21 June 2019

Heed warning on Shanghai commercial property bubble

Over the last two years, the Shanghai office of the China Banking Regulatory Commission had issued early warnings on the financing risks in the steel and copper sectors. It turned out the caveats were not false alarms. 

So when it recently issued a warning over commercial properties in the city, it would be wise for investors to take heed.

The Shanghai banking watchdog has alerted commercial lenders domiciled in the country’s economic powerhouse to the growing risk in the commercial real estate sector, China Business News reported, citing people with knowledge of the matter.

According to internal information, the total loan balance of the Shanghai banking system for 149 property complex developments in the city has exceeded 70 billion yuan (US$11.49 billion) as of September, up as much as 40 percent from a year ago.

A complex development, which covers shopping malls, offices, hotels and housing projects, is often a highly leveraged investment, the report said, citing a local banker.

Through bank borrowings, a developer with only 200 million yuan of capital can undertake a project worth one billion yuan. That would be fine if the property market is on a bull run.

However, the banking regulator reminds lenders to watch out for emerging signs of oversupply and market saturation in the city. High exposure to property complex financing could easily backfire on the banking system when the upbeat asset price and rental value run out of steam.

It is best to heed the warning. SOHO China Ltd. (00410.HK), one of the key commercial property developers in Shanghai, surprised the market last month when it put three unfinished projects up for sale. The unexpected move runs counter to the company’s “build-and-hold” model.

Could it be that the developer has sensed something is awry?

– Contact the writer at [email protected]




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