Conversion craze all the rage in Beijing

August 31, 2017 / By  

Beijing has been swept up in a conversion craze – with landlords and investors continuing to scour the market for their next convertible projects, intent on turning lower-performing retail, hotel, and serviced apartment properties into new office space.

Since the retail-to-office conversion project at Pacific Century Place completed more than a year ago in the high-profile Sanlitun area, landlords and investors have been inspired to follow suit in pursuit of potentially higher gains. In Beijing, recently completed office conversions have generally seen achievable rents increase by as much as 30-50 per cent from their former incarnations as retail, hotel, or serviced apartment properties.

But while the numbers are compelling, landlords and investors should ask themselves a critical question before jumping at the next conversion opportunity: is every building suitable for office conversion?

Chart 1_31Aug2017

Source: JLL Research

A no-brainer?

At first glance, office conversions in Beijing seem like a no-brainer: Grade A office vacancy is among the lowest in the world, while rents are the second-highest in Asia. Interest in conversions is further buoyed by development restrictions preventing new commercial buildings from being built within city centre limits, as well as remaining pent-up demand and huge upgrade demand potential in the market.

Chart 2_31Aug2017

Source: JLL Research

Yet when we take a step back, we see that all of the office conversions in recent years total less than two per cent of the entire office market. In other words, office conversions continue to be special cases. Most office conversions to date have also been small in scale, limiting their influence on the wider market. As such, conversions have not introduced significant inventory to the market compared to new constructions. Still, landlords and investors need to act wisely to reduce the risk of converting an unsustainable property.

If the shoe fits

First, a building must be deemed suitable for office conversion. Retail spaces, for example, tend to suffer from odd-shaped floor plates and have an insufficient number of lifts to support large, office-worker crowds. Properties which are too far off the mark for office space may not be worth the effort.

While a prime location has helped the converted project at Pacific Century Place command relatively high rents, modern office features such as high ceilings, raised floors, and bright corridors have set it apart from other newly completed office conversions in less desirable locations on the edges of office clusters. Landlords of low-quality conversions in less important locations will find it hard to achieve comparable results. Their relevance in the market will be further challenged in the future as obsolescence quickly sets in.

Finding ‘the one’  

Beijing is facing a major influx of new office supply and much of what is coming through the pipeline is of higher quality. Poorly converted office buildings will be among the first to be abandoned in the market.

So, while there are some office conversions that make strong financial sense, we need to remember that not every building is suitable for such an undertaking. But as landlords and investors get their hands on a greater number of suitable projects, we can expect to see more high-quality office conversions complete to form a small, but unique part of the market.

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