Residential projects have traditionally been the mainstay of most China property developers’ portfolios. Companies have grown rich on the back of the steady demand for housing that arises from rapid urbanization as well as the strong appetite for property ownership among the country’s young and upwardly mobile.
But the introduction of numerous government measures since June 2009 to curb speculation and cool near-record home prices has changed the game. Home buyers must place higher down payments, obtaining mortgages for second and third homes has become difficult if not impossible, and banks have also been told to restrict lending to developers. In addition, Shanghai and Chongqing have introduced trial property taxes – pointing to a future in which there are added costs to holding an apartment, not just buying one.
In order to hedge against policy risk, an increasing number of developers are turning to commercial projects – shopping malls, office buildings, and so on. This segment of the market has less of a direct impact on people’s everyday lives, which makes it inherently less political. Yang Guang and Beijing Capital Land, which have mainly been engaged in residential projects, recently announced plans to focus more on commercial property. And China Vanke, the nation’s largest listed developer, has raised the proportion of its commercial interests in its portfolio.
In recent years, concerns have been raised about oversupply and asset bubbles in commercial real estate – yet figures from 2010 show that vacancies are subsiding. According to Cushman & Wakefield, commercial real estate investment by developers jumped 42% in 2010 from 2009. In the first 11 months of 2010, year-on-year growth in transaction volumes for office and retail property came to 48.4% and 50.2% respectively. Meanwhile, office rents in major cities are picking up fast and are getting close to the peak levels prior to the global recession in 2008.
Growing interest in commercial property isn’t just a symptom of developments in the residential market. It may have become harder to buy an apartment, but that doesn’t mean demand is withering.
The key driver of commercial investment is China’s robust economy and the wider global recovery. In the post-downturn era, multinational corporations are expanding operations in the country again, while retailers are hungry to spread out their shop networks to take advantage of growing consumption power. This will only be helped by the government’s stated objective to boost domestic spending.
Confidence in the commercial property market is growing – and will likely continue to do so in the long term as investors bet on business expansion plans in China.