Soho China Sees Oversupply in Second-Tier Cities’ Office Markets

China’s second-tier cities have an oversupply of offices as companies halt expansion amid a slowdown in the world’s second-biggest economy, according to one of the country’s biggest commercial builders.

“There are a lot of empty buildings,” Zhang Xin, chief executive officer of Soho China Ltd. (410), said in an interview with Bloomberg Television today. “Concentrating in cities like Beijing and Shanghai is less risky, but when we go to second and third cities the demand instantly reduces.”

China’s economic expansion slowed to 7.5 percent in the second quarter, extending the longest streak of sub-8 percent growth in at least two decades. Soho China is the biggest developer in Beijing’s central business district, where office rents fell in the second quarter, the first decline in almost four years, according to property broker Knight Frank LLP.

“Companies are not paying as much to rent to expand,” said Zhang, who co-founded the company with husband and Chairman Pan Shiyi. “The slowdown is inevitable and is already happening.”

Zhang last year steered Soho China toward what it called a “build-and-hold” model from a “build-and-sell” model to take advantage of more stable and predictable rental income rather than sales proceeds.

The company said yesterday that first-half underlying profit more than doubled as it booked higher earnings from property sales, mostly from those made the year earlier.

As it moves to the new business strategy, Soho China will hold most of the unsold properties under development as self-owned investment properties and will also finish selling the “leftover” properties that were put on the market before it changed the business model, it said.

Soho China shares rose 1.3 percent to HK$6.50 at 9:33 a.m. in Hong Kong today. The stock has gained 4.5 percent this year, compared with the Hang Seng Index (HSI)’s 3.4 percent loss.

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.