Commercial Real Estate
Gets Ready for the WTO
By: Katja Gaskell

Some believe that WTO membership will be more hype than help, but others see it as the answer to Beijing's real estate problems.

It is generally believed that China's pending entry into the World Trade Organization will be a blessing for Beijing's real estate market, which has been depressed since the economic boom of the mid-1990s.

As China began competing on the global market, it became clear that meeting international standards for quality and comfort were crucial. The message was clear: you may choose to cut corners, but your competitors may not.

Traveling through Beijing can feel uncannily like a trip in Dr. Who's Tardis. In this rapidly evolving urban stew, the mix of buildings ranges from white bathroom-tiled high-rises, to mirrored corporate complexes that could as easily be found in London or New York, to crumbling hutongs that provide a glimpse into what the Peking of old looked like.

The capital's commercial real estate market has been on a dizzying roller-coaster ride for the past decade. At its peak, roughly around 1994, Beijing's rental market was on par with the world's major financial centers. But just six years later, prices have plummeted and there is debate over whether the bottom has been reached.

It is generally believed that China's impending entry into the World Trade Organization will be a blessing for Beijing's real estate market, which has been depressed since the economic boom of the mid-1990s. Opinions differ, however, on when and to what degree WTO entry will impact real estate development in China. Some believe that WTO membership will be more about hype than help, while others see it as the answer to Beijing's real estate challenges.

"Press coverage remains very positive, but the initial frenzy was a bit naive," says Randy White, Beijing chief representative of US-based Cushman & Wakefield, an international real estate company. "The excitement needs to be tempered a bit."

Even with WTO membership, it will be five years before deregulation is fully carried out, points out Samantha Anderson, research and marketing manager in Beijing for Colliers Jardines, a property management company based in Hong Kong.

"The WTO announcement cheered everyone up and made people feel good, but
it's not going to result in any significant changes immediately," Anderson adds.

Still, others insist on optimism.

Jeffrey Tse, managing director of Pacific Property Net, a Hong-Kong-based real estate website, asserts: "I believe China's accession into the WTO will change China's real estate market."

Excuse Appearances: Beijing's Recent Real Estate History

Although Beijing seems like it is under permanent reconstruction, it is only comparatively recently that the incessant cacophony of banging and drilling took over the capital.

A major government policy change in 1992 provided overseas investors with preferential incentives to invest in Beijing commercial real estate, which quickly resulted in the capital becoming one of the world's most expensive rental markets. Previously, foreign companies and foreign residents were extremely restricted by the number of hotels, housing and office complexes available to them.

However, by late 1994, a surge of new buildings began cropping up across the city and Beijing's real estate market peaked. By early 1995 offices were 100 percent occupied and office space was at a premium. Office complexes were charging over US$140 per square meter per month. However, the boom didn't last. After the initial frenzy, rental prices started to slip before plummeting by as much as 30 percent a year.

"In the early-to-mid-1990s foreign investors were literally throwing money into the real estate market," says Pui Chan, Beijing area sales manager for U.K.-based Regus, an international firm offering office-hosting services.

"But investors began to tire of China's meager return on investment." The decline was triggered by a slew of factors, not the least of which was the Asian financial crisis of 1997-99 and the reluctance of foreign multinationals to continue pumping money into a saturated market.

Oversupply remains a problem, with an estimated 20 percent to 30 percent of commercial real estate remaining vacant.

"The commercial and residential markets are over-built because too many developers rushed into China at the same time," says White.

Year 2000: Current State of the Market
But how long before demand equals supply is subject to debate. While some market analysts believe 1999 was one of the most active year in recent memory, others insist that the market is still sluggish. However, overall the advent of WTO membership has brought about a general feeling of optimism. As a result, rental fees are once again expected to rise and vacancies decrease.

"The commercial sector has turned around very quickly," comments White. "Rents are going up."

Indeed, the 37-story China World Tower II, which opened last October, only has three floors available available for rent. The building began with 58,000 square meters of empty space.

Survival of the Fittest
For domestic companies in real estate, a large and steady inflow of foreign investment will be crucial to reforming state-owned enterprises. Reform is invariably going to lead to the closure of many inefficient enterprises. But the good news is that increasing demand is coming from local private businesses.

"Last year saw a very new phenomenon," says Winnie Yip, general manager and
director of DTZ, an international property advisory firm based in Hong Kong. "More and more domestic companies are moving into grade A office buildings which previously had only been occupied by foreign companies."

In the second half of last year, 60 percent of the demand for rental space came from Chinese companies. This development was fueled not only by declining rental fees, but also by a push among Chinese companies to upgrade their image.

QUALITY COUNTS
In addition to shifts in rental costs, the quality of projects in Beijing has improved considerably over the last several years.

"Increased competition has made developers realize that there is a demand for quality," notes Yip.

As China increased its participation in the global market in recent years it became clear that meeting international standards for quality and comfort was crucial for survival. The message was clear: you may choose to cut corners, but your competitors may not. Therefore, in addition to modern facades and grandiose, marble-laden lobbies, a significant number of technical improvements have also been made.

Higher ceilings, faster elevators, year-round air conditioning, and ample daily and back-up electrical power are just some of the improvements included in newer buildings and renovations.

As Nigel Bacon, group chief executive officer of Cushman & Wakefield in Asia, observes: "Multinational companies in Beijing can finally see that the office market has matured, maybe not fully, but at least to the point where there is some value for money."