The Depressed Residential Market: "Easy to Give Birth, Hard to Raise" In Beijing, the rent-to-price ratio of residential properties to commercial properties is 1:2 or 1:3. Driven by this high profit margin, especially as the profit space for residential projects is being compressed, developers are inevitably shifting their focus to commercial real estate. Despite numerous similar failed examples, some commercial spaces with significant business value beyond the Third Ring Road have become fiercely contested territories for merchants. Experts believe that high profits are a major incentive for developers to shift towards commercial real estate. Currently, the cost of developing commercial real estate is about the same as residential properties, but the profits are much higher.
Case Study: SOHO Shangdu's Quiet Transformation
Zhang Kunyu stated that commercial projects differ from residential ones; it's not just about selling well but also ensuring there are tenants and consumers. In other words, "commercial projects" require time and nurturing. However, if management issues arise, the risks associated with commercial real estate far outweigh those of residential properties. According to Zhang Kunyu, General Manager of Beijing Zhongyuan Consulting Advisory Department, although the city has seen a large volume of commercial projects developed in recent years, and most have sold well, many have stumbled in the "nurturing" phase.
Under the halo of Pan Shiyi, SOHO Shangdu, less than a year after its opening, found nearly half of its shops deserted and those still open receiving almost no customers. Entering March, Pan Shiyi, Chairman of SOHO China, announced that SOHO Shangdu would move away from the previous model where shop owners operated independently. It would strengthen its commercial positioning through unified recruitment and operation, officially transforming into an "International Youth Creative Camp." Pan Shiyi hopes that by creating the "International Youth Creative Camp," it will reinforce the commercial positioning of the entire SOHO Shangdu, attracting target consumer groups. Merchants signing two to three-year leases will receive a six-month rent-free period, and the developer will compensate the owners through reduced property fees.
According to reports by the Beijing Evening News, from the earlier opened Jinyu Landa Island to SOHO Shangdu which has been operating for some time, and then to the newly opened Joy City... currently in Beijing, the rent-to-price ratio of residential to commercial properties is around 1:3. Driven by this high profit margin and the depressed residential market, more and more developers are shifting to commercial real estate, including the real estate giant Pan Shiyi who has joined the trend. However, industry experts warn that although commercial properties yield several times more profit than residential ones, if they are not managed according to market rules and properly "nurtured," the risks involved in commercial real estate are actually much greater than those in residential real estate.
Yesterday was the weekend, and the reporter observed that while the number of customers at SOHO Shangdu may not be as high as in some large malls, a unique small store owner said that the current foot traffic is better than before. Sometimes, weekday customers even outnumber weekends, as many people take advantage of their lunch breaks to visit.
Another reason is that current commercial projects, especially small independent commercial and community commercial projects, are often marketing-oriented, which is not conducive to adjustments during the "nurturing" process. There have been cases in Beijing where after commercial spaces were sold, small property owners struggled to operate them. Developers attempted to adjust the business types but, not being the owners themselves, found it difficult to make final decisions. Eventually, the developers had to repurchase parts of the properties to complete the adjustment and operationalize the project. For example, after the properties were marketed, small property owners managed individually, making it hard to establish a unified commercial positioning and atmosphere. If the developer manages the operations, without being the owner, their control and adjustment speed significantly decrease.
Analysis of Owners and Developers' "Same Bed, Different Dreams"
There are primarily two reasons why properties are not "nurtured" well: one is that Beijing's commercial projects are still in their infancy. Developers specializing in commercial projects lack the experience compared to those focusing on residential projects. Few developers have fully completed a set of processes for commercial project positioning, site selection, planning, leasing/selling, recruitment, and operation management. Additionally, given the long chain involved in commercial projects, the degree of professionalism required is very high. Any issue at any stage can lead to operational difficulties.
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