A construction site in Beijing. Real estate investors are returning to Shanghai and Beijing after two years in which they concentrated on provincial cities.
SHANGHAI: Real estate investors and developers are abandoning a two-year foray into China’s provincial cities and switching back to Shanghai and Beijing, where offices are fuller, rents are higher and home prices are stabilising.
Of the $34bn of direct investment in commercial real estate in 2010 and 2011 combined, 20 percent went to China’s 50 biggest second-tier cities, according to Jones Lang LaSalle Inc, up from 5 percent in the prior two years. That percentage for second-tier cities may decline in the “immediate future,” according to Michael Klibaner, China head of research for the world’s second-biggest commercial realtor.
A three-year building boom, fuelled by government stimulus, has pushed up office vacancy rates in second-tier cities such as Chongqing and Chengdu to almost 40 percent, while rising land prices have squeezed homebuilders’ profit margins. Investors and developers are refocusing on Beijing and Shanghai, where prime offices are close to full occupancy and rents are on par with cities such as New York and Sydney, according to Cushman & Wakefield Inc.
“In a world of uncertainties, the best investment is the one that produces stable rents,” said Albert Lau, head of China at property broker Savills.
China’s economy expanded 7.4 percent in the third quarter from a year earlier, a seventh-straight quarterly slowdown, as Europe’s debt crisis crimped exports and the government’s property crackdown cooled domestic demand.
The capital Beijing, the financial center of Shanghai and the two southern business centers of Shenzhen and Guangzhou are ranked as first-tier cities, according to the National Bureau of Statistics. The second tier includes provincial capitals, while the third includes smaller cities.
In the wake of the 2008 credit crisis, developers and investors were lured to inland cities by cheaper land and rising incomes. China’s Premier Wen Jiabao, who is set to hand over power in March after a once-in-a-decade leadership transition that begins next month, has sought to curb property speculation in Shanghai and Beijing. That encouraged developers to seek opportunities elsewhere, where property policies were more relaxed.
China has over the past two years raised down-payment and mortgage requirements for home buyers, imposed a property tax for the first time in Shanghai and Chongqing, increased building of low-cost social housing and placed home-purchase restrictions in about 40 cities. Home prices have risen about 155 percent nationwide since reforms that privatized the country’s housing market in 1998.
Monthly prime office rents in Beijing and Shanghai are 690 yuan ($110) and 563 yuan per square metre, according to Cushman & Wakefield. That compares with 284 yuan in Nanjing, the capital of eastern Jiangsu province, which is the most expensive among China’s second-tier cities, according to the broker. One square metre equals about 10.8 square feet.
Fantasia Holdings Group Co, a Shenzhen-based developer, paid about 779m yuan to buy Huawanli Investment, which holds a 17,138-square-metre site in Beijing’s central business district, according to a statement to the Hong Kong Stock exchange. It plans to develop a business complex on the land, executive director Lam Kam Tong said by e-mail.
Fantasia plans to expand to first-tier cities such as Beijing and Shanghai, Lam said, citing better prospects for commercial properties in the biggest cities.
In the western city of Chongqing, four largely empty office towers bearing names of the country’s biggest financial institutions, including China Life Insurance Co, the biggest insurance company, stand side-by-side along the Yangtze River.
Completed last year to anchor the city’s new Jiangbeizui business district, the skyscrapers with 150,000 square metres of prime office space stemmed from the central government’s 4 trillion yuan stimulus programme in 2008 to revive the country’s economy. Today, about 85 percent of that office space is empty.
“Once the expectation of healthier market conditions take hold in the second-tier cities, you’ll see more interest in those assets,” Jones Lang LaSalle’s Klibaner said. “The fundamental of the markets is more attractive in tier-one cities now.”
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