China: Commercial Property
Commercial Property Market
In the early days of foreign investment into China, commercial property was tightly controlled by the government, with many investors being compelled to accept office space in designated and often unsuitable buildings. Factories and warehouses were simply unavailable, and incoming manufacturers had to build their own by agreement with local municipalities, often with involvement from Beijing as well.
The situation is very different today, with over-supply of offices, shops and industrial premises in a more or less free market where developers, both Chinese and foreign, have invested huge sums into purpose-built commercial real estate. Astonishingly, the building boom continued in China even during 2009, at a time when rents were falling quite dramatically and there was little take up of properties. Rents have since begun to recover, with significant net take-up in the first half of 2010. China is now said to have the largest commercial property market in the world. Commercial property investment in 2009, much of it through investment funds which were favoured by regulatory changes, is said to have been USD160bn.
Apart from office buildings and industrial parks, shopping malls have became a primary target for construction in the last few years, reflecting much greater freedoms for retail distribution by foreign-owned companies.
Despite improvements in the market in 2010, there is thought still to be substantial over-supply, with vacancy rates as high as 30% in the most important cities such as Beijing and Shanghai, handing a significant negotiating advantage to incoming tenants. In Beijing in particular the Olympics acted as a stimulus to development, particularly of shopping malls, and to some extent the same scenario is now being played out in Shanghai in anticipation of the World Expo.
The future for commercial property values in China is obscure. While economic growth is continuing at a fast clip (7.5% in 2012 est.), nobody knows how large a pile of dud real estate loans is sitting unrecognized on the books of the Chinese banks, which are not known for transparency even now that some of largest have had external flotations.
Despite the apparent ready availability of commercial space, there are still traps for the unwary tenant. Much space, and especially the cheaper types, may not have correct government authorizations for use by foreign-owned companies, and in some sectors authorization may be required from Beijing even when a municipality seemingly offers a cast-iron permission of its own.