CHINA - As warnings continue to be sounded about the bubble in China's housing market, real estate industry insiders are warning of another, but one that few people are aware of.
That bubble has formed in the market for urban complexes in second and third- tier cities. Urban complexes are modern developments covering large areas that usually bring together residential blocks, offices, shopping malls and entertainment facilities such as cinemas and clubs.
George Yeung, managing director in North China for Colliers International, said so many urban complexes have sprung up across the country that the market is almost at saturation point. Colliers International, based in Seattle, is one of the four biggest commercial property service companies in the world.
"If bubbles in residential properties burst, people can still sell them if the sticker price is low enough, because people always need a place to live," Yeung said. "But once the commercial property market crashes, nobody is willing to rent a shop that loses money every day, when there is no customer but accumulating rental and utility fees."
A report issued at a Chinese commercial real estate conference in Beijing this month suggested that the commercial property market in some second and third-tier cities has already shown signs of overheating. In the first half of the year, 4,496 plots of land for commercial purpose were sold, 53 per cent more than in the corresponding period last year, it said.
Urban complexes account for a significant proportion of those sales. In Hohhot, in the Inner Mongolia autonomous region, more than 30 urban complexes are being built for an area whose population is only 3 million. The problems that those numbers present become clearer when you consider a rule of thumb in the industry: an urban complex can have a direct influence on about 300,000 residents, which means three or four complexes would be enough for a city with a population of 1 million.
However, mini-cities are also expensive to build: a single urban complex requires at least several billion yuan, so if it does not succeed, the results can be ruinous for investors.What makes the proposition even more challenging is that most of the property developers investing in urban complexes often have a common ambition: to attract top international brands such as Chanel and Gucci to set up shop in their complexes.
"I'm really concerned about whether China's consumption power can support the expansion of so many luxury brands," Yeung said. "Especially when the new leadership is cracking down on extravagant government expenditure. Previously, 70 percent of these top brands were bought as gifts to deal with guanxi - a term which loosely means "connections" - and I don't think the money was from the buyers' own pockets"