Seeing through China's new property bubble
with Tom Holland
We've heard a lot in the past few days about how a speculative bubble is inflating in the mainland property market.
Among the worried is the mayor of Shanghai. On Wednesday, he complained that home prices in the city are rising too fast and called on the government to cool the market.
The turnaround from bust to boom has been remarkably quick. Just a few months ago, the market was dead in the water. In many cities, prices were down by 20 per cent or more from their peak, sales volumes had cratered and developers were teetering on the brink of financial collapse.
Then the authorities came to the rescue and opened the credit taps. Suddenly, developers had access to cheap bank loans again, and buyers were able to get mortgages once more.
In the big cities, sales volumes promptly doubled and prices began to pick up.
Now analysts at UBS are forecasting that residential prices will climb 20 per cent this year. Credit rating agency Standard & Poor's has lifted its negative outlook on the property development sector, citing improved operating conditions.
And mainland developers, some of which were on the very brink of bankruptcy just four or five months ago, have begun queuing up to list on the Hong Kong stock exchange.
But if there is a property bubble on the mainland, it is confined strictly to the residential market. Home prices might be booming, but the market in commercial property remains indisputably bust.
Over the past few years, China has been on an office-building bender. Every city with economic aspirations has built itself a downtown business district, complete with a crop of glittering skyscrapers.
And the biggest cities have built not one but dozens of new business districts, with hundreds of gleaming grade A office blocks.
The pace of construction outstripped even China's fast-growing demand. With many banks and corporations commissioning grandiose headquarters buildings they could never hope to fill, much of the office space completed over the past couple of years has never been occupied. As a result, 'see-through' buildings litter mainland's urban landscape, so called because the lack of tenants and furniture inside means you can look in the windows on one side and see straight out through the other, with nothing in the way to obstruct your view.
Estimating how many of these buildings there are is tricky, but property agency Colliers International estimates that 38 per cent of the grade A office space in Beijing's central business district is sitting empty. In Shanghai's Pudong district, the proportion is about 33 per cent.
And the situation is getting worse. As the charts below indicate, the building is still going on. At the same time, with the global economy sluggish, demand for new topnotch office space is soft, especially from foreign corporations. As a result, in many cities, the supply of new offices coming on to the market over the next year or so looks set to exceed demand, pushing vacancy rates higher still.
That is not deterring the developers, or the banks that are funding them. Last week, a consortium of big mainland banks agreed to lend 60 billion yuan (HK$68.07 billion) to Laze Holdings to develop a new five square kilometre financial district about eight kilometres from Beijing's Tiananmen Square. No doubt Shanghai's attempt to turn itself into an international financial centre will involve equally ambitious building plans.
None of this has posed much of a problem so far. With interest rates low and the banks lending freely, developers have had little trouble servicing their debts, even if they aren't earning anything on their new properties.
But when the authorities eventually tighten monetary policy, conditions will get a lot tougher, and bankruptcies may follow.
That will leave the banks with a heap of bad debts almost as tall as the see-through office towers they will end up owning.