Since home purchase restrictions (HPRs) were introduced in early 2011 across a number of cities in China, many investors have been channeling their cash into commercial properties which are not restricted by HPRs. In addition to strata title office space, commercial title apartments (which many developers market as serviced apartments) have been an alternative solution for developers to market property to investors. However, the demand for commercial title apartments has been relatively weak compared to residential apartments despite the fact that they offer the same functions from an end users’ perspective. This can be mainly attributed to the fact that tax liabilities between commercial title apartments and residential apartments are quite different. The table below is a simplified illustration of the tax difference.
In addition to the tax difference, required down payments are different as well. For commercial title apartments, the minimum down payment is 50%, compared to 30% for residential apartments. As illustrated in the table below, the much higher transaction taxes and down payment requirements for commercial title apartments erode investors’ returns substantially, which results in less investment enthusiasm from investors for commercial title apartments compared to residential apartments.
In most of the cities we track, we find more developers are considering offering commercial title apartments as a part of their office developments, which would lead to an oversupply of such properties in the coming years. In addition, most of these cities will continue to see large new supply of residential apartments over the following years, meaning that developers will face even greater obstacles to sell commercial titled units. In contrast, although the office market in many tier II and III cities across China is facing a short-to-medium term oversupply situation, many cities still lack quality office stock and the long-term prospect of the office market still looks positive as the service sector grows in size.
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