Summary of Key Points
As the real estate industry transitions from an era of incremental expansion (building and selling new houses) to a phase of managing existing assets, the "building economy" (which relies on commercial buildings to drive economic growth through optimized operations and industrial clustering) has become a crucial lever for real estate transformation and high-quality economic development. This approach not only addresses the issues of excessive inventory and high vacancy rates in commercial spaces but also supports the expansion of domestic demand and industrial upgrading. It also helps local governments reduce their reliance on land-based revenues. The article provides specific recommendations for guiding property owners through this transition, enhancing financial support, and coordinating with urban renewal efforts.
Why Should Real Estate Shift from "Building New Houses" to Focusing on the "Building Economy"?
For decades, the real estate sector has driven economic growth by constructing more new homes, which not only directly contributed to GDP but also boosted related industries such as steel, cement, and household appliances. However, this model is no longer viable:
1. Excess supply of houses: Urban population growth has slowed down since 2018, reducing the demand for new housing while the supply continues to exceed demand, leading to an overall surplus.
2. Declining industry contribution: The value added by the real estate sector as a percentage of GDP has dropped from 8.3% in 2018-2020 to less than 6% by 2025, indicating a loss of momentum in the incremental model.
3. New industries require new spaces: Rapidly growing sectors like technology, business services, and wholesale retail need high-quality buildings for offices and operations. Therefore, real estate must shift from focusing on construction to managing existing properties more effectively.
Can the Building Economy Solve the Problem of Excess Commercial Inventory?
Yes! The pressure on commercial inventory (such as office spaces and shopping malls) is significant:
- Long sales cycles: In first-tier cities, it takes an average of 87 months to sell out existing inventory, and in Shanghai, it can take up to 300 months (25 years).
- High vacancy rates: By 2025, the vacancy rate for office buildings is expected to reach 26.7%, with many buildings remaining unoccupied.
The building economy focuses on revitalizing existing buildings rather than constructing new ones. This is achieved through renovation and adjusting the use of space (for example, converting vacant offices into apartments, cultural and creative spaces, or experiential shopping malls) to restore the value of these assets and reduce inventory backlog.
How Can the Building Economy Help Expand Domestic Demand?
The government is aiming to boost consumer spending, particularly in services such as tourism, sports, education, and healthcare, which all require well-designed and engaging environments:
- Young people prefer trendy and immersive shopping experiences, and technology companies need buildings that offer shared workspace and industrial ecosystems.
The building economy can provide these high-quality spaces by transforming old buildings to meet the needs of new consumer trends and business models. Policies such as "urban commercial quality improvement actions" and "renovation of outdated commercial districts" aim to create more consumption opportunities and stimulate domestic demand through building updates.
Can the Building Economy Help Local Governments Reduce Their Dependence on Land Sales?
Yes! In the past, local governments relied heavily on land sales and property transaction taxes (such as deed tax and land value-added tax) for revenue. However, with the real estate market downturn, these sources of income have declined. The building economy can generate additional revenue through "holding taxes" (e.g., property tax):
- Property tax is based on the ownership of properties and is less affected by market fluctuations; by 2025, property tax revenue is expected to exceed 520 billion yuan, making it the largest source of local government income.
- Comparing with Japan, after the housing bubble burst, transaction taxes decreased by 40%, while fixed asset taxes (similar to property tax) remained stable, accounting for nearly 50% of local taxes.
Developing the building economy allows local governments to shift from relying on land sales to generating stable and sustainable revenue through property management.
How to Implement the Building Economy Effectively?
The article offers several practical suggestions:
1. Transform property owners from landlords to operators: Provide tax incentives for those who manage properties over the long term or attract businesses; increase property taxes for buildings with high vacancy rates or frequent transactions to encourage better management.
2. Enhance financial support: Encourage the issuance of REITs (real estate investment trusts) to allow ordinary investors to invest in commercial properties, helping owners raise funds, or offer favorable loans to operators.
3. Integrate with urban renewal: Allow for flexible changes in building use (e.g., converting offices into apartments or adding cultural and creative spaces), and provide more operating space in buildings that serve public services (such as adding community hospitals).
4. Address gaps in the service industry: Bring in international quality medical and educational resources to make buildings more attractive to consumers.
In summary, the building economy is about making better use of existing properties rather than constructing new ones. It represents a direction for real estate transformation and a critical tool for driving economic growth and improving fiscal health.