China developers eye youth apartment concepts amid office inventory glut

PUBLISHED : Sunday, 15 May, 2016, 6:31pm
UPDATED : Monday, 16 May, 2016, 3:51pm

Some mainland Chinese developers are shifting their attention towards mini apartments aimed at young professions, converting land that was originally designated for commercial and office use.

In April, a project in Shanghai featuring 203 fully furnished studios apartments, some as small as 20 square metres, initiated its pre-sale marketing activities. Named @way, the building sits a short walking distance to a nearby subway station. The 20 square metre units are priced at 0.9 million yuan (HK$1.1 million), compared to a general project nearby, which lists an 88 square metre unit at about 5 million yuan.

Nearly 90 per cent of the studios have been sold in less than one month.

Jet Dong, the marketing head of @way, describes the project as an investment-oriented youth apartment, targeting 18 to 36-year-olds who’ve recently kickstarted their careers. He says it also appeals to those seeking out a social living environment via public spaces such as a gym and shared kitchen facilities.

Jingrui Holdings, the developer of the project, acquired the land in 2015, while the land use was designated for commercial use as a shopping mall or office building.

“As the economy slows down, the demand for office buildings is declining,” said Dong. “But home rental is a blue ocean market. Looking for rentals in big cities is increasingly hard. Many end up with living in some poor old buildings and the monthly rental can be as much as 3,000 yuan.”

Jingrui guarantees buyers a 4-5 per cent annual return. The average rental is 3,200 yuan per month.

Demand for small apartments has been heating up in Shanghai and Shenzhen amid buying restrictions designed to cool housing prices. These restrictions block home purchases by non residents, however no such curbs apply to the commercial sector.

Nevertheless, mini apartment projects are believed to operate in a regulatory grey zone. Some of these buildings, including @way, do not provide kitchen facilities inside the units as a way to stay within the development by-laws.

Meanwhile, utilities charges to commercial buildings are also more expensive than residential buildings. In addition, the land lease terms are shorter, usually only 40 to 50 years.

Oversupply of commercial properties is another factor which is forcing developers to be more creative. Ay the end of 2015, total unoccupied inventory of commercial space owned by developers hit a historic high of 250 million square meters, according to property consultants Savills.

“The local governments have increased land supply for commercial but reduced supply for housing, which led to the new supply of offices surges,” said Kitty Tan, head of Savills China Project and Development Consultancy.

Recently, the central government signalled it would support the softening of land designation rules.

In a State Council meeting on May 4, premier Li Keqiang called for developing housing rental market, and allowing certain commercial spaces to be converted into rental housing.

“The intention of the policy is good, it strives to digest excess commercial property inventories while solve the problem of new urban immigrants’ housing, ” said Gong Min, a senior research manager with Shanghai Centaline Property Consultants.

Chinese developers, including Vanke and Greenland, are also introducing new projects geared towards the youth apartment market.

Vanke, unveiled its apartment leasing brand, Vanke Yi, as one of five new businesses last August. Vanke Yi, plans to construct 150,000 studio units by 2017 tailored towards fresh graduates and young adults who have recently moved to big cities. It opened its first such apartment in Guangzhou in April 2015, featuring units as small as 12 square metres.

Vanke doesn’t plan to sell apartments but instead will hold them in their rental pool.

Alan Jin, a property analyst at Mizuho Securities, said the oversupply of office buildings could be eased through land conversion to support youth apartments, but cautioned of legal risks. “The planning for commercial building and housing is different, there could be misappropriation of public resources,” he added.

Gong cautioned that most renters want to be in the downtown areas, whereas most of these new youth apartments are located in suburban areas.

“It is still too early to say the market prospect of youth apartments,” Gong said.