Shanghai property gets set for the next boom

PUBLISHED : Sunday, 19 December, 2004, 12:00am
UPDATED : Sunday, 19 December, 2004, 12:00am

Shanghai's booming property market is ready to get up another head of steam as the city threatens to eclipse Hong Kong as a financial centre, some analysts believe.

It is only a matter of time before China makes the yuan freely convertible, which would sideline Hong Kong and attract the wheelers and dealers directly to the northern power brokers.

When it happens Shanghai will be on track to become a super city, according to property analysts - more than just concrete and glass but a metropolis that blends culture, enterprise and the architectural glamour of its 1930s.

Investors who feel they have missed out on the Shanghai property boom after dramatic price appreciation in recent years should look ahead, says Andrew Ness, head of research at CB Richard Ellis. Shanghai ranks 21st among major cities in terms of most expensive retail rents, well behind Seoul, New York, London and Tokyo. With many newly wealthy Shanghainese climbing the social ladder, the city will close the gap with the elite over the next few years.

'Envisioning Shanghai 25 years hence, I see a city fully on par with Tokyo and in some respects surpassing Tokyo as an international financial and business centre,' Mr Ness says. 'It is inevitable that the importance of Shanghai as a financial centre, with a population which is more than twice that of Hong Kong, and a land area three times the size, will eventually come to equal and then surpass that of Hong Kong.'

The scale of the Shanghai's transformation poses a challenge to investors: how to uncover the bargains across the sprawling city and capitalise on rising land prices.

Despite the hype about China's over-heating property markets, Mr Ness believes the gentrification of the Shanghai- some would call it a yuppie makeover - is just beginning. What makes him optimistic is that the city has a good track record of preserving its past, and seems to be more at peace with its colonial history than Hong Kong.

'Shanghai, in producing such cutting edge developments as Xintiandi, has learned the lesson that the regenerated city had to appear fun, upbeat, secure and innovative if it is to compete against other cities attracting capital investment,' he says. 'And this lesson is currently being applied with considerable success to a wave of urban regeneration now under way along the Bund.'

By contrast Hong Kong tends to fumble the ball with its heritage preservation, most recently with the watered-down proposals to protect the Victoria Prison, not to mention the abysmal handling of the Marine Police Headquarters in Tsim Sha Tsui. More inclined to demolish, it is no surprise the smart money is heading north.

Central to the facelift for Shanghai is the regeneration of the Bund. The waterfront conservation project is the largest of its kind in the world. It is also the only one involving a central business district that never became derelict or abandoned. The strip includes 23 buildings raised by European colonial powers and which were generally used as banks or trading houses. They are all of the neocolonial style common to England in the late 19th century.

After the liberation, the buildings housed the offices of municipal government agencies and state-owned enterprises. Today they are all protected under the highest preservation orders.

By many yardsticks, the facelift is just getting under way. Apart from the success of M on the Bund - credited with starting the wave of gentrification in 1989 - and the more recently opened Bund 18, and 3 on the Bund, there has been limited conversion of buildings to mixed entertainment and up-market shopping complexes. Another project, 6 on the Bund, is now under conversion and scheduled to be completed next year. About 17 buildings remain which could face some degree of use conversion.

The former headquarters of the HSBC at 12 on the Bund is a candidate. Now occupied by the Pudong Development Bank, negotiations are under way to rent the sixth floor, including the domed ceiling, to a private operator for a restaurant and clubhouse. The rent is reportedly US$1 million per year for 15 years, with a 5 per cent upwards review every three years.

The biggest project in the central Bund area is the Waitanyuan. It occupies 17 square kilometres and contains the core of the Waitan Heritage Conservation District.

The Waitanyuan's value as a cultural and historical site attracted the interest of a joint development between the Rockefeller International Group and the Shanghai New Huangpu Group. The first phase, due to be completed within three years, will comprise the five-star Peninsula Hotel. The hotel will be constructed around the British Consulate Building. The second phase will take five years and involve urban conservation work ahead of the 2010 World Expo.

Mr Ness concedes part of Shanghai's success in preservation has to do with a less cumbersome public consultation process than Hong Kong.

The social impact of the preservation drive is not without consequences. In the past decade 2 million people have been relocated from Shanghai's urban centre to fringe areas. Over the next 20 years, an estimated 4 to 5 million residents will be following, resulting in a dramatic lowering of the population density in the nine inner-city districts which comprise Puxi. As the urban population declines, it is likely the old city will become increasing devoted to recreational, office and leisure activities.

'Along with this immense upgrading of the Shanghai central city area will come a monumental rise in ground rents and with it land values,' Mr Ness says. 'By the year 2025, there is no reason to imagine the luxury spas, restaurants and boutiques which will line Shanghai's Zhongshan East Road will command rents that are any lower than the Ginza area of Tokyo, Myongdong in Seoul, or Orchard Road in Singapore.'