Tiny Bubbles

Let my contribution to the expanding body of “Chinese Economic Bubble” literature/postings be the following observation: commercial rents on Shanghai’s Hengshan Road have – over the last twelve weeks – quadrupled and even quintupled in value, forcing vacancies that are unlikely to be filled at the new prices. For those who don’t know it (most of my overseas readers), Hengshan Road is a busy four-lane boulevard that runs between two very important commercial sections of Shanghai. It is probably best known for a several block stretch packed with bars, many of which maintain thriving (ahem) side businesses. The following properties are located within the very heart of the street, and are currently available.

• Corner of Hengshan Road and Gaoan Road
• 170 m² – does not include the adjacent family-owned fruit stand.
• Price recently reduced from RMB 150,000/month (US$21,428/month), to RMB 120,000/month (Currently asking RMB 120,000/month (US$17,143/month).
• Prior to vacancy, the property was occupied by a Lawson’s convenience store and a coffee shop.
• Neighbors include four dive bars (three of which are, ah, reportedly involved in alternative businesses), a fruit stand, a pirate DVD shop, and a small family-owned office supply store. Nightly neighbors include three separate kebab stands run by migrants. Rumored rents for the other commercial tenants begin at RMB 10,000 (US$1428), and may reach as high as RMB 30,000 (US$4285).
• Located on first floor of run-down twenty-five story residential high-rise with large retiree population. One bedroom rents for expatriates available for as little as RMB 2700 (US$385).

• 385 Hengshan Road
• 130 m²
• Available for RMB 120,000 (US$17,145).
• Located in the middle of a long city block dominated by residences, handicraft shops, a post office, a Chinese law office, and one additional bar. Two luxury hotels focused on business travelers located across the street; several high government officials lives within a five minute walk; government retiree housing on next block.
• Prior tenant was a low-volume bar; no food service. Rumored rent was RMB 18,000/month (US$2571/month).

• 249 Hengshan Road
• Two luxury office spaces available (I am trying to obtain the area and will post once I have it.)
• RMB 500,000/month (US$71,428/month). For comparison, Sasha’s, a historic three-story bar and restaurant property (formerly a residence of Jiang Jieshi and Soong Meiling) is widely believed to rent for significantly less (according to a Shanghai F&B industry insider: “There isn’t a bar in Shanghai that could make that kind of rent.”).
• Conveniently located next door to the Hello Bar and its famously friendly hostesses. Connected to a high-end service apartment.

So why the run-up in prices along Hengshan Road? Knowledgeable observers of the situation claim that the recent arrival of Starbucks on the street, in a space that had been on the market for RMB 200,000/month (US$28,571/month) for more than a year. It’s unlikely that Starbucks paid that price, but – as a chain operation looking for brand identity on a busy street – it is certainly in a position to overpay the market. People knowledgable about the Hengshan Road property market generally acknowledge that certain key properties are undervalued by 50% – 75%. These same people are baffled – from a business standpoint – at the recent steep run-ups in rents. Nobody is surprised at the resulting vacancies. Everybody is curious to see how long the landlords (and their bankers) can stomach empty properties.