Shenzhen steps up urban redevelopment to tackle residential land supply shortage

The southern Chinese city of Shenzhen is getting more aggressive in launching urban redevelopment projects amid a severe shortage of residential land supply and surging home prices.

Such projects - which involve converting existing, often dilapidated, buildings into new homes - will become the most intense area of competition among companies eager to profit from the country’s most expensive property market, analysts say.

Shenzhen approved 91 redevelopment projects in 2016, the highest number in recent years, according to an official statement.

In the coming five years, it is aiming redevelop an urban land area of 30 square kilometres and renovate more than 100 old industrial districts and 100 urban villages, according to its 13th Five-Year Plan, a major economic scheme covering the years to 2020.

The plan aims to resolve the housing problem by building some 260,000 new residential apartments in the city centre and near railway stations, according to a statement on the government’s website.

“Urban redevelopment is going to be the major channel for China’s property developers to grab land in the future,” said Zhang Dawei, chief analyst with Centaline Property, “The traditional big players in this field are not necessarily going to be the winners of this game, but those who can gain the most trust from local governments and original landowners will benefit the most from those projects .”

Bordering Hong Kong, the once tiny fishing village has seen rapid economic growth since 1980 when it was designated as a special economic zone by late leader Deng Xiaoping.

Now a thriving technology hub, Shenzhen’s growing population and robust economy have boosted home prices, and it is accelerating schemes to renovate old urban areas to tackle the land scarcity.

Xu Qin, the mayor of Shenzhen, said last year that property prices have been sprinting up “too fast”. He said the government was speeding up the construction of subsidised housing for low income groups to try to stabilise prices within a reasonable range.

David Hong, head of research at consultancy China Real Estate Information, said lucrative redevelopment projects provide a rare opportunity for small real estate companies to grab parcels of land in prime locations and boost their brand awareness.

“More and more companies are eyeing these projects in Shenzhen,” Hong said. “Some non-property firms or current tenants may also want to buy the land to profit from the high property prices.”

However, the high returns come with significant risk for developers. Hong said redevelopment projects often involve prolonged negotiations, with local residents demanding high compensation for giving up their homes.

A smooth negotiation process depends largely on having the support of local officials, which adds to the political uncertainties of taking on such projects, he said.

In 2015, Kaisa Holdings Group, a top developer active in Shenzhen’s redevelopment, defaulted on its offshore bonds after the local government banned it from selling residential units, a move believed to be linked with a corruption investigation.

“A redevelopment project takes seven to eight years to complete,” Hong said. “There may be leadership reshuffles during that time. You never know whether the new officials will support you or not.”

Zhang said that any property developers that can balance the interests of local authorities with those of the residents who own the land that is being redeveloped would take the lead in the fierce competition for obtaining land resources.

“Shenzhen is likely to see more obstruction than other top tier cities in redeveloping old districts, as the original owners are mostly farmers, and the negotiation process might be tedious, while in Beijing and Shanghai the land is mostly owned by governments,” he said.

He said local governments are increasingly commissioning land developers to carry out urban renewal projects to avoid direct clashes with residents over the amount of compensation they receive.

Shanghai revealed its plan in December to renovate an urban area of 50 square kilometers over the next five years from 2017, mainly using a “demolish and rebuild” strategy in its key districts.

Beijing said it had redeveloped an urban area of around 18 square kilometers in 2015. It is aiming to renovate its more than 150,000 run-down houses in core areas such as the West District by the end of 2017.

Guangzhou has joined the party by rolling out plans to renovate its more than 300 square kilometers of urban land by 2020, according to the Guangzhou Daily newspaper.