Shanghai Commercial Real Estate Changes
Anxiety among 200,000 owners of commercially zoned apartments in Shanghai
When protesters in Shanghai take to the streets over new real estate regulations, observers must assume that something dramatic has impacted the market. On this occasion, the scenes of protesters marching along Nanjing Road were the outcome of an announcement by the Shanghai city government in May that left individual buyers, as well as property developers, in fear of their properties’ becoming worthless assets.
The announcement stated that apartments built on commercial land instead of residential land (often serviced apartments or lofts) would be suspended from being sold, from being transferred and that sanitary installations inside of these units would need to be removed. This would make all such apartments uninhabitable for residential purposes and diminish most of their value.
Why did the government previously grant tacit approval for the development and sale of these types of apartments only to suddenly bring it to a halt?
One plausible reason for the government’s former position may be that it used to be a way of deriving income from the sale of commercial land (originally intended for use as office or retail space). While residentially zoned land has become extremely scarce in Shanghai, commercial land is somewhat easier to acquire. The government’s new stricter regimentation may be caused by the dramatic increase in the number of these ‘commercial apartments’ in recent years, which in some districts account for more than 50% of apartments sold. The crackdown is also likely part of the government’s initiative to curb property speculation amidst fears of a bubble after property prices continued to rise at a rate of approximately 30% within only a year.
Could real estate developers and buyers of these apartments have foreseen the risk? It is probable that almost everyone was aware that this was somewhat of a gray area. But, since it was such a widespread practice the government’s intervention came as an unexpected shock to most people. The shift began in December of 2016 when the government ended the approval of commercial and residential mixed-use projects in Shanghai. This move was quickly followed by the suspension of 148-serviced apartments that fall within the mixed-use specification. Several districts began demanding current developments restructure their plans to attain complete commercial function. It was further announced that for projects still under construction, toilets and related facilities could not be installed inside individual units, thus making utilization as an apartment impossible and forcing it to be a purely commercial space, such as office or retail. It was also revealed that apartments already completed and handed over to their owners would in future not be tradable on the open market, greatly diminishing their market value.
While for property developers this asset class had proved to be a solid profit maker, for buyers it had always been a double-edged sword. Buyers of these apartments faced some serious disadvantages as they held a title deed for only 40 or 50 years instead of the usual 70 years for residential buildings. They also paid a 4% deed tax instead of 2%, their electricity and utility fees tended to be higher than at normal apartment complexes and usually their units did not come with a natural gas connection.
What did attract potential buyers though, was the possibility for people not holding a Shanghai Hukou to purchase the apartments, which was not an option with other residential units. Furthermore, there was the typically higher level of interior decoration and prices per sq.m that were 30 to 40% lower than those for apartments sitting on residential land with a 70-year zoning. Many people, in the hope of creating a long-term home in Shanghai for themselves and their children, opted to invest in this kind of unit, sometimes relying on financial support from their extended family.
Recently, the government has published further announcements indicating a certain level of goodwill towards those who previously bought this type of property. However, we do not expect additional ‘mixed-use’ developments to be added to real estate development pipelines in Shanghai or Beijing anytime soon.
The first half of the year brought to completion 19 Grade A office buildings in Shanghai. The market gained a record-setting 1.35 million square meters, more than any time in history. Due to this huge jump in supply, the vacancy rate in Shanghai rose slightly to 3.2% last month despite increased demand.
New 2nd Quarter openings included HKRI Centre Two, BFC, Sinar Mas Plaza, Capital Square, Baosteel Group Expo, Orstar City, and Longshi Square. These additions allow the CBD to reach 7.76 million square meters of Grade A office building space while in more decentralized business areas, premium office space reaches 2.95 million square meters.
Despite the boom in E-commerce, the first half year of 2017 still saw the arrival of five additional shopping malls. To expand customer reach, a variety of beauty and fashion brands are opening food/beverage shops in several new locations. Chanel begins their 12-day Coco Café pop-up store on West Nanjing Road as Bobbi Brown’s Café and Hera’s “Like It” dessert shop open in Raffles City.