By Clare Jim and Elias Glenn
HONG KONG/BEIJING (Reuters) - A crackdown in Shanghai on commercial office projects converted into residential apartments will squeeze speculators, but could also hurt bona fide homebuyers already struggling with high prices and buying restrictions.
Some property developers in the city bought land zoned for commercial use as a cheaper alternative to plots meant for homes. Apartment blocks put up on these sites were consequently cheaper, and weren't regulated under home-purchase rules brought in to curb speculation and soaring prices.
The properties proved popular with investors and homebuyers shut out of the market by the buying restrictions.
But Shanghai last month rolled out a "clean up and rectify" campaign for commercial-turned-residential developments, following similar moves in the capital, Beijing.
While this may deter some speculation, it is likely also to further squeeze the mainstream housing market and push up prices.
"These types of apartments were quite popular in the past few years because of home purchase restrictions," said Clement Luk, CEO of East China at realtor Centaline.
"Clients like those who haven't lived in Shanghai for the required amount of years or buy-for-investment purposes go for these apartments. But with the new measures, demand from both real users and investors will be wiped out all at once."
In Beijing, sales of these so-called serviced apartments nearly tripled last year to more than 4 million square meters (43 million square feet), according to data from E-House China R&D Institute, accounting for a third of all residential sales, up from just 13 percent in 2015.
But sales there collapsed in April, down more than 98 percent year-on-year, while unit prices fell 31 percent in May, the E-House data shows.
The crackdown by Shanghai's housing authority - ordering developers and buyers to rip out fixtures such as toilets and kitchens before properties could be sold on - prompted a protest by hundreds of people last weekend after the market effectively froze. A similar protest is planned in Beijing this weekend.
The Shanghai measures have already dented buyer sentiment for similar developments in other Chinese cities in anticipation of a broader nationwide clampdown, said Centaline's Luk.
Developers in Shanghai have suspended sales of all related developments, including Hong Kong developer Sun Hung Kai Properties' (HK:0016) luxury serviced apartment project on the Huangpu River in Pudong, property agents said.
"Some cities over-planned their office supply; by converting some of this into apartments would have helped ease the glut," said Stanley Ching, head of Citic Capital's real estate group.
"But the new measures seem to contradict the policy intention to clear office inventory, and removing this extra supply of serviced apartments may further drive up home prices."
STILL UNCLEAR
Following the protest, Shanghai's housing authority said buyers of commercial-turned-residential properties could take delivery of them if they had already signed purchase contracts, while developers were told to accommodate buyers seeking to cancel contracts.
Some buy-and-hold investors, who want to rent out their apartments or live in them, welcomed this week's shift.
"It's OK for those of us who are holding on to them for the long term," said Ms. Ye, who said she was waiting to take delivery of a 50 square meter loft she bought two years ago that is still being built.
Others, though, say they still don't know if they'll be allowed to re-sell these properties or if they'll be compensated if they cancel the purchase now.
Developers and anyone looking to sell one of these properties soon are likely to be hit as they will be required first to restore residential apartments back to commercial use, and office space is worth up to a fifth less than apartments.
Some funds, too, are now reviewing their investments.
"(The measures) will have an impact on investment firms' strategy because many involve these developments, and the policy is likely to be introduced in other cities," said Ching at Citic Capital. "We're stalling some deal talks until we have a clearer sense of the policy direction."
Greenland Holdings (SS:600606), whose Beijing unit was punished by local authorities last month for promoting apartments built on land designated for commercial use, said it has a few developments in Shanghai that fall into the "clean up" category, and it will adjust its marketing strategy accordingly.