Shanghai’s Real Estate Market is IMPLODING FAST

Wednesday, January 7, 2009 16:34

3 years ago, you could not enjoy a meal without the topic of real estate coming up.  Prices were soaring, flats were flipping, agencies were popping up everywhere, and everyone had a “tip”.

Now though, there seems no end to the news related to the real estate market, and even as I have done my best to keep up, the news and rumors are coming too fast!

so, with that, here are the rumors of the day:

1) Shanghai Puli Hotel and Spa, which has had its glass curtain on for over a year now, is now reportedly classified as a “lanwei lou” – or a building in default – after the investor ran out of money.  This is PRIME REAL ESTATE along the Nanjing West Road corridor

2) The two hotels that Shui On has built to house the Shanghai Conrad  were put on hold about 3 months ago due to the recent fallout that the hotel industry has experienced (average hotel occupancy is now in the 40% range, more than 60% off).

Stunning new story of the day once again goes to China Stakes and their article Shanghai’s Office Space Rental on the Edge of a Cliff. According to the article:

Savills, a global real estate services provider, reports that the vacancy ratio of A-level commercial buildings in Shanghai, which was only 5% at the beginning of 2008, soared to 15.4% by the end of the year. In Pudong, the percentage is as high as 25.6%, up to even 50% in some high-end commercial buildings.

The average daily rent at the beginning of 2008 was 8.25 yuan per square meter, rising to 8.41 yuan in the third quarter, but it dropped to 7.68 yuan by the end of the year. Average daily rent in the Lujiazui Financial Zone dropped by 10.7% from 8.97 yuan per square meter in the third quarter to 8.12 yuan in the fourth.

DTZ estimates that average room rent in 2009 will be about 8 yuan/square meter/day for high-end A-level commercial space, 5 yuan/square meter/day for medium A-level space, and 3 yuan/square meter/day for B-level space.

8 RMB?? THAT IS INSANE. to put that number in perspective, 5 years ago when putting a client into the Portman, the rate was somewhere in teh 1.15-1.30USD range, Plaza 66 was a dollar, Westgate was .60~.75/USD per meter per day.

At this point, were I to have 25 million USD (I am just short 24.99999), I would be getting ready to enter the market.

It is clear to me that while the rental market is falling, a long term investor who UNDERSTANDS and believes in the LONG-TERM will find some of Shanghai’s jewels  available for a song.

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10 Responses to “Shanghai’s Real Estate Market is IMPLODING FAST”

  1. Aimee Barnes says:

    January 7th, 2009 at 7:24 pm

    Great post- two of my friends recently purchased in Pudong and both admitted that they got a really nice deal. I’m glad to see that you emphasized the “LONG-TERM” aspect… Let’s just hope that Shanghai’s development pace slows down a bit– and soon.

  2. Rich says:

    January 7th, 2009 at 7:41 pm

    Thanks Aimee

    yeah – the problem with investors is that their investment horizons are only 2-3 years on average. I had two large deals that dissolved in 2004 for assets in Chengdu becuase they could not see the bigger picture of China… had they put their money in (unleveraged) they woul have gained 40% in the 12 months following.. never mind the full 2005-2008 gains. Anyway, let’s see if attitudes change. I hesitate to think they will, but let’s see who is left standing.

    As for the pace of development of Shanghai. Were the economy still strong, then a lot of buildings would be coming to market. However, given the situation, many are slowing down their developments…. but that isn’t the ideal situation either.

    Hope all is well and all the best for 2009!
    R

  3. Bill says:

    January 7th, 2009 at 7:46 pm

    Did you mean “lanmei lou” and not “lanwei lou” ?

  4. Rich says:

    January 7th, 2009 at 8:20 pm

    Hi Bill.

    Lan Wei Lou (烂 尾 楼) = Rotten Tail Building.

    Lan Mei Lou is not a term I have heard before (nor my trusted real estate resource)

    R

  5. Duncan says:

    January 7th, 2009 at 11:13 pm

    I always get the sense that when talking real estate in China you really need to distinguish between the different market segments that can often be going off at complete tangents. Residential real estate transaction levels have apparently been picking up in Shanghai in the last two or three months, for example, although admitedly that says nothing about prices. I can easily believe the turnover increase is just a temporary bounce, however, and I’d suspect with you that the commercial sector’s just starting on its troubles…

  6. Rich says:

    January 8th, 2009 at 1:08 am

    Hey Duncan.

    1) You are correct in that this should all be taken into context. China has a number of conflicting dynamics that occur naturally in general, and real estate typifie this.

    Shanghai commercial is getting hammered, may mean nothing for Chengdu’s commercial sector. Additionally, Shanghai commercial may mean nothing for residential.

    2) From what I have been told (and keep in mind I am not in a large real estate research group), volumes are all over the place. It was virtually at a stand still this summer as sellers thought prices were low, and buyers though they were high. Now you have a lot of sell side on the institutional side (Morgan, M. Goodman) and within the new residential low/ middle end where developers are cutting their prices. My sense is that this is not healthy volume.. it is desperate to the last drop. Perhaps I am not reading it right, and I am more than open to others to let me know what they are seeing.

    3) I think we are about to see what many in town were talking about 3-4 years ago in Pudong. Where this plays into the bigger picture is simply the fact that the volume of foreign firms who had plans to enter the China market, expand within China to 2nd/ 3rd investments, or simply were growing has fallen. people are retrenching/ waiting on sidelines, and that is hitting the rental market square in the teeth.

    Where all this is an opportunity, from a corporate investment perspective, is that firms that once leased space may find it attractive to purchase prime real estate. The prices are way off, and there is a case for purchase as a means to mitigate future rebounds.

    Thanks
    R

  7. Zhou Ji-Ming says:

    June 2nd, 2009 at 1:05 am

    Rich,

    For what it’s worth, my anecdotal evidence currently – June, 2009 – supports the notion that real estate continues to be ‘all over the place’ in SH. To wit:

    Residential values of properties in excellent locations continue to be strong and improving. Remember that in RE, it’s ALL about location…especially in a market that is taking a deep breath.

    My wife and I were ‘market researching’ – villa shopping – over the past couple of weekends in SH. I was not totally surprised to see busy sales offices….out in Qingpu of all places….they say they’re selling like crazy. In years past, I have been sceptical of this kind of talk but the number of shoppers is an indication of market sentiment.

    At the Spring RE Fair in SH a couple of weeks ago, it was the same thing…groups of shoppers like we haven’t seen in quite some time. And while no one wishes to pump up the market, it is true that sentiment is not weak.

    At the same time, it is no secret that commercial rents in Beijing and Shanghai are taking a serious beating…and will continue to get beaten down as more and more stock arrives on the market through end of 2010.

    Zhou

  8. Rich says:

    June 8th, 2009 at 3:02 am

    Zhou.

    Thanks for the insigths.

    My question is who is buying in Qingpu, and why.

    Are these people who intend to commute into Puxi/ Pudong on a daily basis, or is this their weekend escape?

    First or third villa… and do you see any furniture in any of them yet?

    Philosophically – what does it mean when the only sales volume is coming from new homes instead of 2nd hand market? What does it mean that these hoes are so far away from inner ring road (the safety line for most Shanghai buyers)?

    R

  9. Zhou Ji-Ming says:

    June 9th, 2009 at 4:44 pm

    First villa, if it ever happens. The major downside, of course, is the commute and the extreemly poor quality of the roads in that area, which must be up-graded before they turn into cow paths again…..then it’ll be construction for years to come.

    As far as where the volume is coming from, that is difficult to track although one could straw-poll the real estate service centers in each district. I am inclined to believe that one of the reasons that 2d hand sales may be low in the city is because there is not much stock on the market.

    In my own complex where I live now, it is clear to everyoen that the majority are home-owners; a very small percentage rent. And those people are not selling.

    If one takes a look at, say, One Park Avenue on Xin Zhao Lu, although there are a higher percentage of renters, there are still comparatively few units on the market. So, the simple answer is that there are a greater number of new units coming on the market which are transacted more quickly than 2d hand sales.
    Just my toughts.

  10. Zhou Ji-Ming says:

    June 9th, 2009 at 4:48 pm

    Qingpu: They were all middle – upper class local Chinese who were probably buying one big unit for the extended family. The complexes we saw were very attractive, well landscaped, more intuitively designed than those built 5-10 years ago.

    One 5-floor townhouse even had it’s own lift where the stairway would be……but that one was a little rich for me…