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Shanghai's real estate market set to gain momentum
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Shanghai's real estate market ended last year with strong growth in all sectors and the trend is expected to continue this year.

The central government is expected to keep a close eye on the development of the market and introduce new policies to maintain a measure of control.

Strong domestic demand and continued interest from overseas investors, however, will augur well for the city's market, a recently released market research by property experts Savills has found.

Today, we offer detailed explanations of the many positive and negative factors likely to affect the Shanghai real estate industry.

Positive factors for 2008

With high inflation levels likely to persist, real interest rates are expected to remain low or negative for most of this year, encouraging divestment from bank savings into higher return investments such as the property market, especially for those with higher capital reserves.

Shanghai's economic growth is expected to continue. Corporate expansions and a tight labor market for mid management and professional positions are expected to feed into increases in wage packets spurring on retail spending and property acquisitions.

Though not taking a major role in the Beijing Olympics, the knock-on effect of the event is expected to have a significant impact on tourism figures this year, creating strong demand for short-term accommodation and retail. Shanghai will host the preliminary rounds of the football.

The continued appreciation of the yuan against the US dollar is expected to continue as downward pressure on the dollar and upward pressure in terms of trade and inflation on the yuan remains. Analysts predict a revaluation in the range of eight to 10 percent after the 6.5 percent revaluation last year. This adds extra incentive to investors and will keep interest in China strong.

Increasing scarcity of developable land in downtown areas and high land prices and relocation costs will likely curb future supply, putting a strain on existing stock and upward pressure on prices.

The supply-demand imbalance that was present last year is expected to persist in 2008. Developers are unable to satiate demand from the growing wealthy young working class.

Despite government attempts to absorb excess liquidity in the market, rising share prices and property prices in conjunction with growing pay packets have made cash readily available. With limited investment channels, most funds tend to find themselves directed into real estate or stock markets.

Despite increasingly restrictive policies regularly being released to deter foreign funds from investing in China, investors' appetites are expected to remain strong, drawn to China by its miraculous growth story and its many opportunities.

Central and local governments predict strains on China's infrastructure and consequential investment into both inter- and intra-city infrastructure. The demand will help provide a framework for rapid expansion of the economy and real estate markets.

While the slowdown of the American and European economies could lead to an adverse impact on China, the reallocation of investment capital from the West to Asia, where higher returns are achievable, could significantly outweigh any slowdown in the economy.

Negative factors for 2008

Rising inflation concerns will put pressure on the government to continue increases in interest rates possibly resulting in weaker lending and a rising number of mortgage repayment defaults.

With China recording another record in terms of growth last year and with real estate prices continuing to rise, the government has said it would continue to introduce regulations to moderate growth.

The subprime mortgage crisis in the United States and Europe, and its drastic impact on the financial markets, could lead to a slowdown in the economy.

Government initiatives to increase supply of low-cost housing could restrain price rises in the market as a whole.

The continuing rapid appreciation in house prices could lead to social unrest in China.

(Shanghai Daily February 5, 2008)

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