China’s real estate revival plan is threatened by confrontation over old neighborhoods

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The homes in Dragon Pearl Garden may have cracked pipes and sunken foundations, but the hundreds of people living in this faded Shanghai neighborhood have no intention of leaving anytime soon.

The government’s offer of 12 million RMB ($1.6 million) — three apartments worth four million RMB per family — is nowhere near enough to convince residents to leave. “I will stick to my house unless the government pays me 20 million RMB to move,” said a resident surnamed Wang.

The standoff highlights the challenges facing China’s plan to revitalize the real estate sector in part through the redevelopment of historic and often poorly maintained buildings in old neighborhoods, or so-called urban villages.

Its transformation into shopping malls, office buildings and residential apartments has for many years been a growth engine for the world’s second-largest economy, which is struggling to recover after Covid-19 restrictions were lifted. More than a quarter of China’s economic activity is related to real estate, but many debt-laden developers are struggling.

In 2015, Beijing’s efforts to redevelop these run-down neighborhoods helped offset a decline in housing sales. A real estate boom followed, as local authorities spent trillions of renminbi, backed by cheap loans, demolishing old apartments for redevelopment.

Displaced residents then went on a home-buying spree, spurred by compensation payments. Donghai Securities, based in Changzhou, estimated that China’s 21 largest cities had at least 10 million homes in urban villages as of the end of last year.

Government officials hope this redevelopment will now bring similar benefits. The State Council, or cabinet, said in July that the government would “actively” embark on the redevelopment of major cities as part of an effort to “boost domestic demand.” The People’s Bank of China said in a report that the financial system will “enhance” support for the project.

Old residential buildings are being demolished to make way for high-rise buildings in Shanghai
The conversion of old residential neighborhoods into high-rise buildings has been a growth engine for the Chinese economy © Johannes Eisele/AFP/Getty Images

The latest campaign could cover 35 cities and attract up to 9 trillion renminbi in total investment from developers over the next five years, according to an official at the China Development Bank, which has helped finance previous redevelopments. “This is the only bright spot in China’s economic stimulus, which has achieved little so far,” the official said.

Although Premier Li Qiang described the latest program as an “important measure” to revive the country’s sinking economy, economists are more skeptical. “Some old houses may be demolished and new apartments built, but the impact on the economy will be limited,” said Dan Wang, chief economist at Hang Seng Bank China.

Unlike the past, when developers bought up dilapidated housing in small towns at low cost and quickly turned them into upscale apartment complexes or shopping malls for huge profits, tenants are demanding larger amounts. The latest redevelopment campaign also focuses on the suburbs of major cities, many of which are owned by rural cooperatives, not the government, and thus qualify for lower compensation rates.

“Residents are seeking higher relocation compensation no matter where home prices go,” said James Wang, a Wuhan-based developer who has worked on redevelopment projects.

Residential complex in Nanjing
More than a quarter of China’s economic activity is related to real estate, but many debt-laden developers are struggling © AFP/Getty Images

To protect traditional neighborhoods, many cities have set limits on the number of old homes that can be demolished. The State Council in July asked local authorities to convert homes into affordable housing, which provides little, if any, profit margins.

These factors have made it difficult for private developers to make profits from projects that could generate high double-digit returns.

“We were once able to make a quick profit developing (urban villages),” said Wang, the Wuhan-based developer. “Now it takes much longer to recover the investment, and sometimes we suffer a loss.”

With private developers reluctant to enter the market, some state-owned developers and local government financing vehicles, which benefit from access to cheap credit, are encouraged to participate.

“We are doing this for political considerations, not economic considerations,” said an official at Hubei-based Xiangyang Xincheng Construction and Development Company, a local investment firm that last month borrowed 790 million renminbi from the Bank of China to redevelop a historic district.

However, as China’s economic outlook darkens, local loan funds are also grappling with an increase in debt payments and sluggish performance.

An executive at a state-owned development company in Xi’an, which two years ago lost more than RMB200 million in redeveloping an old town, said the government needed to “find a viable business model for regeneration (of urban villages).”

In Dragon Pearl, major developers such as Vanke and Country Garden have already backed away from the plan, according to Wang, the resident, who added that developers were not willing to pay what residents were asking for. Vanke and Country Garden did not respond to requests for comment.

Wang said the redevelopment “should not be done at the expense of local residents.” “Right now, the authority cannot displace us. I don’t mind waiting a few more years for a better compensation plan.

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