• Tue
  • Sep 2, 2014
  • Updated: 5:00am
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PUBLISHED : Saturday, 05 April, 2014, 3:35am
UPDATED : Friday, 18 April, 2014, 1:21pm

Empty office buildings point to deeper malaise in China's wealthiest region

Authorities built waves of new towns believing demand would continue unchecked for decades

 

Municipal officials in the Yangtze River Delta are learning a hard lesson: excitement over a flourishing regional economy can be dangerous.

According to property firm Jones Lang LaSalle, vacancies in Grade A office buildings in the area's major cities will stay high in the coming years due to weaker-than-expected demand.

While a loan default by a developer in Zhejiang sparked fears of a collapse of the residential property sector, the situation in the office sector appears to be even worse . Residential property developers can at least slash prices to dispose of flats to recover part of their investment. Half-empty buildings, however, are not just white elephants but financial black holes.

Jones Lang LaSalle found that at the end of last year, vacancy rates for Grade A office buildings stood at 58 per cent in Wuxi, Jiangsu, and 30 per cent in the Zhejiang capital, Hangzhou . In other major delta cities, which together make up the most vibrant and developed regional economy on the mainland, vacancy rates also hovered around 30 per cent last year.

Reshuffles of officials led to dramatic changes in urban development plans

In Wuxi, the vacancy rate for Grade A office buildings was expected to stand at 48 per cent in 2016, it said. By the end of that year, the stock of prime office space in the city would nearly triple from last year's amount to 565,000 square metres.

It is easy for government officials to defend themselves by saying the high vacancy rate is only "temporary" and some time is needed before the fresh supply of offices is "digested" by an influx of fresh capital in future.

Nonetheless, Jones Lang predicted that demand would not be strong enough in the coming years to drive vacancy rates down.

Last month, developer Zhejiang Xingrun Real Estate, based in Ningbo in Zhejiang, defaulted on a loan, adding more evidence to the argument the property market was at increased risk of collapse.

Such fears appear well founded.

Over the past decade, delta cities have pulled out all the stops to launch one new town one after another. Located on the suburban fringes of each city, they are designed to accommodate millions of residents and attract more corporate investors.

The boom was based on officials' unshakeable faith that sustainable growth of delta cities would last for decades.

Developers splashed out billions of yuan to build office buildings, shopping malls and entertainment complexes in the new towns, believing an affluent population of 75 million would be enough to support their businesses. Unfortunately, reshuffles of municipal officials led to dramatic changes in urban development plans. New leaders would map out their own blueprints, earmarking more untapped land for new high-rise residential areas or industrial zones .

Incumbent officials had the clout to draw new investors by offering incentives such as tax breaks or promises of procurement contracts for manufacturers that set up in the new towns.

Officials took it for granted that the size and scale of the local economies would ensure success in a battle for supremacy among the region's rival cities.

As the fresh supply of office and retail space continues to soar across the delta, a similar rise in the number of white elephants seems inevitable.

It is also a strong reminder to Premier Li Keqiang, an advocate of rapid urbanisation. Without meticulous planning for a long-term development, urbanising the vast areas of the mainland can only lead to a glut of office and retail space, even in the prosperous Yangtze Delta.

Correction: an earlier version of this article misquoted Jones Lang LaSalle as saying occupancy rates for Grade A office buildings at the end of last year stood at 58 per cent in Wuxi, 30 per cent in Hangzhou, and around 30 per cent in other major delta cities. It should be "vacancy rates" throughout the paragraph.  

ren.wei@scmp.com

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This article is now closed to comments

Beaker
funny, Commies just project based on how a vacuum bottle fills effortlessly and project upwards based on the initial effortless fill-rate. Then, the bottle reaches equilibrium, and it takes real work to fill the rest, like by pumping. Then, the Commies are too lazy to pump, but all expected the filling to take place effortlessly. This is the state of China. Well done!!! The building was never about projected occupancies. It was always about the 5% leaked off for corruption, so they built and built to increase the value of the 5% stolen. Now, all that is transported via Union Pay to foreign accounts, there is nothing left in China but for the pain. People should string up such "leaders" and make examples of them. The country should extradite entire famiries of the corrupt, or grab them back Mossad style to face the music. But, does China have the balls to do that? Nope. They only go after those who are not friends of XJP.
johnyuan
Self restrain is not a Chinese characteristic. At the end, a happy party always ends with bad taste all over. It happens in politics, immigration, real estate, population, milk production, education and …….
newgalileo
Refreshing. In Beijing real estate companies still claim office space is scarce. I am not convinced, while it is true rents for offices and apartments have been climbing (and driving operational costs up to unsustainable levels). But many of the office (and apartments) are sitting empty as owners do not put them on the market.
 
 
 
 
 

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