because some potential investors would have difficulty finding the right properties.

DTZ Debenham Tie Leung general manager (Beijing) Vincent Luk Fung-siu said: 'The foreign acquisitions in the first quarter are exceptional cases and I don't see [these transactions] marking a turning point for foreign investment in the Beijing office market.

'CapitaLand's acquisition translates to an average price of about 16,000 yuan per square metre - an attractive discount to comparable properties selling at about 20,000 yuan per square metre - while Morgan Stanley and Merrill Lynch are involved in a kind of joint-venture relationship rather than a simple acquisition.'

The Beijing office market will tilt towards local investors in the next two years because most offices for sale do not have an attractive tenant mix for foreign investors.

Most foreign pension funds felt that present rental yields of about 6per cent to 8 per cent a year were insufficient to justify the risk of investing in the mainland, Mr Luk said.

Mr Luk said that opportunistic funds mostly eyed residential projects for quick returns.

'I don't see many major acquisitions coming on stream in the near future,' Mr Luk said.

'There are a lot of office buildings for sale in Beijing, but most don't have a tenant mix that attracts international investors looking for stable rental returns.'

DTZ Debenham Tie Leung said average office rents in Beijing increased 4.4 per cent in the fourth quarter last year to US$26.30 per square metre per month, while the vacancy rate was 12.5 per cent.