Grade A building rents in Beijing’s priciest office district have reached a new high that is proving to be the threshold for a noteworthy number of foreign companies. Their presence in Finance Street has declined by a significant 25 per cent in the span of a year, leaving them to account for just 13.6 per cent of total leased space in the area.

Figure 1: Grade A Space Leased by Foreign Firms in Finance Street
Source: JLL Research

Record rental highs in Finance Street
Following a remarkable 30 consecutive quarters of growth, rents in Finance Street – which may be finally reaching their peak following nearly flat growth in 4Q16 – registered a record per sqm per month in the quarter. The figure is a phenomenal 66 per cent higher than Beijing’s average office rents, which are already the most expensive in mainland China.

This makes the premium for Finance Street so high that foreign firms are finding it increasingly difficult to justify the prodigious rents against traditional gains of being close to regulators. This rings especially true in an era where Finance Street rental subsidies are becoming a distant memory for the majority of tenants (whether foreign or domestic).

Shifting to alternative areas for affordable rents
With a slowing economy, and in an office market that has grown to offer quality alternatives for as much as half the cost, a growing number of foreign firms have had little choice but to trade in their proximity to regulators for less costly buildings in mature areas like the CBD. In order to stay in Finance Street, certain tenants have either reduced their space down to a small, representative office or negotiated short-term leases.

Domestic companies now dominant in Finance Street
In turn, the departure and downsizing of foreign firms in Finance Street has created greater opportunities for domestic finance firms. Domestic companies are now further entrenched as the dominant occupier-group in the area, occupying 86.4 per cent of the leased space in Finance Street.

With the central bank (People’s Bank of China) and the three main financial regulators (CSRC for securities, CBRC for banking, and CIRC for insurance) present, Finance Street remains highly attractive to domestic firms, particularly after the fall of peer-to-peer lending platform E-Zubao.

Finance Street address remains prestigious
In a market concerned about credibility, a Finance Street location speaks volumes to the legitimacy of a business and its prospects – and because of this, the premium on location is also considered well worth the investment, especially for domestic finance firms.

Although rental growth in Finance Street is expected to slow under competition from the incoming wave of new supply set to enter the CBD core, there is no reason to expect a significant decline as Finance Street vacancy continues to be extremely low and limited new supply is planned for submarkets.

As such, regardless of their preference to stay put, we may still see more foreign firms departing Finance Street as cost-sensitivity is unlikely to subside anytime soon.

For more information on the Beijing office rental landscape, download our Asia Pacific Property Digest Q4 2016 for more insights.

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