China's massive property market continues to boom, fueled by middle class desires for home ownership and expanding, office-hungry companies both foreign and Chinese. But the much-rumored real estate bubble appears to be in no danger of popping just yet.
In the first quarter of this year, residential property sales in Shanghai rose 42% year on year. This followed an increase in sales of just over 20% last year over 2002, despite the significant impact of the SARS panic in the middle of that year.
Chinese city dwellers are still enjoying their first opportunity to own their own home in decades – from the 1950s to the early 1990s, home ownership in the commercial Western sense was almost unknown. What drives the apartment block building boom is the basic desire of people to own their own home. Added to which, several hundred million more people are expected to shift from China's rural areas to the cities over the next 50 years, and will presumably be looking to own rather than rent. Urban property, like most of the economy, is scorching hot. But is there any basis to widespread bubble fears?
For a bubble to exist, there must be a sizable gap between market demand and market supply. Guy Hollis, Country Head for Jones Lang LaSalle's China operations, sees no such gap in the overall real estate situation in China's major cities. Rather, he sees an undersupply of mid to low-end housing.
"There's huge demand and there isn't enough supply, so that's driving up prices," Hollis said.
China's Ministry of Land and Resources projects a steady rise in urban property prices throughout the year from increases in both demand and investment on the back of GDP growth, which was 9.7% in the first quarter. Meanwhile, the price of office space, particularly in Shanghai, is likely to continue to rise. In a global property survey for 2003, Shanghai had the fastest rising office rents in Asia and the third-fastest in the world. Shanghai office rents rose by 9.7% to US$347.70 per square meter, ranking 29th in the world and first on the Chinese Mainland.
"Supply in Shanghai is being outstripped by demand, so office vacancy rates have come down," Hollis said. "There is not much supply coming on in the next two to three years – so the outlook for the market in Shanghai is fairly healthy – if you're an owner. If you're a tenant, expect rental increases."
While the office and top-end property markets are due for substantial increases in supply after two or three years, which could bring prices down, Hollis ultimately remains upbeat.
"You just hope that it's a market slowdown and not a crash," he said. "There's no sign right now of a slowdown because the economy's growing so fast."