First China Ripples of Global Financial Crisis Come Ashore – Part 2 – Real Estate

Sunday, October 26, 2008 20:19
Comments Off on First China Ripples of Global Financial Crisis Come Ashore – Part 2 – Real Estate

For the last 3-4 weeks, the only topic more popular than Tina Fey‘s amazing resemblance to Sarah Palin has been the implosion of the global financial system that has unfolded.

To be honest, the first couple of weeks, the issues remained largely theoretical in China within my field of vision.  It was clear that like a tsunami, the epicenter of the financial crisis in New York was going to throw off some monstrous waves – and that those of us in China needed to work through the possibilities – but there was too little data to provide a trajectory.

Now several weeks into it, we are beginning to see the first signs of what is to come.

The first conversations I had were last weekend when a friend of mine and I were discussing the commercial property market in Shanghai.  Working on some of the highest profile properties in Shanghai, she gave me a few nuggets that showed me the scale of what was going on:

1) The new Maori tower(which already had a troubled history) is in trouble with occupancy rates at about 20-25%.  they lost 3 floors when Lehman Brothers went bust.  they have reduced their rent pricing to an amazing 10RMB/ m/day for a property that was going for 16-18RMB just a few months back… and to make matters worse, they moved people from HSBC tower and have space there as well

2) The next year will bring a large amount of space online, and many owners are going to lose money as prices are going to plummet due to the over supply.

3) Many tenants who were looking to move as part of an expansion or upgrade, will be staying put.  Firms are already beginning to announce layoffs, and no one is going to put the 1000-1500RMB/ meter investment into a new property fit out.

With that being said, Shanghai’s market is still the safest market for investors, and some of the second and third tier cities could see much more difficult times as they were still in the “build it and they will come” phase of their development. Personally, I have heard from friends in Chengdu and they are seemingly ok at this point, however some other cities that were struggling in the good times to attract foreign firms are finding it even more difficult.

Firms are simply not willing to expand as quickly right now, travel budgets are being reined in, and this is spelling trouble for the newly built 5 star hotels, A grade residential buildings, service apartments, and commercial buildings.

Where I would say this could be an opportunity is that firms who are cash rich and are looking to expand and have the business case for expansion, now would be a good time to negotiate for land, lease, loan, and incentives.

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