The outlook for the office market in Suzhou in Jiangsu province - the first city to impose austerity measures to cool the overheated commercial property sector - is bleak, as new supply will reach a record high this year and next, analysts say.
Frank Chen, executive director for China at property consultancy CBRE, said the overall office vacancy rate in Suzhou was 20 per cent, but in the grade A segment it was 31 per cent last year.
"Hit by a historic high in new supply this and next year, the vacancy rate in the office market is going to climb higher in the city," he said in CBRE's Shanghai office.
An estimated two million square metres is scheduled for completion in the next two years, largely in the 288 square kilometre Suzhou Industrial Park (SIP), of which 80 square kilometres belongs to the China-Singapore co-operative zone.
Taking into account the 1.47 million square metres in existing stock, this would raise potential supply to 3.4 million square metres over the next two years, he said.
Suzhou has the ninth-largest new supply of commercial properties, including office and retail space, according to a survey of 20 cities by Insite China, a real-estate management company in Beijing. Nanjing in Jiangsu province tops the list, followed by Hangzhou in Zhejiang and Xiamen in Fujian.
However, Suzhou - about 35 minutes by high-speed train from Shanghai - takes up an average of only 100,000 square metres per year of new supply, Chen said.
"Although only half of the two million square metres may be completed according to schedule, the market will still be flooded with supply," he said. He expects the office vacancy rate to jump to 30 per cent in the coming two years if all projects are completed according to schedule.
A case in point is the completed grade A office project Harmony Tower. In the heart of the SIP, with offices on higher floors commanding a view of Jinji Lake, only 30 per cent of the space has been leased since it was ready for occupation a year ago.
"We have 70 per cent of the space still available for sale or for lease," a sales representative said last week.
"The rent and rent-free period are negotiable subject to the size the tenants require. Bigger sizes will get bigger discounts, but normally we will give a one-month rent-free period."
The space was going for 100 yuan (HK$126) to 122 yuan per square metre per month, she said.
The Suzhou government imposed measures last month to curb investment demand.
To deflate the commercial property bubble, the government ordered developers that win auctions for land designated for commercial purposes to hold 30 per cent for three years.
Zhang Ping, head of research at Insite China, said: "This is not a good policy to solve the existing problem. For projects that have already been finished, developers will now have to hold them themselves instead of selling them."
However, Powerlong Real Estate Holdings chief executive officer Hoi Wa Fong said: "It's a good policy to adjust market development, which is good for us. Without government control, there will be big problems."