Shanghai Free-Trade Zone Plans Spark Surge in Residential Prices

Home prices near an area that Shanghai has designated as a free-trade zone have surged 30 percent amid expectations the development will boost housing values, according to China’s second-biggest property brokerage.

Prices rose to 22,000 yuan ($3,595) per square meter (10.76 square foot) in Gaoqiao, in the city’s northeast, in the first two weeks of September, said An Tao, a manager at Century 21 China Real Estate. Sales climbed about 50 percent from the same period in August. The government said in an Aug. 22 statement that the State Council had approved the special zone.

“Home prices have risen a bit out of control in just two weeks,” said An, who has been working in the area for four years and whose team sold about 20 existing homes during that period. “Sellers raised prices as they saw news about the free trade zone.”

The 29-square-kilometer (11-square-mile) proposed free-trade zone in China’s financial center may allow freer yuan convertibility, liberalize interest rates and relax restrictions on foreign investment as part of Premier Li Keqiang’s drive to sustain growth by shifting the economy toward services and consumption from investment and exports. The zone may be opened officially by the end of the month, two people with knowledge of the matter said Sept. 14.

“A number of residential purchasers whole-heartedly believe something tremendous is going to happen,” Joe Zhou, head of East China research at broker Jones Lang LaSalle Inc., said in an interview in Shanghai. “Just the expectation of what may happen, not necessarily the policies, have already had an impact on the property market in those locations.”

The asking price for a 60-square-meter two-bedroom home in Gaoqiao is about 1.3 million yuan ($212,436), according to SouFun Holdings Ltd., China’s biggest real estate website owner.

Freer Economy

China’s biggest cities, including Shanghai and Beijing, have been driving a resurgence in home prices this year, as property curbs have failed to damp demand for homes even as the economy has been slowing. New-home prices in Shanghai jumped 15 percent in August from a year earlier, according to government statistics.

The Shanghai zone was approved by the State Council headed by Li on July 3. A draft plan seen by Bloomberg News shows the free-trade zone may liberalize 19 industries from banking to shipping and allow freer convertibility of the yuan, though the government hasn’t published details.

Li and his cabinet are considering the Shanghai policies ahead of a Communist Party meeting in November at which the leadership may expand on its plan for reducing the government’s role in the economy and financial system.

Trade Zone

The free-trade zone will cover four customs areas where goods stored are exempted from tariffs and value added taxes: Waigaoqiao bonded zone and logistics park, Pudong airport zone, and Yangshan port zone, according to the government.

Gaoqiao is the closest residential area to downtown Shanghai and has a Crowne Plaza hotel.

Most homes in Gaoqiao, near the Waigaoqiao free-trade areas, were built in the 1990s, while the land inside the zone has mostly warehouses, according to Centaline Property Agency Ltd., China’s biggest real-estate brokerage. Lingang, near the Yangshan port zone, has newly built government office buildings for customs and taxation, and shopping centers.

‘Key Beneficiary’

Home prices around the free-trade zone are lagging behind the average for Shanghai. Prices in Lingang rose in August an average 5.5 percent to 1,100 yuan per square meter, according to Century 21. Home prices in Shanghai rose 7.7 percent in August from a year earlier to 28,979 yuan per square meter, according to SouFun.

“Property would be a key beneficiary thanks to surging demand for offices and warehouses, which should drive the need for residential and retail malls,” Jefferies Equity Research Hong Kong-based analysts, led by Christie Ju, wrote in a research report Sept. 20.

Mall developers such as CapitaMalls Asia Ltd., Hang Lung Properties Ltd. and Sun Hung Kai Properties Ltd. are among the stocks Jefferies favors, it said.

Office Market

Citigroup Inc., HSBC Holdings Plc and Standard Chartered Plc are among financial institutions that have signaled interest in the free-trade zone.

It is too early to say how big an impact the zone will have on the city’s office market as no detailed plans have been announced, according to Jones Lang and Savills Plc.

The vacancy rate for offices in Shanghai fell to 5.2 percent in the second quarter, compared with 6.1 percent in first quarter, while rents for prime offices rose to 9.9 yuan per square meter per day, according to Savills.

The impact of the Shanghai zone on the property market may not be as clear as one-time events such as the Olympic Games in Beijing in 2008 or the World Expo in Shanghai in 2010, Liu Yuan, a Shanghai-based researcher at Centaline, said.

“The zone will be developed based on existing developments, while the Olympics or the Expo have brought along a lot of new infrastructure constructions,” Liu said.

China already has a financial zone in the Qianhai district of the southern city of Shenzhen, which borders Hong Kong. The area was created by the State Council in 2010 and the government said in June 2012 it would make Qianhai a test ground for freer yuan usage and capital account convertibility.

“There’s a lot of hype about it, a lot of support for it, and a lot of speculation that something great will come out of the Shanghai zone, said James Macdonald, the Shanghai-based head of China research at Savills. ‘‘It is definitely going to be positive for the city, but the question is just how positive will it be.’’

— With assistance by Bonnie Cao

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