Quarterly Overview of Beijing's Residential Market

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The Overall Residential Market Encountered A Low Season

Market Review

As winter is typically the low season, the luxury residential leasing market encountered downward pressures during this quarter. The average rental dropped 1.6% and vacancy rates increased 2.0% this quarter. After recording good performance for several quarters, the average rental and the occupancy rate of serviced apartments fell. For leased apartments, owing to intense competition, the average vacancy rate went up by 2.9%, while the rental remained stable. As for villas, the average rental decreased slightly and the vacancy rate remained steady.

At the end of 2005, the Beijing Construction Committee issued a regulation on construction quality management of residential projects by residential units. The new regulation will begin to use individual apartments instead of the entire building when approving the quality acceptance test. The new policy is designed to reduce dissensions caused by poor project quality. Furthermore, starting 2006, sales contracts for commodity housing in Beijing will be signed through the internet. Information will also become more available to the public. This is a big step towards market liberalization and increasing transparency.

Supply

Only a few new luxury residential projects were launched on to the leasing market this quarter. Lane Bridge Villa Phase II was one of them. Projects completed at the end of 2005 will not enter the rental market prior to Chinese New Year in 2006 as owners need time to decorate unfurnished units.

The luxury residential sales market was relatively active in 2005 Q4. There were new projects entering the market in all submarkets, such as Orchid Garden in Shunyi villa area, Upper East Side Phase II around Lufthansa area and Stadium No.3 in the 2nd Embassy area. As for projects in CBD, Beijing Yintai Centre, which launched this quarter, took the market spotlight.

Rental Pricing and Vacancy Rates

Besides leasing apartments, rentals of serviced apartments and villas both dropped to different extents. The average rentals of serviced apartments and villas dropped by 1.8% and 2.0% respectively. The vacancy rate of leased apartments changed substantially from 19.8% to 22.7%. Otherwise, the average vacancy rate of serviced apartments increased slightly by 1.9% and that of villas remained stable.

The serviced apartment market experienced a low quarter in 2005 Q4. During the holiday season, the quantity and frequency of multinational senior executives visiting China slowed and weakened demand. Total vacancy rates increased from 15.0% to 17.0%. In the meantime, most landlords lowered rents to attract tenants in order to improve occupancies. Overall average rental of serviced apartments decreased 1.8% to US$20.8/month/sqm.

In the leasing apartment market, new supply was gradually absorbed by the market. However, the rate is slower than expected. Furthermore, the hardware of older projects which have been on the market for some time will need upgrades in order to stay competitive in the market. Total vacancy rates climbed to 22.7%. In particular, for middle-end apartments, despite their drop in market rentals, the vacancy rate increased 6.2%. Conversely, low-end leasing apartments successfully attracted many local tenants due to their affordable rentals. The market vacancy rate dropped 2.7% in Q4 2005. Overall average rental of leasing apartments was stable at US$14.6/month.sqm.

New projects recently entered the villa leasing market with strengthened marketing strategies have successfully attracted new tenants. The vacancy rate of high-end villas went down from 21.4% to 20.0%. Newly completed projects typically entered the market with lower rentals in order to help establish the surrounding living community. The average rental of villas dropped from US$18.4/month/sqm down to US$18.1/month/sqm.

Sales

The price for Beijing’s luxury residential market rose slightly in Q4 2005. CBD and Chaoyang Park continued to take the 1st position for the highest increase in sales price this quarter. According to Villaschina.net research, Beijing high-end residential price index was 107.6.

Market Outlook

After New Year, many foreign companies will expand their businesses and continue sending an increasing amount of senior executives to China. Because of their flexibility in leasing terms, full amenities and high-standard management, serviced apartments will continue to be favored by foreign executives. Demand for serviced apartments is expected to warm up after Chinese New Year. The market rental is expected to rise with a decreasing vacancy rate.

New supply to the leasing apartment market is expected to stay low in early 2006. Available units will mainly come from projects that started occupation in the second half year of 2005. As living communities for these new projects continue to mature, more tenants will be attracted to the communities. The average rental of leasing apartments should increase slightly with lower vacancies.

Some villas will be under decoration during the winter before release on to the market for lease. These villas are expected to enter the market after March 2006. High-end villas are always the first choice of multinational senior executives with families due to their superior natural environment and accessibility to international schools. The average rental and the occupancy rate of villas are forecast to go up next quarter.

Many luxury residential projects in various submarkets that launched in the past two years already achieved high occupancy rates. Continuous improvement in amenities and facilities in their neighborhoods continued to lead project values to surge. Furthermore, these areas attracted many investors driving demand. Prices are expected to climb steadily.

Whether it is a policy for altering the measuring unit of residential acceptance approval or enforcing the contract signing process over the internet, the government’s purpose in these measures are to help standardise the real estate market system. These implementations will further strengthen the market supervisory power and protect consumers.