As Residential Property Boom Fades, Developers Look to Office and Retail
At recent meetings across China where property developers announced 2010 financial results, confident real-estate executives told their investors about an important, and collective, shift in business strategy: From this year forward, commercial projects would replace residential properties as the industry’s new focus.
The coordinated messages marked the first, formal indication of common interests toward the commercial market among key players in an industry that’s grown rapidly on the back of booming new-home demand.
“We will adjust our investment accordingly. In the past, our sales relied on residential homes,” declared Xu Rongmao, chairman of the developer Shimao Property Holdings. “We are now more involved in commerce and tourism.”
The commercial market is clearly smaller and probably less profitable than the residential sector in China. But surely the nation’s developers have thought out the future of commercial development, the opportunities as well as potential traps. Or have they?
Impetus to Grow
The central government has made clear that it wants to promote economic development by raising domestic consumption levels. That position, in turn, has raised investor confidence in spending and income growth among urban residents.
Real-estate developers, property funds and investors have been charmed by the story of China’s consumption growth as well.
Xu said the latest shift fit the pattern set by the government’s 12th Five-Year Plan, which has prioritized the service industry and advanced manufacturing over labor-intensive businesses and high-risk, low-return companies for the period ending in 2015.
An executive at one listed property firm told Caixin that, unlike the residential sector, the commercial-retail property market is not exposed to the government’s macroeconomic controls. This is a key factor that’s attracted developer attention.
Besides, the executive said, a shift from residential to commercial real estate goes with the economic flow encouraged by the government.
According to data from real-estate analyst Jones Lang LaSalle, property-industry investment in China last year totaled about 5 trillion yuan ($765 billion). Less than 30% of that amount went toward commercial projects — a ratio essentially unchanged from 2006 to 2010.
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