China loosens policy on commercial buildings to reduce oversupply, but analysts sceptical

China officially allowed developers to convert commercial property into residential leasing units starting June this year as a way to ease the serious oversupply of commercial buildings, but analysts don’t see it solving the problem anytime soon.

While excess housing inventory has troubled the Chinese government since late last year, unsold commercial space could be a bigger headache.

By the end of May this year, vacant office building stock waiting to be sold stood at 34.4 million square metres, up 17 per cent from a year earlier, while that of commercial buildings rose 24 per cent to 152.2 million square meters, according to the National Bureau of Statistics. These figures compare to a 3 per cent growth in vacancy rates for unsold residential homes.

The situation has pushed the central government to finally allow developers to change the use of buildings from commercial to residential, a grey area that Beijing was not keen on touching for many years.

But analysts doubt if the policy support will have any immediate impact. “Many applicable commercial buildings have been already changed to residential use [and] the supply of new homes is very sufficient in most cities, so I don’t see that home rental demand will see a big increase that could help digest the commercial property stock,” said David Hong, head of research at China Real Estate Information Corp.

From the government perspective, it had hoped for a win-win result by boosting the home rental market to meet demand from new urban immigrants who cannot afford to pay soaring home prices, while at the same time reducing excess commercial property inventories.

In the past, many land parcels were sold on the condition that property developers would have to allocate 30 per cent of the area to commercial properties, which resulted in the oversupply, said Carol Wu, China property analyst at DBS Vickers.