Beijing landlords turn retail into office space

PUBLISHED : Wednesday, 08 July, 2015, 12:00am
UPDATED : Wednesday, 08 July, 2015, 12:00am

The crowds are gone in Beijing's Zhongguancun area - China's Silicon Valley. Several malls that once sold electronic devices such as cameras, computers and mobile phones now house start-up technology firms and incubators.

"The strong office market, coupled with a relatively weak retail market, has led to a growing number of conversions of retail shopping centres for office use," the Urban Land Institute said in its annual report.

It cited a research analyst as saying retail space can be seen "being converted to office space everywhere in Beijing".

A similar change is also taking place in Sanlitun, the capital's trendy bar area.

Pacific Century Place lost anchor tenant Pacific Department Store in 2011 due to high rent. The space has been converted into offices after the complex, which also has two office towers and two serviced apartment blocks, was sold to Hong Kong's Gaw Capital Partners last year for US$928 million.

Not far away, the retail space at Full Link Plaza has also become offices.

"The trend is unlikely to emerge beyond Beijing and Shanghai, as retail space usually provides higher rents than offices," said Zhang Ping, a general manager at consultancy Insite Research Centre.

Office rents in Beijing have soared since 2011 and supply in the next two years will be limited, which means they are unlikely to fall from historical highs.

Data from global consultancy CBRE showed average office rents were 421.70 yuan (HK$533) per square metre per month in the first quarter.

The average ground-floor rent for shopping malls was 35.30 yuan per square metre per day (or 1,073.71 yuan per square metre per month).

However, the withdrawal of the anchor department store tenant at ZGC Plaza drove up the vacancy rate to 7.1 per cent, against 5.8 per cent in the office sector.

CBRE ranked Beijing's Finance Street and central business district as the world's third and fourth most expensive office locations.

According to JLL data, Beijing remains one of the world's best office markets, with a vacancy rate of 3.6 per cent in the first quarter, compared with the global average of 12.9 per cent, thanks to rising demand from internet and financial firms.

Meanwhile, retailers have been backed into a corner by the e-commerce boom, which cut the number of visitors to physical shops, hurting their revenues.

The value of e-commerce on the mainland jumped 31.4 per cent last year to 13.4 trillion yuan, according to data from the China E-Commerce Research Centre. Meanwhile, retail sales grew 12 per cent to 26.2 trillion yuan.

"For Beijing's landlords, offices ensure stable rents in the next few years while rents from retail shops are not secure," Zhang said. "Malls that sell standard electronic products are the worst hit by e-commerce and they need to be restructured first."

Steven McCord, the head of research at JLL in North China, said the move to convert underperforming retail projects into offices in the past two years was rational.

"Many of these conversions are still in progress and there are no overwhelming success stories just yet," McCord said. "There are fewer new cases appearing recently as most of the obvious opportunities have been exploited."