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Investors told not to fret over empty offices

HONG KONG: Stephen Roach, Morgan Stanley's Asia chairman, has said investors should not worry about the vast amount of empty office blocks that are sprouting up across the mainland following last year's record bank lending spree.

Property developers are flush with borrowed cash after banks lent 9.6 trillion yuan (RM$4.64 trillion) last year, and this has led to an immense building boom.

In Shanghai, developers are building 3.6 million sq m of new offices, according to figures from property agency Colliers International. That is equivalent to 36 of HSBC's massive Hong Kong headquarters. In Beijing, where commercial property construction has been intense, 45% of offices in the central business district stood empty in the first quarter, real estate adviser Jones Lang LaSalle reported.

But Roach, who is one of Asia's most respected economists and not viewed as a China bull, said this was unlikely to become a problem.

"The big story in China in looking at property, infrastructure, urban construction is that it tends to be more forward-looking than similar activity in more market-driven societies," he said. He cited the example of Shanghai's Pudong financial district, where office vacancies peaked at 60% in mid-1997, the year most buildings were completed. Pudong was packed out by early 2002. "What looks empty today is likely to be inhabited tomorrow."

Jack Rodman, the president of Beijing-based distressed asset consultancy Global Distressed Solutions, questioned Roach's assumptions.

He argued that the early years of the last decade were a one-off boom for commercial property in Shanghai and Beijing. "This was when most of the global investment banks, accounting firms and law firms set up in China. That wave of new occupancy is unlikely to happen again."

Some economists are fretting the vast amount of empty property in the country may cause a banking crash, because developers who cannot rent out buildings could go bust.

Roach has said in the past, however, that most of last year's economic stimulus loans went to infrastructure projects including railways and roads, instead of property. He has argued that infrastructure loans are higher quality and less risky for banks than real estate debt.

Roach was speaking as he also announced he is moving his office base from Hong Kong to New York.

Roach, whose main role is to brief Morgan Stanley's clients on developments on the mainland, will continue doing that job. He is also joining the faculty at Yale University. – South China Morning Post

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