Commercial property markets in both Beijing and Shanghai witnessed a strong rebound in the second quarter, driven by surging demand from the ongoing economic recovery, real estate service provider Jones Lang LaSalle said on Tuesday.

Grade A office rental rates in Beijing rose 3 percent to 249 yuan (US$36.6) per square meter in the second quarter compared to the first quarter.

"Because of steadily increasing demand, we anticipate rents will rise 9 to 10 percent this year," said Julien Zhang, managing director of Jones Lang LaSalle Beijing.

Soaring demand from domestic and foreign companies also strengthened the rental rebound in Shanghai's office market, with rents growing 4.9 percent in Pudong and 3.2 percent in Puxi.

"We see a significant number of Puxi-based multinational corporations expanding their businesses and believe that this trend will continue fueling a rebound in the area," said Anthony Couse, managing director of Jones Lang LaSalle Shanghai.

Other areas of commercial property markets, such as the retail and industrial sectors, also experienced strong rental growth in the second quarter, especially from international luxury brands.

However, investments in the commercial sector were stagnant in the second quarter as both domestic and international institutional investors took a wait-and-see attitude.

There was only one en-bloc transaction recorded in Beijing - Beijing Huarong Investment Co Ltd bought Financial Street No.1, an office complex with a total gross floor area of 96,000 square meters, for around 3 billion yuan. In Shanghai, both the number and total size of the deals were down from the first quarter.

According to Eric Pang, head of Investment at Jones Lang LaSalle Beijing, sluggish en-bloc transactions was due to a drop in gross yields and the unwillingness of cash-heavy developers to cut prices.

In the past two years, capital values increased sharply, while rentals fell, causing gross yields to drop to the levels of mature markets abroad. Although this quarter has witnessed a steady rise in rents as well as capital values, gross yields still remain around 6.5 to 7 percent.

As a result of lower gross yields, foreign institutional investors have been reluctant to make new investments. With the market still not in line with institutional investors' required yields and local developers unwilling to provide discounts, few transactions have taken place, as buyers and sellers cannot find common ground.

(China Daily July 7, 2010)