THE REAL ESTATE MARKET IN SHANGHAI,

ARE THERE ANY OPPORTUNITIES FOR INVESTORS?

 

By Hadar Sharan and Ellen

 

Due to its location on the delta, Shanghai has developed from being a small fisherman’s village to a flourishing modern city. For the last 200 years, Shanghai has been the gateway to China and has developed as an economic center.  Shanghai sports two international airports, The Shanghai Railway which is one of China’s ten railway hubs and Shanghai Port, not only being the biggest port on the mainland however its water freight forms the most convenient transportation system. Shanghai now comprises nearly 40,000 industrial enterprises, with about 4 million employees in more than 400 industrial sectors.

 

The influence of Western culture on Shanghai since the British and French colonials has contributed to the business environment and can be seen by the ease at which foreigners feel in the city. One could say Shanghai is not China as New York is not the United States. Shanghai and New York will be further compared below.

 

We should not forget the changes that China has undergone since its joining of the United Nations in the early seventies. Moreover, by joining the WTO, China has chosen the path of progress in world economics in order to generate investment and bring progress to the Chinese people.

 

As one of China’s major cities with a population of more then 20 million, Shanghai is transforming at a very high speed. From data accumulated over the past few years the following surprising developments can be observed.

 

  1. Last year, Shanghai’s GDP was USD 60 billion, an increase of 10.2 % on the previous year.
  2. As of last year, the average income per person per family stood at USD 1558, an increase of 9.9% on the previous year.
  3. Today the number of privately owned cars in Shanghai stands at 167,000 with that figure growing day-by-day. The total number of vehicles in Shanghai is in excess of 1.41 million.

 

In Shanghai, people are getting richer as is their consumption rate. The world’s free market would like China to adjust its currency’s exchange rate. However since the Chinese RMB is strengthening, the Central Bank of China are trying to keep the status quo in order to gain a few more years of foreign investment and development. Eventually this step will become imminent and we may then see China gradually adjusting its currency’s exchange rate. It would therefore seem to be a good chance to invest in China now just before such a boost occurs.

 

Shanghai is currently at a stage of development comparable to that of cities such as Taipei, Hong Kong, Seoul and Singapore around 15-20 years ago. Its epithet could fairly be “the tiger of the Far East” or indeed “the entire world”. We simply cannot monitor this progress without mentioning the real estate market.

 

Real Estate in Shanghai

 

The growth and consequent wealth of Shanghai has also given momentum to Shanghai’s real estate market. Many domestic Chinese investors from both within and without the city are now able to purchase new apartments located in new projects with the combined help of the government and banks who offer attractive loans of up 80% of the total property cost.

 

 

Although the percentage of foreign investors in real estate property has remained at around 2% of the market, the number of overseas buyers is growing, as is the number of high standard projects being developed. The increase in demand for properties has brought the price per square meter (m2) of development up and has even doubled it. The rise in the land’s value in preferred locations has had an impact as well. The following chart may help to explain this trend.

 

The following data is price growth in M2 recorded at one of the development companies.

 

Time of Record

Average Price M2

Minimum Price M2

Maximum Price M2

1/4/2001

USD$663

UDD$590

UDD$783

1/1/2002

USD$795

UDD$542

UDD$1181

1/7/2002

USD$904

UDD$904

 

1/10/2002

UDD$964

UDD$964

 

13/5/2003

UDD$1084

 

 

3/6/2003

UDD$1446

UDD$1084

UDD$1807

17/6/2003

UDD$1446

 

 

30/7/2003

UDD$1325

 

 

2/9/2003

UDD$1687

 

 

 

 

 

 

 

There are many presumptions with regard to Shanghai’s real estate development trend. Two or three years ago one may have heard an estimation that a bubble market would be created that would explode and leave a host of bitter investors. The local government is probably aware of such a possibility and is monitoring the symptoms of such a change. This certainly will happen but will it happen now or in 15 years time?  To that question, no one can give an answer. Under the assumption that Shanghai and China continue to grow, the next 5 years could bring a continuous increase in real estate prices and a growing demand for high quality properties in golden areas.  The private property prices in Shanghai are currently half or even a third of that of a similar property in Hong Kong Taipei or Tokyo, which leaves enough room for a growth in price.

 

 

It is estimated that the demand in Pudong’s financial area for office buildings will increase by 50% until the year 2007, which will probably have an effect on the demand for private property and leasing as well.

 

Today the income from realty rent is about 8% a year or even as high as 10%. The rent cost is comparatively high and may not rise in accordance with the future increase in the value of properties. In a few years time however, we may see a drop in the income from rent of between 5-7%. Therefore probably those who buy property within the next 5 years will retain high rent benefits, a rise in property value and earnings from the solidification of the RMB currency.

 

 

Shanghai’s developmental areas (Pudong & Puxi)

 

The changes in the real estate laws will have a big role to play in the future of foreign investment in Shanghai’s real estate market. About two years ago the Shanghai local government loosened restrictions on foreigners buying property and has already decided to provide equal investment opportunities for both locals and foreign investors.

 

The District of  Puxi

 

Thanks to its advantageous geographic location, Today Puxi has become an excellent sea and river port, boasting easy accesses to a vast hinterland. Shanghai is the only city, which was first to open the areas of retailing, banking, insurance and telecommunications.

 

By the end of the year 2001, the population of Puxi had grown to 13.2714 million (according to the permanent residence registration), which represents 1% of China's total population whereas the city’s total population stood at 16.74 million (including the floating population).

 

Between 1998 through 2002, total GDP and per capita disposable income increased by two digitals. By 2002, the GDP of Shanghai had reached USD 65 billion with per capita GDP standing at around USD 5000. According to expectations, by 2007, per capita GDP will be USD 7500. At the same time, the rate of unemployment will be between 3%-5% and the ratio of inflation below 2%-4%. (From www.smert.gov.cn)

 

Puxi is the economic and political center of Shanghai having a variety of comprehensive services ranging from banking, accounting, engineering, entertainment and telecommunications, etc.. Moreover, there are sufficient hardworking human resources with proficient working skills. According to the statistics, approximately 60 thousand foreign residents live permanently in Shanghai and the trend of this figure is rising. Its residents have become more open-minded and there are more and more foreign language speakers. Shanghai has always boasted itself as a shopper’s paradise. Since the reform and opening, its commercial development has accelerated. Based on the existing Nanjing Road and Huaihai Road commercial streets and Yu Garden Commercial City, Shanghai has continued to revamp the existing commercial facilities while building additional network of commercial facilities such as the  Shanghai Railway Station, Xu Jia Hui, and the People's Square Underground Shopping Mall, etc.. Furthermore, various scales of chained supermarkets are to be found all over the city.

 

In Shanghai, there are all kinds of housing options for working staff from foreign countries such as Hong Kong, Macao and the Taiwan regions. These options range from high standard villas to common apartments whereas the wide choice is sufficient to satisfy the various types of clients. However, the prices are very different. Whereas the monthly rent for a high standard villa is between 3,000-7,000 USD the monthly rent for luxury apartments is between 2,500-5,000 USD.

 

According to data obtained from the Shanghai Bureau of Statistics, Shanghai’s real estate development and construction will continue to expand in the future. From January to November last year, the amount of investment on real estate development was RMB 68.653 billion Yuan, which equals around 8.5 billion USD. The effect of this on arousing the rise of total investment cannot be ignored.

 

The District of Pudong

 

Pudong Introduction

 

Pudong New Zone is the east gate of Shanghai. A delta area facing the Shanghai center and located across the River, it is the out to sea main line to the East, with the Huangpu River to its West and neighboring Yangpu and Huangpu districts along the River. Pudong’s has a land area of 533.44 square kilometers and a permanent population of 1.63 million.

 

In the past, due to the lack of bridges and tunnels across the river, Pudong lagged far behind the old downtown of Shanghai in term of economic growth, though only due to a gap in the river. On April 18th, 1990, what the Chinese Central Government announced is planning to open up and develop Pudong. Since then, local economy has kept growing at a fast rate and in a healthy manner, with economic strength steadily building. Pudong New Area has become a center with new and high technology and advanced manufacturing processes. It is emerging as a new growth pole in Shanghai. This was seen as an opportunity to build Shanghai into one of the international economic, financial and trade centers and to regenerate the economy of the Yangtze River Delta and the whole Yangtze River Valley. This has also been a major strategic decision in continuing the social and economic progress of China.

 

Over the past ten years, the economy of Pudong has been growing at a good rate. Amazing changes have taken place in the general appearance of this new urban area. In 1990, at the early stages of the development of Pudong, the local GDP was a mere 6,024 million RMB Yuan, only 8.1% of Shanghai’s total whereas in 2000 GDP was 92,052 million RMB Yuan. The average annual GDP growth rate is 20%. The average annual GDP growth rate between 1992 and 1994 was 26.6% and between 1995 and 1997 it was 20.2%. GDP in 2000 grew by 13.0% as compared with that of 1999. In 2000, Pudong's GDP accounted for 20% of the city's total.

 

At present, the urbanized part of Pudong comprises 100sq. km., of which 60sq. Km is found  in the key development zones. A basic but complete range of trade and finance functions is performed at the Lujiazui Finance & Trade Zone where international finance institutions congregate. A concentration of new and high-tech businesses has emerged in the Jinqiao Export Processing Zone. Whereas the Waigaoqiao Free Trade Zone and the harbor area perform integrated services in order to carry out free trade, bonded warehousing, export processing, etc.. The Zhangjiang Hi-Tech Park is swiftly becoming a base for the development of hi-tech industries focusing upon modern bio-pharmaceutics and microelectronics.


Real estate industry in Pudong constituting 7.5 % of the local GDP has become a pillar of the local economy. With pleasant scenery and refreshing air, Pudong is now a top location for people to live and relax. It was awarded the title of the first National Garden City in the country. The public green areas cover 1,479 hectares, about 30% of the land area in Pudong. The Pudong New Area offers a whole package of incentives for buying houses and apartments. The completion of the Metro Line No.2, the new international airport and the Century Avenue has triggered a new high in  housing sales in the Lujiazui Area of Pudong. 77% of the office space in Lujiazui has been occupied. Some Grade A office buildings such as Merchants Tower and Thomson Center have achieved an occupancy rate of over 90 %.

 

Residential houses in Pudong have also been selling well. In the year 2000, a total of  30,212 suites and residential houses targeting domestic customers were sold with a total area of 2.8491 million square meters and sales value of RMB 7.954 billion. 22,563 suites and residential houses targeting domestic customers have been registered for sales, with an area of 2.60 million square meters and a total contracted sales value of RMB 8.791 billion.

 

Pudong's development is not only economic however can be described as an all-round advancement of its society. Extensive developments of cultural and sports facilities is growing with the rise in economy. Pudong is now more frequently than ever playing host to sports and cultural events, such as the arts festival, the fireworks festival and the square art events. There are many buildings and facilities, which have been purpose, built for such services e.g. The Shanghai Science and Technology Museum, The Yuanshen Sports Center, The Pudong New Area Library, The Oriental Art Center and Pudong’s New Area Children's Palace. Between 1990 and 2000, infrastructure construction became first priority in Pudong. 116.4 million RMB Yuan were invested into two rounds of infrastructure development. A multi-mode transportation network is now taking shape, comprising of air, ground, underground and water transportation facilities.

 

Air Transportation

 

Phase I of the Pudong International Airport has been completed. The total investment stands at RMB 10.9 billion.  Phase I covers 30 square kilometers of land area with a designated annual passenger flow capacity of 20 million and freight handling capacity of 750,000 tons. The airport was opened to traffic in October 1999. Since then, Shanghai has become the only city in China to have two international airports, connecting Shanghai with over 96 cities around the world.

 

Ground Transportation

 

The Huangpu River bridges, namely Nanpu, Yangpu and Xupu, have extended the Inner Ring Road and Outer Ring Road into Pudong. A highway network connecting the Yanggao and Zhangyang Road and Century Avenue as the main arteries provides swift transportation links within Pudong as well as between Pudong and other parts of Shanghai.

 

Underground Transportation

 

The parallel line of Yan'an East Road Tunnel and the Phase I of Metro Line II has been completed. Phase II of the Pearl Line began working in 2001 and was completed early in 2003. The line is 35 kilometers long, connecting Longyang Road and the Metro Line II with Pudong’s International Airport. On New Year's Eve of 2003, the world's first commercial maglev train began its maiden trip to Shanghai and opened a new chapter in railway history. The expected daily passenger flow is 40,000. People will enjoy a speedy and comfortable service as well as a great view along the line.

                                                                        

About 70 per cent of high-tech enterprises are located in Waigaoqiao, Jinqiao, Zhangjiang and Sunqiao, and this area has developed into a key high-tech industrialization and high-tech renovation model base. At the end of 2000, the Pudong New Area government carried out some preferential polices, such as a regulation to support the development of technology renovation organizations in enterprises. All this reflects the local government’s commitment in continuing to make every effort to provide better service and to push forward the integration of a threefold technological, industrial and skilled capital in Pudong.

 

Pudong’s New Area has become the new growth point for Shanghai. It is the focus and symbol of China's reform and opening up and has been given the role of the "locomotive" in the opening up and development of the cities along the Yangtze River. Pudong, backed by the solid economic strength and social cultural resources of Shanghai, shares such unique city advantages as a superb geographical location, convenient traffic conditions, well-trained human resources and strong industrial power. It is now widely acclaimed as "the gateway to Chinese economy", "a golden key to the Chinese market" and "the bridge linking China with the global economy".