China's real estate sector is already grappling with stagnation and significant debt burdens, but a new and more serious problem has emerged. The expiration of lease agreements for thousands of commercial properties is approaching in the country.
Uncertainty surrounding land ownership rights is undermining investor confidence, causing sharp declines in asset prices, and making the sale of these properties extremely difficult.
According to a Bloomberg report and estimates from Cushman & Wakefield, the lease term for non-residential properties valued at over 1 trillion yuan (equivalent to $148 billion USD) expires in 20 years or even sooner. This uncertainty, which has persisted throughout five years of real estate decline, is putting immense pressure on developers and investors.
In China, all urban land belongs to the state. Developers or citizens are not landowners; instead, they are granted the right to use the land for a specific period. These rules were established in the early 1990s. As lease terms expire, investors are confused about whether the contract will be renewed, what the required fee will be, and for how long the rent will be increased.
This crisis extends beyond documentation and affects transactions. According to Cushman & Wakefield, banks are reluctant to provide refinancing or new loans for properties with less than 10 years remaining on their lease. JLL notes that insurance companies and large investors prefer to invest only in properties with at least 20 years remaining on the lease.
Buyers are demanding substantial discounts given the potential future costs of lease renewal. Office space prices in major Chinese cities have fallen by more than 40% from their peak levels. Chinese developers have already declared defaults on debts amounting to approximately $130 billion USD, and the inability to sell assets complicates fundraising.
CBRE forecasts that by 2030, about 30 million square meters of office and retail space in 18 major Chinese cities will have less than 20 years of lease remaining. The actual figure could be higher as it does not include owner-occupied properties. Seeing the deepening crisis, the Chinese administration has begun taking measures. Following Guangzhou, Shanghai officials have also released a draft set of guidelines to determine the terms and cost of lease renewals in order to reduce market uncertainty.
