Top 500 Companies and Foreigners Have All Left, Shanghai's Rents Have Plummeted! | by 700ETH | Jun, 2023 | Med...
On June 5th, a real estate industry insider in Shanghai appeared on Fuxing Middle Road, pointing to the deserted buildings on both sides of the street, “This place used to be packed with foreigners. Now, there's not a single foreigner around, only Chinese. All the foreigners have left.” Following this, he brought up the rent situation in Shanghai.
He said that in places like Mingyuan Century City, Jiali Garden, Huijing Garden, and Wutong Garden, the rent was usually tens of thousands per month, and the tenants were all foreigners. “These are the world's top 500 multinational companies. They're rich and spend company money. Now they're gone, and these houses are empty.
“ “So many houses are vacant now, but there's no demand, no new customers, because you can't replace these wealthy multinational companies. There's no way to fill these vacancies. Therefore, rents in Shanghai are bound to fall.” In the video, he also mentioned that a friend of his, who sublets properties, used to make a fortune, but now he's losing terribly with no tenants for his properties.
Real estate is an important pillar of China's economy. After three years of the pandemic, China's economy is rapidly declining, and the real estate industry is on the verge of collapse, with housing prices and rents plummeting drastically. Shanghai, being an indicator city for the property market, has seen a further decline in luxury housing prices and transaction volumes recently.
Industry insiders in Shanghai say that many foreigners have left as foreign companies move their headquarters out of Shanghai. Now, nearly nine out of ten rooms in areas inhabited by foreigners in Shanghai are vacant, and commercial office buildings are also experiencing the same situation. The market slump has exceeded expectations.
“There's no other way, the economy is bad, and foreigners have left… Rent is bound to fall,” he warned. “There's no other way, rents won't increase in the next few years, they might even continue to fall.” This video has received 15 million views within a day, and the publisher said on June 6th, “This video has had too much impact, and we worry about it causing negative effects on the public,” so they removed it.
Currently, the video is being widely shared on Twitter. Local real estate insiders say that the volume of second-hand home transactions in Shanghai has started to decline significantly this year, from a peak of 24,000 units in March to 15,300 units in May. According to local real estate agents, some newer neighborhoods have seen prices drop by about 5% to 10% compared to February this year, while older buildings have seen prices drop by 10% to 20%.
A video by “Uncle Han Talks Investment” on the NetEase WeChat public account says that the office vacancy rate in Shanghai is now extremely high. “Now the vacancy rate is extremely high. A friend of mine said that there's only one company renting in the office building near their company.
(03:17) A few weeks ago, I visited an older office building in Huangpu District. The location is excellent, right on Nanjing West Road, and you can overlook the Bund from the high floors. The price is also reasonable, but I found that the building was empty, with only a few companies visible on some floors.
“ Radio Free Asia reports that following the 20th Chinese Communist Party Congress, many Chinese tycoons have lost their illusions about the future and are urgently selling off their assets at low prices. In Shanghai, luxury houses are up for sale with prices plunging by 40%. Additionally, some Taiwanese businessmen have started to liquidate assets by selling off restaurants, hotels, and other properties.
Currently, rents are decreasing and vacancy rates are continuously rising in most Chinese cities. NetEase reported in March that rents have dropped in 342 cities in the first quarter of this year. NetEase quotes real estate agents as saying, “These past few months have been very difficult. There's no shortage of property, but there's a scarcity of tenants.
It's not just an issue in individual communities, but entire areas are having trouble renting out properties. Many friends are in the same situation, with the highest rent reductions at 20%, and still no tenants.” The report points out that this nationwide rent plunge is neither seasonal nor accidental.
The primary cause of this situation is the increasing difficulty for young people in China to earn money. Faced with layoffs and pay cuts, they have little confidence and have to consider cutting expenditures. As a necessity, rent is directly impacted. Let's take a look at the recent trends in the real estate market.
From 2020 to 2022, double-digit price declines have appeared in multiple areas. Many local governments have started to announce “limit drop orders”, hoping to use administrative orders to prevent the bursting of China's real estate bubble. Moreover, China's population structure is changing.
In 2022, China's population decreased by 850,000, marking the first negative growth in 61 years. This means the real estate market has entered an irreversible downturn. On May 8th, the mainland financial website reported that data released by the Zhongzheng Institute showed that from April 29 to May 3, the transaction volume of representative cities nationwide during the May Day holiday fell by more than 20% compared to the same period in 2019, before the pandemic.
Taking Beijing as an example, during the May Day period, the transaction volume of new homes fell by 65% compared to the same period last year. The performance in second, third, and fourth-tier cities was even more lackluster. The Financial Times reported on May 5th that house prices in many third and fourth-tier cities in China have seen a significant decline.
Particularly in the second half of 2021 and in 2022, the average price of second-hand houses in many cities has fallen by 20% to 30% compared to the peak in 2019. In some cities, the decline exceeds 30%, and the highest drop is over 50%. The report states: “In the past three years, trillions of wealth have evaporated from the people.
“ This kind of loss is undoubtedly painful for many residents and could directly affect their consumption behavior, thereby impacting China's economy and consumption recovery. The Business Times reports that overall, China's economic growth model, especially the dysfunction of the financial system, has made the overdevelopment of real estate go wildly out of control.
The report suggests that nearly every aspect of China's political economy, especially in terms of infrastructure construction, is under the tight political control of the Chinese Communist Party. This control disregards market mechanisms and distorts them, particularly in the real estate sector. With the excessive printing of money, the Chinese Communist Party has created and maintained enormous economic bubbles nationwide, including a massive real estate bubble.
Even after local Chinese governments frequently issued “limit drop orders,” the real estate market has shown no signs of the “soft landing” that officials had hoped for. Recently, rumors about a complete lift on purchase restrictions have been widespread. The purchase restriction order, originally implemented as a temporary administrative measure to control housing prices by curbing speculative demand, has dynamically impacted China's property market for over 12 years.
On June 6th, China Economic Times, a central-level media, published an article stating that real estate purchase restrictions should be timely adjusted until they are phased out. The real estate industry predicts that in June, the central and local governments are likely to accelerate the introduction of policies to “stabilize the property market” and restore market confidence.
However, how much longer can a real estate market sustained by administrative orders hold out? Additionally, China's property market has recently been in turmoil. Advertisements for zero and negative down payment deals, which had previously disappeared, have begun to “flood” major social media platforms.
Negative down payment has become popular in multiple cities, including Shenzhen, Foshan, Huizhou, Changchun, and Chongqing. Media investigations found a variety of underlying operational modes, including delayed payment, down payment loans, high appraisal loans, and a variety of borderline or illegal operations emerging endlessly.
It is worth noting that unlike previous “zero down payment” schemes, which were mostly marketing gimmicks in the primary market, real estate developers would lower the down payment threshold for buyers in the short term through installment payment, deferred payment, and other methods. Some industry insiders pointed out, “The essence of Chinese real estate is debt.
Residents emptied all their savings to make down payments and borrowed thirty years into the future, which led to the prosperity of the previous years. However, debts must be repaid. Anyone with basic life knowledge knows how painful it is to cut down on expenses to pay back the money borrowed, no matter how enjoyable the consumption funded by the loan was.
“ In an event that took place in Shenzhen, where negative down payment appeared, media reports mentioned a residential area called Guanshan Ruiyuan in Luohu District. Similar properties in the area are listed for 6.42 million yuan, with bank valuations at 5.7 million yuan. With too many properties, the owner planned to sell at a low price of 5.
2 million yuan, but buyers could borrow 5.7 million yuan from the bank based on the valuation price. In this way, not only would the buyer not need to make a down payment, but they could also get an extra 500,000 yuan as “renovation funds”. Therefore, this is essentially a desperate asset escape by the seller, cutting over a million yuan.
According to data from Shenzhen's real estate information platform, 3,192 second-hand residential properties were sold in April this year. This figure cooled down rapidly in May, with only 2,788 transactions. The actual situation might be even worse than the official data suggests. Some insiders mentioned that since May, new property sales in Shenzhen have been deserted, especially for the mid and low-end properties.
There are very few transactions of second-hand houses. Based on the current number of immediate orders, there might only be around 2,000 transactions in June. China's economic recovery is showing signs of faltering after the relaxation of its “zero-COVID” policy, with weak domestic demand and a surge in unemployment.
Despite the economic difficulties, Chinese leader Xi Jinping has repeatedly pledged over the years to “avoid and reduce real estate bubbles/speculation.” On May 30, Xi chaired the first meeting of the 20th Central National Security Committee, once again issuing a security warning and a supreme directive.
He emphasized that national security should adhere to baseline and extreme thinking, preparing to endure major challenges even in the face of turbulent waves. Some netizens commented that the economy is on a dead-end path because all viable alternatives have been extinguished. For instance, China should improve relations with the United States, yet it insists on antagonism.
The US, which has been searching for an imaginary adversary, is presented with one on a platter. Secondly, by promising not to attack Taiwan during his lifetime, Xi Jinping could immediately improve foreign investor sentiment. Both sides of the strait could enter a beautiful era focused on economic development.
Ignoring the economic situation while emphasizing the bigger picture every day, the big picture now has become a personal ambition, which is unchecked nationwide. Under such circumstances, there is no way out. Taiwanese senior analyst Xie Chenyan said, “Xi Jinping's insistence on a zero-COVID strategy will inevitably lead to a decline in domestic consumption or even economic stagnation.
During the process of deleveraging in real estate, the development of the real estate market will undoubtedly continue to shrink.” On June 7, Barron's reported that Desmond Lachman, a senior researcher at the American Enterprise Institute, warned that China's economic boom may have come to an end and could enter a “lost decade”.
In addition to China's failure to achieve a significant recovery after ending the devastating COVID-19 policy, the risk of bursting bubbles in the real estate and credit markets is a major contributing factor. Lachman suggested that those who do not believe in China's economic collapse need only recall last year's debt default by Evergrande and 20 other real estate developers.
Another fact is that China's house prices have been falling month by month over the past year due to the sudden halt in land auctions, causing some local governments to struggle with debt repayment. Additionally, China's youth unemployment rate has surged to a new high of 20.4%, adding further concern.
In the eyes of observers, the Chinese Communist Party's long-term maintenance of the real estate bubble is extremely foolish and dangerous. The blind expansion of real estate from megacities to county towns can stimulate the entire economy, but it will disrupt the normal operation of the economy, causing it to be hollowed out by the real estate bubble.
High housing prices lead to high production costs, causing the collapse of manufacturing industries and a large number of unemployed people becoming the country's biggest destabilizing factor, leading to social unrest, and inevitably sparking a serious economic crisis. On the other hand, once the huge bubble formed by China's real estate market is punctured, it will become a powerful political bomb, which could ignite a crisis in the CCP's rule.
Wen Guanzhong, a retired economics professor from Trinity College in the United States, has pointed out that China's real estate bubble is like a ticking time bomb, we do not know when it will explode, but it could happen at any time.
