Ghost Town

You will all have seen reports on China’s “ghost town” developments. The accompanying photographs usually show a bicyclist or farmer with a hoe in front of acres of empty high-rise apartments and vacant shopping malls. The story has been a favourite filler in the Western press for some years. The most frequently cited “ghost town” is Kangbashi New Town, near the coal-rich but water-poor city of Ordos in Inner Mongolia. In recent years, the list has extended to places such as Chenggong at Kunming and Tianducheng, a replica of Paris, in Hangzhou. And in the past few weeks, there has been plenty of talk of slowing property sales, a piling up of housing inventories and falling property prices. So what do the ghost towns look like today?

I started my trip from Changzhou, about 165 miles from Shanghai. I had decided to take an early-morning train. I boarded the high-speed train at a quarter past seven, and it arrived at five past eight. That’s nice, I said to myself. But it took another 30 minutes in a taxi to reach the new district of Wujing, where the projects I was visiting are located.

The first project I visited was Le Leman City developed by the Top Spring Group. It is a massive development with aggregate gross floor area (GFA) of about one million square metres, comprising residential flats and commercial facilities, including a luxury hotel. Once completed, the project should accommodate 7,000 families. When the first phase was launched in 2007, the average price was around Rmb3,000 per square metre. There are a few blocks on sale at present, and the average offer price is Rmb6,400 per square metre. The developer told us that most of the finished flats have been sold, but that the overall occupancy rate was about 65%.

What does the buyer get for his money? I soon discovered. The garden surrounding the buildings was quite nice. What surprised me, though, was the interior. It was just bare load-bearing walls, without even internal partitions. The developer told us that the interior walls were usually knocked down by homeowners when they decorated their flats, anyway, so there was no point building them in the first place! That’s right – all your money buys is a framed floor space.

I moved on to the next project, Magnolia Square, developed by the Greentown Group. This is a mega-development with a total GFA of 1.5 million square metres, which is going to accommodate about 10,000 households. Greentown is well known for its building quality and usually sells its property at a premium to its peers in the local market. The first phase of this project was on sale at an average price of Rmb7,500 per square metre. As I passed through the construction site to see the show flats, I was again impressed by the gardening works. There was even a swimming pool. But do ghosts swim, I wondered. On leaving, I noticed a couple taking wedding shots on the site (see the picture overleaf). Clearly, one person’s ghost house is another’s dream home.

A letter from China21 May 2014

China builds excellent models. Shame about the project names…

During lunch with some local property developers and property concerns were raised – in many cities there are unoccupied flats, unlet shops and empty office blocks. Were industry participants worried?

Although our local developers acknowledged the decline of sales in the first quarter and were cautious about the market outlook this year, their view of the “ghost town” phenomenon differed from the popular perception. They argued that because of the fast development of new towns and their lack of proper infrastructure and living amenities, the occupancy of new residential properties in some new districts was temporarily low. But as time passes and facilities develop, occupancy picks up. One of the speakers saw from my name card that I am based in Shanghai. “If you visited Pudong ten years ago,” he said, “even Lianyang Community could be called a ghost town. Today it is a heavily populated area.”

He is right. I remember, a few years ago, a British-themed development in Songjiang, a suburb of Shanghai, called Thames Town (China’s architects and developers have yet to find a new Chinese style and fall easily into pastiche). This was dubbed a ghost town in the press, but the situation is very different today. But that’s in Shanghai, of course. As new districts and high-rise apartment blocks mushroom in many second- and third-tier cities, I doubt that all these developments have been carefully planned with due consideration of market demand. Over a decade of double-digit economic growth in urban China has been forgiving of the “build it and they will come” method of property development.

The next stop was the spectacularly weird Tianducheng in the Yuhang district of Hangzhou. This development is known as the “Replica of Paris”, including its very own Eiffel Tower (see picture below).

After a two-and-a-half-hour bus ride, we arrived at Paris-en-Zhejiang. Strolling through the completed residential blocks, we met only a few babies with their grandparents. It was very quiet. The shops on the ground floor were mostly unlet and locked. On the other side, however, there are still vast constructions underway.

I went into the sales office and talked to the site manager. She told me that when fully developed this satellite town would have a total GFA of about 4.5 million square metres to accommodate around 100,000 residents. Currently, only a third of the site has been developed or is under construction. When the first arrondissements were launched in 2001, properties were sold at about Rmb2,500 per square metre. Properties currently on sale have an average price of Rmb8,000 per square metre.

Questions on occupancy were dismissed: “What we care about,” she said, “are sales, and more than 80% of properties launched have been sold so far.” She knew why this question was asked: “I know that some media reported this project as a ghost town, and I saw the pictures taken by journalists. They take shots under the iron tower, together with a few people farming on the idle land.” She continued as I tried not to smile: “But actually, the idle land was planned as a town square for commercial facilities. We are going to build it in the last stage. It has been left idle temporarily, and we allow our homeowners to farm on it for fun. You can go to see with your own eyes.” She seemed a little impatient.

We walked out into the aforementioned square, surrounded by residential blocks with the large Eiffel tower sitting proudly in the middle. The land was idle, with grass growing in wild profusion. Here and there, some sections were planted with vegetables and cereal crops. As some of the homeowners were actually farmers before they lost their land and moved into flats, it is no surprise that they have planted vegetables on the spare land.

I left the so-called ghost town before night fell, in order to meet a few local bankers, trust managers and other vampires for dinner in downtown Hangzhou. It took about 45 minutes to drive into the city centre.

One manager from Bank of China told us that his bank has not intentionally tightened lending to the property sector this year, in terms of either project loans to developers or mortgage loans to homebuyers. The bank perceived mortgage loans as low-risk and low-return assets. As mortgage loans are usually conditional on a 30% to 50% downpayment, the banker was not too concerned about homebuyers walking away from their mortgages.

Trust managers also seemed to be comfortable with the loans they have granted to developers. The reason given was that trust companies have developers’ properties under construction as collateral, with the loan-to-value ratio usually

set at about 50%. The managers believe that if developers have liquidity problems, they can sell properties to the market and get their money back, even if they have to cut prices by 30%.

So far then, the parties involved in this great Chinese building boom are putting on a brave face. But what happens as economic growth slows? The market does not lack demand, as China’s process of urbanisation continues. But this demand has been distorted by a number of factors. Flawed financial incentives for local governments and developers are a big part of the problem; chronically underfunded local authorities are dependent on the proceeds of big land sales to developers, and the officials involved have extracted benefits from the process. (On one project visit I was told I could not look at the block with the best view as it was “reserved for officials”.) Behaviours are likely to change with the inevitable rollout of a recurring, rates-style property tax. The poor planning of citizen services and amenities have also created many problems.

In addition, China’s emerging middle class is perhaps too comfortable investing in real estate. With high savings, and limited investment options, people often buy apartments in incomplete communities, merely expecting capital values to rise, or with the vague notion that they, or some relative, will live there someday. The consequence is a string of empty and deteriorating developments that remain speculative investments rather than real homes. As the level of leverage is low, this seems unlikely to result in a Western-style property crash. But for individual investors, the return on such property may prove insubstantial – indeed ghostly.

Wang Zhufeng

www.odfund.com