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Industrial Land Pressure in Shanghai

Less available land, stringent requirements and higher prices lead to a challenging situation for Shanghai industry.As is the case with much of China, Shanghai is in a period of... 


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Park Place / 越洋广场

District: Jingan Dist
1601 West Nanjing Road
Proximity to Metro Line: Line 2 & 7
Approximate Rental: 13-14RMB
Built In: 2008
 

Plaza 66 / 恒隆广场 I

District: Jingan Dist
1266 Nanjing Road (west)
Proximity to Metro Line: Line 2
Approximate Rental: 13-14RMB
Built In: 2001
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Are We Heading for a Real Estate Revolution in China?

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The central government in Beijing has long been working to manage the ongoing residential property predicament. Recent developments indicate that a push towards encouraging renting over buying lies at the centre of Beijing’s strategy. Alongside fresh policy changes to support this aim, the two largest e-commerce companies have decided to wade into the real estate industry. These are substantial changes. So, what is going on and what does it mean for the wider industry?

Recent changes in government regulation

A year ago, President Xi Jing Ping pronounced “Property should be for living in, not for speculation.” This set the tone for the governments new vision for property ownership in Mainland China.

One key pilot initiative being introduced by the government to support this is the provision of equal access to public services for renters and buyers. Initially rolled out across 12 major cities, this is especially significant in reference to school access. The new law means it is now possible for students to attend the best schools in the area where they live without needing to buy an apartment in the area. The impact of allowing school access to renters could prove very significant, as the purchasing of apartments for the purpose of gaining access to the best schools has been a major driving factor in the market until now.

City authorities are also encouraging renting by increasing the amount of land allocated to rental apartments. Beijing has promised 500,000 rental units over a five-year period and Shanghai has been even more ambitious, aiming for 700,000 homes between 2016 and 2020. The top-tier cities are also looking to develop government-backed home rental services platforms that could bring greater control and transparency to the rental market.

What about investors?

Although the government is hoping to develop the rental market as a solution to the current housing problems, there are some serious issues. The rental market continues to be relatively weak with average yields of just 2-2.5%. This is unlikely to change over the short term. For many investors, this makes the prospect of leasing their apartments extremely unattractive. Developers can often have financing costs as high as 15% and are therefore not in the position to hold onto properties and offer them for long-term rental.

It seems that it will require more than just new government regulationto boost the rental market.

New Players

It is within this context that Alibaba and JD.com have decided to enter the property industry. The two companies in question have taken slightly different approaches on entering the industry.

Alibaba ( 阿里巴巴) will take a more consumer focussed approach. They plan to allow Alipay ( 支付宝; Zhifubao) users with a high enough credit rating to rent apartments through their online system. The major selling point for renters is that they can avoid the usual 3-month deposits required to sign a rental contract, as Alipay will make these payments through a financing agreement. For Alibaba, this could be a gateway to wider financing services for properties, as well as an invaluable source of consumer data.

JD.com ( 京东; Jing Dong) is taking a more developer-focussed approach. They have partnered with over 120 developers and property agents with the aim of supplying them with consumer data that can help with inventory management and potentially even housing design. In a similar manner to Alibaba, this is done by providing an online platform for consumers to rent properties, while JD.com is not offering any financing services.

What benefits might these new players bring?

There are some major advantages to this latest development for the industry. The rental market has struggled with the lack of enforceable regulation that has meant both tenants and landlords are wary of entering contracts. Alipay’s platform lifts some of the financial burden of renting whilst maintaining the cash flow for landlords and agents. It also encourages tenants to avoid missing payments and damaging property, which would have a negative impact on their credit score. Establishing a system that could provide some form of monitoring and better transparency within the market is certainly a welcome change.

Jing Dong’s provision of data to developers will allow greater insights into consumer needs to better shape future developments. Improved inventory management could also create savings that may be passed on to tenants.

Are there any downsides?

Of course, it is likely that early adopters will face issues as the system evolves. Inevitably, refinements and changes will need to be made to both online systems that may end up causing losses for those who have made a hasty plunge. On the other hand, this often seems to be the form of development for new products in China, so it is expected that consumers will not be unduly put off.

Some market observer and agents may be looking at these recent changes with a fair amount of concern. Yet, online platforms for finding housing have existed for some time and are being made use of to great effect. However, whether agents, investors, buyers or renters, a willingness to adapt and innovate will be necessary to stay abreast of coming developments in a fast changing industry.

Market Notes

In 2017, the rapid development of E-commerce and high-tech enterprise industries have been the biggest growth points in the leasing market of Shanghai Grade A office buildings, and this trend is estimated to continue in 2018.

In co-working spaces there is some consolidation as bigger players continue to look to increase market share, while some smaller actors mismanage their cashflow leading to closures or takeovers. Some developers are setting up their own coworking spaces. However, there may be issues with WFOE registration at some coworking spaces.

Older office buildings, of around 20 years old or more, are increasingly becoming subject to renovation as landlords attempt to upgrade existing facilities. These buildings can often make attractive options, due to their relative affordability and better than expected interior standards.

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