Wednesday, 25 May 2016

Housing crisis in China’s ‘Silicon Valley’: Huawei, other hi-tech giants head for cheaper cities as rising costs deter talents

Home prices in Shenzhen surged almost 50 per cent last year and are now more than double those in provincial capital


Guanyu said...

Housing crisis in China’s ‘Silicon Valley’: Huawei, other hi-tech giants head for cheaper cities as rising costs deter talents

Home prices in Shenzhen surged almost 50 per cent last year and are now more than double those in provincial capital

Celine Ge
25 May 2016

Shenzhen, the southern city known as China’s Silicon Valley, could be losing its lustre due to a housing affordability crisis much like the one that struck the American original.

Led by tech behemoth Huawei, talent, resources and money have been flowing out of Shenzhen to cheaper locations, in particularly Dongguan, about an hour’s drive north.

Nanshan, in south-western Shenzhen, has been the breeding ground for its hundreds of hi-tech start-ups and listed companies, housing the mainland’s top innovation powerhouses such as Tencent and ZTE. However, its prohibitive property prices are scaring off talent and causing a headache for young hi-tech firms looking to expand their operations.

It’s a situation that has startling parallels with the plight of workers on low incomes in Silicon Valley, California, due to what has become known as the Facebook effect, where nurses and firefighters have been priced out of the local property market.

David Huang, co-founder of Sleepace, which develops sleep-quality trackers, has seen his five-man start-up, launched five years ago, become a firm with 81 employees that sells its patented gadgets in more than 60 countries.

After receiving second round funding of 44.06 million yuan two years ago, the former Peking University student moved his company’s headquarters from a 250 square metre warehouse to a modern, prime office at the centre of Nanshan’s hi-tech industrial park.

The 32-year-old saw his firm’s strong growth as paving the way to a public listing in four years. But his ambitions have been increasingly overshadowed by the difficulty he has encountered in attracting and retaining good staff.

“About 30 per cent of my time now is devoted to hiring, while salaries are eating up the lion’s share of our revenue,” he said.

Huang raised pay rates by 20 per cent last year, in large part to help his employees deal with rapidly rising rents.

The cost of renting a home in Shenzhen climbed 23 per cent last year, data from real estate agency Homelink showed, with those in Nanshan district jumping 46.2 per cent year on year to top the list.

While many real estate developers in second-tier mainland cities are still struggling to trim bloated inventories, Shenzhen made global headlines last year for having the world’s fastest-rising house prices according to real estate firm Knight Frank. They surged almost 50 per cent last year to an average of 31,425 yuan a square metre, more than double the average in Guangzhou, another mega city and the capital of Guangdong province.

“The housing market here is crazy,” said Christopher Balding, an associate professor at Peking University HSBC Business School in Shenzhen. His family has been renting a flat since moving to Shenzhen more than six years ago and he has no plans to buy a home.

Just a few blocks away from the fast-food restaurant in a bustling Nanshan shopping complex where Balding was speaking, a 130 square metre flat in the Southeast Gate residential compound was priced at 10 million yuan. For the same money you could buy a lavish, three-storey villa in Guangzhou.

That is despite the fact that the average monthly salary in Shenzhen – 7,631 yuan according job searching site – is only 10 per cent higher than the average in Guangzhou.

Shenzhen, a hub of entrepreneurship that is home to the mainland’s only Nasdaq-style stock exchange, has created a large number of millionaires and its maturing capital markets have also become a big draw for investors from other Chinese cities or overseas.

Guanyu said...

But the continuous flood of capital into the city in search of good, investable assets sparked a property market boom, said Jin Xinyi, a delegate to the Shenzhen city Chinese People’s Political Consultative Conference, while the government failed to boost land supply.

To save money, most of Sleepace’s employees choose to live in the city’s outlying Baoan and Longhua districts, meaning they have to spend between 80 minutes and two hours travelling to and from work every day.

“It is getting harder to get hold of ideal job candidates, and what we can do is to offer higher salaries,” Huang said.

Some job applicants may opt to accept offers in cheaper and smaller cities, while others prefer offers from Chinese internet heavyweights Baidu, Alibaba and Tencent – collectively known as BAT – if they choose to remain in Shenzhen because they are big enough to be able to provide their employees with generous housing allowances.

Tencent is headquartered in Shenzhen and Baidu and Alibaba have set up key offices in China’s hi-tech hub.

However, even those working for the internet giants are struggling to cope with Shenzhen’s housing bubble.

Jack Li, who has worked as a software developer at Tencent for five years, said that if his family of three wanted to settle down in the city in the long term, the only option would be to apply for government-subsidised housing.

“But the chance is too slim as there are too many people sharing the same thinking. Even if we can afford the down payment for a two-bedroom flat with the help of our companies and parents, we might well have to spend the next 20 years paying off mortgages,” he said, adding that would leave them with little discretionary income.

The couple, who make more than 40,000 yuan a month between them, would see their monthly budget more than halved and their quality of living fall drastically if they decide to purchase a two-bedroom flat in Nanshan district.

Since the arrival of their first child, Li has been discussing with his wife about moving back to his hometown in Changsha, the capital of central Hunan province, where a flat in a top location would cost only about a fifth of one in Shenzhen.

He said some of his colleagues were thinking of relocating to Tencent’s office in Guangzhou, where education and medical services were as good as, if not better than, Shenzhen’s but the cost of living was significantly lower.

The 30-year-old is among a growing number young research and development (R&D) professionals in Shenzhen’s hi-tech sector who are seeing their dream of owning a home collapsing despite earning a monthly income almost triple the city average.

In a poll of more than 2,000 Shenzhen residents conducted by media outlet this January, 35 per cent of respondents said they planned to move to Guangzhou, more than the 34 per cent who said they would remain in Shenzhen.

That must be a worrying trend for Shenzhen party chief Ma Xingrui, a former aerospace scientist who was appointed just over a year ago, as he maps out his blueprint to “deepen reforms and enhance innovation’s role in bolstering the economy”.

Since the late 2000s, the low-end manufacturing sector that contributed heavily to the city’s economic success in the 1990s and 1980s has been disappearing due to rising wages and the Guangdong provincial government’s pledge to “climb up the value chain” from low-value-added goods to hi-tech products, and from manufacturing industry towards services.

However, Jim Li, assistant chief analyst at leading hi-tech trade publication Electronics Supply and Manufacturing – China, said it was not only the shoemakers who were looking to move elsewhere, but also some of the city’s leading hi-tech giants.

In Longgang, a major industrial district of Shenzhen that is home to Huawei, the number of employees of firms with revenue of more than 200 million yuan a year slid by 10.5 per cent last year, according to official figures.

Guanyu said...

The world’s third-biggest smartphone maker by shipments has been mapping out a vast industrial park at Songshan Lake in southeast Dongguan since early this decade and bought more than 11 hectares of residential land in the area last year.

Songshan Lake’s management committee says Huawei will relocate the global headquarters of its consumer business arm to Dongguan after the project is completed next year.

“Dongguan’s Songshan Lake ... has a pleasant environment and much lower home prices as a place for our staff to settle down and work happily,” Yu Chengdong, the chief executive of Huawei Consumer Business Group, said in a Weibo post in 2013 explaining the tech giant’s decision.

Dongguan is now home to 7,638 newly registered hi-tech businesses, almost double the number in 2012 when the local government launched an all-out effort to cultivate high-value-added industry.

“The flows of talent and businesses from Shenzhen to Dongguan appear to have speeded up over the past two years and the momentum shows no signs of losing steam,” said Li Lixun, dean of Sun Yat-sen University‘s school of geography and planning.

Apart from Huawei, other Shenzhen hi-tech giants moving their R&D offices to Songshan Lake include DJI, the world’s biggest consumer drone maker, motion controller producer Googol Technology and emerging tech conglomerate Kuangchi, which was established in 2010.

Long Long, director of industry research at the China Development Institute, said young businesses in Shenzhen were finding it hard to scale up because industrial estates were being converted into more profitable residential properties.

Kuangchi chairman Liu Ruopeng warned the Shenzhen People’s Congress last year that home price fluctuations would “certainly limit the growth of emerging hi-tech firms like Huada Gene, DJI and Kuangchi”.

“Will Shenzhen still be a breeding ground for great innovative firms after 2015?” he asked.

ESM’s Jim Li said rising living costs would drive the major hi-tech electronics firms out of Shenzhen, leaving only their “most value-adding” R&D headquarters in the city.

Shenzhen CPPCC delegate Jin, who is also the vice-president of Qianhai Finance Holdings, said: “The city will surely enter into trouble if even relatively high-income software developers from Tencent cannot afford a flat.”

One threat posed by the disappearance of Shenzhen’s leading manufacturers is the loss of a key source of government revenue.

Founded in Shenzhen 29 years ago, Huawei has always been among the city government’s two biggest taxpayers, with its often upbeat earnings providing a much-needed boost to flagging regional industrial production.

“Were it not for Huawei, all of the industrial data in our district points to an increasingly tough business environment,” Longgang district’s statistics bureau said a report released in January.

While both the property and finance sectors registered double-digit growth last year in their value added to Shenzhen’s gross domestic product, the city’s factory output grew only 7.1 per cent year on year, with 3.3 percentage points contributed by Huawei alone, official data showed.

Some pundits fear Shenzhen may share a similar fate to Hong Kong, as soaring costs hollow out the city’s real economy and leave it over reliant on the finance sector – already the second ranked driver of Shenzhen’s economy.

But Shenzhen’s capital market still lags behind its Hong Kong and Shanghai counterparts.

“And a dying hi-tech sector would hurt the corporate banking business that is essential to the city’s finance industry,” Jin said.