With the completion of many development projects, Shanghai is likely o shed the title of the world's biggest construction site. But an even less appealing title is waiting the city with the world's largest stock of empty space.
Office space alone will more than doubled from 1.7 million sq metres at end-1996 to 4 million sq metres in 1999, according to real-estate agency First Pacific Davies. Nearly half of the supply will be in Pudong, Shanghai's new commercial and financial district. Residential units for foreigners will also increase, by one-third to about 40,000 apartments during the same period. With such abundant supply the vacancy rate is unlikely to fall from the current 45 per cent for office blocks, says Mr Sam Crispin, associate director of First Pacific Davies. Things are going to get worse before they get better, he says.
The glut comes at a had time, with the local economy slowing down and the region's financial typhoon not yet over. A few Asian developers have put their projects on hold, while small-time landlords are placing more emphasis on getting a tenant than securing right price, says Crispin.
The property market may have become weaker but analysts do not expect a South-east Asian-style property burst, thanks to China's closed market. Chinese banks may be lumbered with bad property loans but the government would never allow a major financial institution to go bankrupt. Also, speculators can do little to trigger a financial crisis because the currency is not convertible and the capital market is closed.
More for less
Another reason for the relative stability is the deep pockets of foreign developers, such as Hong Kong's cash-rich property giants Henderson and Hang Lung, which occupy prime sites in dovvntostir Shanghai. As for domestic developers, many are building offices in Pudong for their own use. Among these are powerful ministries, national banks, listed Chinese conglomerates and even the army.
Shanghai has taken steps to prevent the glut from worsening. In 1996 it stopped selling plots for villa projects, while last year it also stopped granting land-use rights for office projects. It has allowed troubled developers to convert their sites into car parks or public gardens until the business climate improves. Industry sources say the govern-ment may also halve the tax rate on property leasing from 21 per cent to 10.5 per cent, so that developers can rent out their units instead of selling them at a steep discount.
One welcome result of the oversupply is lower rents. Rents for office space are expected to fall 10-15 per cent this year, in addition to the 30 per cent drop in 1996, industry sources say lake the Shanghai Centre, the city's best-known office building. Its rents have dropped from a monthly average of US$90 per sq metre in 1994 to the current US$60. Shanghai has been demoted in the league of the world's most expensive property and that is good news, says Crispin.
Foreign companies that once operated in sub-standard office buildings have moved to bigger, better-managed blocks for less money. Many break their old lease, pay the penalty and still find they can afford to move into buildings of higher quality, says Mr Tom Cheung, local manager of the real-estate agent Richard Ellis. Meanwhile, mainland companies have moved into vacant offices once occupied by foreign firms, as the lower rents have made them more affordable.
Relocating to Pudong
Another positive trend is that more companies and expatriates are moving to Pudong, bringing life to what was recently a ghost town of vacant skyscrapers and golf courses. Foreign banks required by the government to do their yuan-based business in Pudong led the pack in 1997, taking up space in the Marine Tower and China Merchants Tower in Pudong's prime business area, Liujiazui.
Next, the government relocated its banks, departments and trading exchanges to the east of Huangpu River. Pudong got another boost last December when the local stock exchange moved its trading hall there, to the new Shanghai Securities Exchange Building.
Construction projects involving Asian companies have been affected. CP Group of Thailand, which is divesting from several China projects, is considering scaling back its plans for a shopping centre in Pudong. Daewoo Construction of South Korea announced that construction of the Pudong residential complex Inter Dragon City would be postponed by about a year. There has even been concern over prospects for what would be the world's tallest building, the World Financial Centre, although the Japanese developer Mori Building said it would be completed on time in 2001.
Shanghai's property cycle began with the drop of the hammer at the city's first land sale in 1988. Since then, the government has used revenue from land sales to build roads, bridges and other public works. Between 1992 and 1996 Shanghai raised YnlOObn from selling land, an amount close to what it spent on improving its infrastructure. Official statistics show that, since 1988, Shanghai each year completed an average of 184 high-rise blocks. By end-1997, Shanghai had 1,953 high-rise blocks, compared with an estimated 800 a decade ago.
Billions of dollars have gone into Shanghai's property market, with especially strong involvement of Asian developers and small-time individual investors. Many went into the market for a quick profit, but oversupply means it will be a long time before there will be good capital gains.
There are few sale transactions today, while the average rental yield has fallen from a peak of 30 per cent to 8-10 per cent for most property for expatriates. "The speculative market has completely died out," says Cheung of Richard Ellis. Some investors are putting money into property for the long term or because it makes more economic sense to buy rather than to rent, he adds.
Property agents expect rents to stabilise eventually after their steep decline in the last two years. Crispin believes that rents will go down by another 10-15 per cent, beyond which point landlords will be unwilling to cut. Instead, competition for tenants will focus on the management of the propertyand give-aways such as several months of free rent for long leases.
Demand however remains strong for certain quality blocks, agents say. People are still queuing for a few landmark buildings. For example, in Xujiahui (in south-west Shanghai), only Metro Tower offers sufficientoffice space to meet the requirements of multinationals, says Cheung. With residential housing, villas are a favourite among expatriates. Villa complexes such as the Woodland, jasmine Garden, Sassoon Park and Zomson Golf Villa have an occupancy rate of 80 per cent.