China property

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

More needs to be done to allow owners to change the usage of existing properties, analysts say

PUBLISHED : Monday, 04 July, 2016, 3:40pm
UPDATED : Monday, 04 July, 2016, 10:31pm

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.

“The stock is huge and not all kinds of commercial buildings can be converted to apartments,” she said, taking high-end office buildings as an example, which were not a match for the ordinary residential market given their location, facilities and cost.

James Macdonald, head of Savills China Research echoed the view, saying the issue depends on the cost of renovating a commercial building into a residential unit and the potential return that the landlord could receive.

If no departments take responsibility the new policy will hardly take effect
Zhang Hongwei, Tospur Real Estate Consulting

At present, residential leases for most of parts of China are relatively low compared with the potential outlay to convert a commercial premises, which could mean landlords would rather leave properties vacant than change the usage. However, in top-tier cities where residential rents are higher there may be a greater incentive for landlords to convert buildings, especially in more central locations.

“A way to encourage landlords to convert stock could be with subsidies,” Macdonald said.

Analysts pointed out that the new government policy lacks details. Zhang Hongwei, research director at Shanghai-based Tospur Real Estate Consulting, said there are currently no specific official departments to guide land owners through the detailed procedures, such as how to pay back the land price difference to the government.

“If no departments take responsibility the new policy will hardly take effect,” he said.

Going forward, Macdonald said more freedom should be provided to owners to change the usage of existing properties as long as top-up charges are paid and housing codes adhered to.

“As cities evolve, the use of properties should evolve to accommodate changes in needs,” he said,

“Eventually we could see conversions such as vacant downtown retail premises converted to logistics facilities for e-commerce platforms. ”