Written by: Leju Finance, Wang Min

The "Commercial-to-Residential" conversion has broken the ice.

On July 8, the Kunming Municipal Government's official website released the "Policy Measures for Optimizing the Steady and Healthy Development of the Kunming Real Estate Market".

The measures clearly require suspending the supply of new commercial and office land, and allowing applications to adjust the planned land supply to residential land according to procedures. Enterprises are allowed to apply for reasonable adjustments to planning conditions and design requirements for land already sold, to better adapt to market demand.

On July 2, Changsha issued the "Notice on Supporting the Adjustment of Apartment-like Residential Commercial Housing to Residential Housing".

The notice clarifies that Changsha has ceased planning approvals for new apartment-like residential projects within the municipal jurisdiction. For apartment-like residential commercial housing projects that have completed the approval of the master plan but face difficulties in development and sales, under the premise of ensuring the capacity of public service facilities and basic supporting facilities, they can be adjusted to residential housing according to regulations and procedures after feasibility studies.

Changsha stated that this move is also to support enterprises in revitalizing idle stock land and accelerate the destocking of apartment-like residential commercial housing.

Yan Yuejin, Research Director at E-house China R&D Institute, said that Changsha's "Notice" is the first destocking innovation policy in the second half of the year, with great enlightening significance.

Li Yujia, Chief Researcher at the Housing Policy Research Center of Guangdong Urban Planning Institute, also believes that this means that planning and design conditions, including non-residential land, can be reasonably adjusted to encourage enterprise development. "Changsha has not only made adjustments to land use but also made adjustments to existing buildings under the policy guidance of destocking, which is a significant breakthrough."

According to CRIC statistics, Changsha's apartment market supply increased by 30% year-on-year in June, with two projects, Wanxiang Futai and Blueray Yongjinfu, obtaining permits and entering the market for sales. However, transactions fell by 66% year-on-year, and the average transaction price decreased by 2% year-on-year. Poor sales and an extended inventory cycle forced a batch of apartment-like residential projects in Changsha to sell at discounted prices to recoup funds.

In Li Yujia's view, for cities similar to Changsha where non-residential projects are oversupplied, if apartments can be adjusted to residential housing, they will be an important source of affordable housing. Local acquisitions of stock non-residential projects can not only solve the source of affordable housing but also achieve the goal of destocking and stabilize the commercial housing market.

Earlier, on June 25, the Wanning Municipal Government Office of Hainan Province issued the "Work Plan for Promoting the Destocking of Commercial and Office Commercial Housing". The plan states that under certain preconditions, commercial and office commercial housing is allowed to be managed with reference to residential housing, and purchasers of such commercial housing can enjoy the same treatment as residential housing, such as nearby schooling for family children and equal charging standards for water, electricity, and gas.

Regarding this policy adjustment, the work plan states that to promote the destocking of commercial and office commercial housing projects in the city and prevent and resolve real estate market risks, corresponding preferential measures will be implemented for commercial and office commercial housing across the city in accordance with the working principles of "adapting to local conditions, gradual advancement; being proactive and prudent, acting within one's capabilities; one building, one policy, overall consideration".

The issuance of this plan indicates that Hainan's nearly three-year-old policy of "strictly prohibiting commercial-to-residential conversion" is showing signs of breaking the ice.

It is reported that in October 2021, the Hainan Provincial Department of Natural Resources and Planning and other departments issued the "Opinions on Strengthening the Whole-process Management of Commercial and Office Construction Projects". The opinion stated that transforming commercial and office projects into "residential-like" projects with long-term residential functions affects the basic functions of public service facilities. Because these products are not affected by Hainan's real estate purchase restriction policies, there have been phenomena such as irregular sales, false propaganda, and misleading home buyers by development enterprises, impacting Hainan's real estate market and affecting the implementation of real estate policies. Therefore, it is resolutely necessary to curb all kinds of real estate behaviors that indirectly develop "residential-like" projects in the name of construction and regulate the order of the real estate market.

Relevant analysts believe that Wanning's pioneering breakthrough of the "red line" prohibiting "commercial-to-residential conversion" policies is a positive exploration and attempt to destock commercial and office products in Hainan.

It should be noted that in previous years, apartments were directly banned in many major cities.

Since Beijing issued regulatory policies for commercial and office projects in March 2017, Shanghai, Guangzhou, Shenzhen, Chengdu, and other first-tier and some hot second-tier cities followed suit. By August 2019, when Xiamen issued the strictest "ban on apartments," "commercial-to-office" and "commercial-to-residential" conversions were completely eliminated.

Zhang Hongwei, Founder of Jingjian Consulting, said that when talking about real estate destocking, we generally associate it with residential destocking, but in fact, the pressure to destock commercial and office properties is also very high. Now that Wanning and Changsha allow the conversion of "residential-like" properties with commercial and office property rights to residential property rights, this is a significant breakthrough. He suggests that more cities with commercial and office inventory pressure follow suit.

According to the CRIC Research Center, commercial real estate in Chinese cities at all levels has experienced two rapid development stages from 2005 to 2008 and from 2010 to 2013. The building economy has become the most important card for local governments, and the desire for economic data has led to the construction of a large number of office buildings across the country.

In addition, two plots in Shenzhen's Houhai area have also announced "commercial-to-residential" conversions.

On July 7, the Nanshan Administration of the Shenzhen Planning and Natural Resources Bureau issued a notice stating that to increase the supply of residential land and promote a balance between jobs and housing in the Houhai area, it plans to adjust the planning of the DU10 and DU13 development control units in the statutory plan of the "[Houhai Bay - Dongjiaotou Area]" after review by the planning authority.

The planning shows that the dominant functions of both the DU10 and DU13 units have been adjusted to "commercial service land + Class 2 residential land (C+R2)."

Industry insiders predict that these two plots are likely to trigger a new round of bidding fever among real estate developers, and with the development of these plots, new high-end residential projects may be added to the Shenzhen market.

However, there are also cities tightening their grip and showing zero tolerance for new "commercial-to-residential" conversions.

In April 2023, the Dongguan Natural Resources Bureau, Dongguan Housing and Urban-Rural Development Bureau, and other departments jointly issued the "Dongguan Implementation Plan for Strictly Controlling the Conversion of Commercial and Office Spaces into Apartments", which will further regulate the management of non-residential real estate projects such as commercial and financial land and mixed-use land for commercial and residential purposes. The plan aims to strengthen the planning layout, total supply, and development timing management of commercial and office spaces across the city from the source, strictly control new commercial and office spaces, and resolutely put an end to new "commercial-to-residential" conversions.

But this is news from last year. Nowadays, the successive release of "commercial-to-residential" policies in these places is one of the means to destock the real estate market.