Shanghai's Real Estate - A Bubble To Pop?

The statistics tend to confirm what is visually obvious, that the real estate market in Shanghai is soaring. Property investment has risen 14.2% year-on-year to RMB 72 billion (EUR 8,1 billion), commercial and residential realty sales by 16.3% to RMB 81 billion (EUR 9,1 billion), together resulting in an overall increase in prices by 10%. This development has raised the concern that, once again, a bubble is forming in the Shanghai property market. Back at the height of the Asian crisis, 50% of Shanghai’s 3.2 million square meter capacity was empty, and Grade-A rents slumped by 75% during three years.

To prevent this from happening again, the government has toughened real estate regulations by increasing the minimum deposit requirement for mortgages, strengthening the control of land supply, and intensifying supervision over real estate loans. Moreover, the title deed tax has been doubled from 0.75% to 1.5%, and income tax deductions for home purchasers will end in May.

On the other hand, the real estate developers are playing down the talk of another bubble. They argue that with Shanghai’s economy flourishing, and the upcoming World Expo in 2010, it is natural that real estate prices are rising.

Even though capacities have grown as much as 14-fold since the early 1990’s, the total capacity today roughly only equals that of Frankfurt in Germany, a considerably smaller place than Shanghai. With an increasing domestic demand for real estate and the expected extension of lease-terms, rents will be less cyclical and there will be a downward trend in vacancy rates.

Whilst the debate will undoubtedly continue and a degree of consolidation in the near term likely due to slight oversupply, the market will stabilize in the mid- to long term. As such, there is, and will be, no bubble to pop.

» Latest News Index
» Subscribe Fiducia Newsletter