State of the Occupier - Beijing: Landlord to Tenant Market?

Being the capital city, Beijing is considered one of the most sensitive and critical parts of China. Accordingly, it has one of the most one of the most COVID-19 restricted working environment policies in the country. While outside the work environment, there have been substantial relaxation in disease prevention measures, within the work environment certain strict measures are still in place. Current occupancy restrictions mean that on average, most firms are operating rotating shifts with an approximate 30%-70% of employees in the office at any one time dependent on occupant density. Each employee needs to provide personal health information, including body temperature, to the government’s database on a daily basis.

There continues to be limited transactions in the market for new space, and we are seeing pressure on rents across most of the market. Some tenants have postponed or cancelled move requirements. Those that have, most are seeking forms relief such as rental discount or additional rent free period in exchange for renewals with mixed results. Some landlords are being proactive to incentivize moves and renewals, while others are steadfast on their commercial terms. Time will tell who will be the winner based on their respective strategies.   

When will these COVID-19 prevention measures be relaxed? We have witnessed a gradual relaxation including at the end of April when domestic travel restrictions and 14-day quarantine requirement for domestic returnees to Beijing were no longer required. However, if you have been to a high-risk area domestically, those restrictions and quarantine requirement remain in place. Further, for people returning from overseas, there is a 14-day quarantine requirement in a government nominated facility plus a further 7 days quarantine requirement at home.

Can I get a rental discount or rent-free period during my current lease term? The government gave guidance to SOE landlords to offer a rent free period several months ago. However, this is only a guidance note. We have seen very mixed results as to how this has been adopted. Further, non SOE landlords have provided very limited, if any, incentives at this time.  

OCCUPIERS?
Is now a good time to move? If you don’t have capital expense constraints, and for some, even if you do, now is a great time to consider moving. There is substantial new stock and more coming on line in and around the CBD, so it could be a great opportunity to get a discount over your current premises, or upgrade at a similar rental rate. However, please know, not every landlord is responding the same way so there is a large variance between what you will be offered in the market.

LANDLORDS?
It has been a landlord biased market for quite some years in Beijing. This is changing with increasing vacancy rates, lower if not negative absorption rates in some districts, and substantial new supply coming on line in certain areas. COVID-19 has only added to the pressure. Some tenants will have pressure to consolidate and or cut costs. Some will use this chance to upgrade. We suggest that Landlords take a proactive approach in considering incentives to current tenants as well as developing packages to attract new tenants. Standing still in this environment is not expected to be a winning strategy as COVID-19 shakes out globally.


DEVELOPERS / INVESTORS?
Investors are looking to acquire assets that are now trading at a significant discount.

The Beijing market is transforming from long-time landlord’s market (8-9 years) to a tenant’s biased market. For tenants in a healthy financial condition, it’s a good opportunity to consider upgrading building quality at minimal additional marginal cost, or potentially at a discount.

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