Shanghai Free Trade Zone: Potential impact on Shanghai’s property markets

Background
Shanghai officially launched its integrated Free Trade Zone (FTZ), officially known as China (Shanghai) Pilot Free Trade Zone, at the end of September 2013, bringing together its four bonded areas under one administration. The new “zone” exists primarily on paper, and is made up of four existing bonded areas: Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Zone, Yangshan Bonded Port and the Pudong Airport Free Trade Zone. The related policy reforms are intended to serve as a trial for national policy as well as a boost to Shanghai’s service sector.
A framework plan has been released, though details about implementation remain vague at this point. Specific rules are expected to be rolled out over the next year in phases. The most hotly anticipated and debated reforms are those aimed at the financial sector, which will allow the convertibility of the yuan and interest-rate liberalisation. The extent of these reforms, much less the actual methods of their implementation, is still unclear. More details are expected following the Third Party Plenum in Beijing in November 2013.
Despite the lack of clarity surrounding implementation, anticipation of the zone’s impact on Shanghai’s economy and real estate market is high. The potential growth in asset performance is significant for a number of real estate markets, including the office, industrial, residential, retail and hotel sectors, in both Pudong and neighbouring districts such as Yangpu and Hongkou.
Office
In the office property market, the establishment of the FTZ is expected to generate new demand from industries that will benefit from the policy reform, including the finance, professional services and trading sectors. The zone is also anticipated to make Shanghai a more attractive base for the regional headquarters and operation centres for multinational companies. The ultimate impact, of course, will be decided by the specific implementation measures of policy reform, and their ultimate impact on the economy.
That said, demand for quality office space in the FTZ, and particularly Waigaoqiao, will outstrip the current limited supply, which is generally composed of mezzanine floors in warehouses or small buildings attached to workshops. This demand is likely to spill over to surrounding areas.
Pudong will benefit the most from the FTZ, as all four existing zones are located in this district. Commercial centres in Pudong such as Sunland, Jinqiao, Zhangjiang, and even Puxi’s Yangpu district (all in close proximity to FTZ) are expected to absorb the majority of this spillover. Asset performance of the office sector within and/or close to the FTZ is projected to see steady improvement.
In addition, Shanghai’s finance sector stands to benefit greatly from the proposed liberalisation of interest rates and the convertibility of the yuan. Anticipation of these changes has already created growing interest in investment in Pudong’s commercial real estate market from domestic investors in recent weeks.
Industrial
The industrial real estate property markets in Shanghai’s existing bonded zones has been undergoing significant changes and upgrades in recent years. The additional stimulus from the Free Trade Zone plan will only speed up their development and evolution.
Waigaoqiao is expected to be the major beneficiary from the FTZ policy reform. The expected growth in demand from service sector companies for high-quality facilities will outpace the current supply. In line with an ongoing trend, vacated manufacturing facilities may be re-purposed as office space, though it’s still unclear if this activity will be led by the government or the market. Land prices, which are already relatively high in Waigaoqiao, will increase, with the likely effect that logistics companies will move to Lingang, where land prices are less expensive and there is much more land supply.
Residential
Anticipation of the FTZ’s long-term effects have already had a noticeable impact on the residential real estate market in nearby areas, and Chuansha, Waigaoqiao, Tang Town and Lingang New City in particular. The confidence of developers with available supply in these nearby areas have led the average new home price for these four areas to rise 7.8% between 1 September and 15 October, compared to the first eight months of 2013. This is more than double the growth rate for the entire city during the same period.
In Tang Town in particular, new home prices have spiked 45% since September, from an average of approximately RMB27,700 psm between January and August 2013 to RMB40,000 psm in September and the first weeks of October.
Despite this short-term speculative activity, long-term price growth for these areas will remain tied to fundamentals such as infrastructure, building quality, accessibility and nearby amenities.
Summary
The government’s launch of China (Shanghai) Pilot Free Trade Zone is China’s biggest step forward since joining the WTO in 2001. Though detailed policy guidance is still being formulated, the anticipation of the zone’s effect on some of Shanghai’s property markets has already begun to emerge and the potential impact on long-term prospects is significant. Colliers will continue to follow the new Free Trade Zone, and its effect on Shanghai’s real estate market, as it develops over the coming years.
For further information, please contact:
Lina Wong MRICS CCIM
Managing Director | East & Southwest China
Investment Services | China
Dir +86 21 6141 3600
Mob +86 139 1777 7166
Lina.Wong@colliers.com