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August 1, 2009

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Strategy cements optimism in realty

THE central government's recent decision to transform Shanghai into an international financial and shipping center by 2020 isn't likely to have much immediate impact on the local property market, but the strategy is expected to underpin optimistic sentiment toward the future of the sector.

"Shanghai already is the largest shipping center and financial center on the Chinese mainland, and the purpose of the announcement was to gain the support necessary at the state level to boost the city's economy between now and 2020," said Steven McCord, senior manager of research at Jones Lang LaSalle Shanghai, one of the major global real estate services firms.

"While it will take more time to see a clear link between the announcement and what is happening in the real estate market, we believe the most effect in the future will probably be in the office and residential sectors."

Foreign companies now dominate the premier office market in Shanghai, and the new policy will help create a stronger incentive for domestic companies from other provinces to set up offices in Shanghai. The Lujiazui financial district in the Pudong New Area on the east side of the Huangpu River remains particularly popular.

As China develops its domestic market, local companies will drive the premier office market almost as much as foreign enterprises by 2020, McCord said.

The high-end office market was harder hit than other sectors by the global financial crisis.

Average rents in top-priced office buildings fell 9 percent to 7.1 yuan (US$1.04) per square meter per day in the second quarter of this year, while vacancies climbed by 1 percentage point quarter on quarter to 14.1 percent, according to global property services firm Colliers International.

Lujiazui felt the slack demand particularly keenly, registering probably its worst performance with average rents plunging 13.5 percent from the previous quarter. That compared with a 5.9 percent decline in Puxi, the west side of the river, during the same period.

"The 'two centers' decision by the central government is expected to offer an extra boost to the city's office market in the medium to long term as more companies, especially financial ones, are set to either establish or enlarge their presence here," said Hingyin Lee, director of research and advisory for Colliers' east China operation.

In addition to the office sector, the residential market will also become more attractive to home buyers, both domestic and foreign, following the State Council announcement, industry analysts said.

In particular, confidence in the luxury market will be boosted, McCord said.

A decline in available residential building sites in downtown and an ever-growing number of higher-paying jobs may lead to demand outstripping supply in the luxury end of the market, driving prices higher over time.

High-end residential sales registered a substantial recovery in the first half of this year, when more than 4,800 units priced at 25,000 yuan per square meter or higher, changed hands.

That compared with a little more than 5,500 units for the whole of 2008, according to Danny Ma, director of research with CB Richard Ellis China.

However, during the same six-month period, the local supply of luxury units only hit 2,828, compared with 10,646 units for all of 2008, according to the company's research.


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