Increasing supply will keep the Beijing office market vacancy rate high for the next few years despite strong demand, property consultant Cushman & Wakefield says. About 175,000 square metres of grade-A office space had come on the market in the first half this year, raising grade-A stock to 1.3 million sq m in 36 major buildings, it said. New supply would accelerate dramatically in the second half, with a further 760,000 sq m due to be completed. Leasing activity in the second quarter had been strong, with major deals concluded by Hewlett-Packard, Microsoft and General Electric. Mainland companies also were a major force in pre-commitments, particularly for grade-B office market, it said. Developers were increasingly aggressive in capturing well-known, large tenants. Some recent deals had been concluded at exceptionally low rents with incentives such as longer rent-free periods and free naming rights. The company said demand in Beijing was solid but the more than 3.5 million sq m of grade-A and grade-B office space under construction was putting pressure on property owners. The average vacancy rate for prime Beijing buildings was 32 per cent at the end of the second quarter. 'It is difficult to forecast exactly when and where the bottom will be in Beijing, but clearly the market has not seen the worst,' Cushman & Wakefield said. It forecast rents would continue to fall steadily for the foreseeable future, although many large tenants were looking for substantial amounts of space. Developers would continue to offer greater concessions and greater flexibility in leases. CB Richard Ellis said the increasing imbalance between supply and demand precipitated a sharp drop in asking rentals for Beijing's quality office properties in the second quarter. Net asking rentals for prime office buildings had averaged US$44.90 per sq m per month, down 10.8 per cent from the first quarter. Rental achieved represented a discount of 15 to 20 per cent off the asking rate, depending on the quality of tenants and the size of space committed, it said. Despite a solid leasing performance by major new buildings, increased supply had pushed vacancy levels to 29.2 per cent in the quarter, from 28 per cent in the first quarter. CB Richard Ellis said about 884,000 sq m of office space came on stream last year and the market still had to digest the excess supply. In the second quarter, five new Beijing office properties had become available for occupancy - the New China Hong Kong Manhattan Centre in Dongcheng district, the Motorola Building and HP Building in the Onward Science & Trade Centre in Chaoyang district, and the Tong Tai Building, Xinda Building and National Investment Building near Financial Street in Xicheng district. CB Richard Ellis said the number of newly approved foreign investment companies which established operations in Beijing in the first quarter shrank 24 per cent year on year. Foreign investment funds utilised in the quarter increased year on year by 15 per cent to $940 million, stimulated by the acceleration in construction of such large-scale projects as Oriental Plaza and Capital Times Square. Oriental Plaza is a massive commercial development being built by a consortium led by Cheung Kong (Holdings) at Wangfujing, the central area of Beijing. CB Richard Ellis said the softening in rents had made investors adopt a more cautious approach towards acquiring Beijing office space and buying activity had subsided. Prices of the office properties located near Jianguomen were the highest in the city. These buildings were completed and largely occupied, it said. While the office-leasing market in the area was active, most of the unsold office properties were being converted into leased properties. The number of properties offered for sale was limited and the average asking price there had stabilised at $3,600 per sq m. The consultant said prices of office properties in other parts of Beijing varied widely, depending on their location and quality. Office properties in the Chaoyangmen area of Chaoyang district were asking between $2,500 and $3,000 per sq m, while prime offices in Financial Street were asking between $2,200 and $3,300 per sq m. Prime office properties in the East Third Ring Road area were asking prices of between $2,600 and $3,300 per sq m.