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Why Are Landlords Letting Property Sit Idle Instead of Lowering Rents?

Is Taipei’s East District Becoming a Ghost Town?

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Is Taipei’s East District Becoming a Ghost Town?

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In mid-January, Yun Fu Lou, a well-known restaurant at East District Taipei, sent shock waves through the gourmet community with its announcement that it will shut down at the end of February. Reportedly, the restaurant, a fixture in the city’s hospitality sector for more than four decades, could not afford the pricey rent anymore. The nearby Swatch watch store ceased business at the beginning of the year, although the landlord had lowered the annual rent from NT$1.8 million to NT$1 million. Is there still hope for a revival of the once buzzing and busy East District of Taipei?

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Is Taipei’s East District Becoming a Ghost Town?

By Kwangyin Liu
web only

In mid-January, Yun Fu Lou, a tradition-steeped restaurant serving classical Zhejiang cuisine on Zhongxiao East Road in Taipei, sent shock waves through the gourmet community with its announcement that it will shut down at the end of February. Reportedly, the restaurant, a fixture in the city’s hospitality sector for more than four decades, could not afford the pricey rent anymore. Street artists have already left graffiti on the roll-up metal doors of shuttered stores next door.

The nearby Swatch watch store at the corner of Dunhua South Road ceased business at the beginning of the year, although the landlord had lowered the annual rent from NT$1.8 million to NT$1 million. Is there still hope for a revival of the once buzzing and busy East District of Taipei?

Ironically, this is where the “snails without shells” movement, a campaign for affordable urban housing, originated some thirty years ago. (Read: How Rich Was Taiwan?) Back then, no one imagined not only that ordinary people would be unable to afford to live in the city today, but even retail stores and restaurants would be forced to move away because of the high rents.

Not long ago, Zhongxiao East Road was a prime location, yielding commercial rents of NT$40,000 per ping during its golden days which made the district the 15th most expensive retail space in the world. Today, however, “for rent” signs beckon from shop fronts every few steps.

Mr. Tseng, a local real estate agent, currently has a portfolio of nearly 30 shops of various sizes that are for rent or whose lease is about to expire. Viewing is possible anytime. “But the landlords are not budging on the rent because they don’t lack money,” says Tseng frankly, debunking expectations that the glut in vacant retail space will bring down rents.

High Living Costs, Heavy Mortgage Burden

Even SinoPac Holdings Senior Executive Vice President Michael Chang cannot stand the situation anymore. In a sarcastic poem posted on Facebook, he ridiculed the landlords who are unwilling to lower rents in the East District as “bloodsucking leaches.”

After 40 years of successful business, Zhejiang cuisine restaurant Yun Fu Lou shut down on February 24 because it could no longer afford the rent. (Photo by Kuo-tai Liu)

“The Taiwanese are very diligent and smart; how is it impossible for young people to enjoy a good life?” asks Chang. He told the reporter the guiding thought behind his own research of the property market problems was: How could it have come to this?

When analyzing data, he discovered an important factor: Because the house price-to-income ratio keeps rising, the mortgage burden rate increased from 40 percent [of median income] ten years ago to more than 60 percent [of median income] now.

This means that the disposable household income [after mortgage payments] has shrunk from 60 percent a decade ago to 40 percent now.

So why are East District landlords letting their commercial properties sit idle or renting them out at a discount to clearance sales operators instead of lowering rents for annual leases?

Wealthy Landlords Fear Lower Rents Will Affect Resale Value

Andy Huang, head of market research at the Taipei branch of global real estate consultancy RePro Knight Frank, pinpoints two reasons. First, since the East District is an early commercial district, the local landlords have enjoyed good returns on their property for several decades. Given their deep pockets, they do not worry about vacant property.

Second, they are concerned that lower rents would affect the resale value since rental income factors into the valuation of rental property. Assuming a two percent rate of return on rental property, a shop leased for a monthly rent of NT$30,000 per ping (3.3 square meters) would generate annual rental income worth NT$360,000 per ping, which would translate into a resale price of NT$18 million per ping.

If the monthly rent were lowered to NT$20,000 per ping, the resale price would decline by NT$6 million to NT12 million per ping. So it should not come as a surprise that property owners do not light-heartedly lower rents.

For instance, the store on the corner of Zhongxiao East Road and Dunhua Road, which used to house a Miss Sofi shoe store, remained vacant for three years until the premises were leased to O-Bank in 2017. Based on the amount of space actually used, the monthly rent of NT$1.3 million translates into a rental price of nearly NT$60,000 per ping per month, which is not markedly less than what the previous tenant paid.

Vacancy Rate in East District Nearly 10% in 2018
Comparison of Vacancy Rates in Taipei’s Major Commercial Districts (%)

Huang points out that, since the government introduced taxation on property transactions based on actual selling prices, commercial properties are not that attractive as tax evasion tools anymore. Because property owners are now taxed based on the actual selling price, reselling is less lucrative now. Therefore, they try to make as much money as possible from rents.

Still, the retail sector is facing headwinds around the globe, not just in Taipei.

Global Retails Sector Feels Chill

Huang notes that the retail sector faces challenges around the globe, be it the United States, Japan, Hong Kong, Singapore or South Korea, partly due to a decline in Chinese tourists, the global economic slowdown or changed consumer behavior as more people buy online instead of in real stores. In the hospitality sector, the traditional restaurant business faces a stiff challenge from the trend towards ordering via app and having food delivered right to your doorstep.

The downward spiral of the East District had already begun a few years ago.

Statistics by global real estate services firm Cushman & Wakefield show that retail space rents in the East District began a steady decline after peaking around 2014 and 2015. Last year, market rents had nosedived by about 30 percent.

Rents Fell Most in East District, Ximen District Up-and-Coming
Change in Monthly Rental Prices (NT$10,000/ping, average) for major Taipei Commercial District During Past 5 Years

Abbie, who has been running an apparel store near the Breeze Center shopping mall for ten years, observes that the East District lost its attractiveness for shoppers as the Xinyi District, following a massive urban renewal project, emerged as a shopping and entertainment magnet.

The Nanjing West Road shopping area around Zhongshan MRT Station also gained markedly in popularity with the opening of the new Eslite Spectrum Nanxi Store last year. (Read: The Rise of the Eslite Nanxi Commercial District) While traffic jams were formerly the rule in the East District, traffic now flows smoothly.

Abbie also discovered that some landlords in the East District have begun to lower rents. On Fuxing South Road, a shop selling roasted sweet potatoes moved away two years ago after the monthly rent was hiked to more than NT$200,000. After the property remained vacant for more than a year, the owner last year tested the market, lowering the monthly rent to NT$160,000. But  the store has yet to find a new tenant.

Can lower rents save the East District?

Vacancy Taxes, Community Rejuvenation Projects Revitalize Commercial Districts

Huang is not optimistic. He believes that retail store clustering is not the only reasons why Xinyi District and the Ximen area draw large crowds of shoppers. In contrast to the East District, the streets in these areas also stand out for their shopping-friendly spatial design such as pedestrian zones.

In Xinyi District, which was planned anew from scratch, the government incorporated many public facilities, particularly those that cater to the needs of children and the elderly. In the East District, however, stores are located along streets that are busy with traffic, and most buildings and facilities are rather old and shabby. The shopping experience here cannot compare with the newly developed glitzy commercial districts.

Why have only the rents in the Ximen commercial district been going up in recent years?

Huang notes that some 20 years ago, the Ximen commercial district was also in a desolate condition and had the reputation of being a lawless no-go zone. Thanks to several factors, the area staged a powerful comeback. First, the government invested heavily in the restoration of heritage buildings such as the Buddhist Nishi Honganji (Xi Ben Yuan Temple) temple complex and Bopiliao Old Street. On top of that, local shop owners banded together to propose a street rejuvenation project that made the area more inviting to visitors.

As a growing number of stores remain vacant in the East District, shop owners settle for the second best, renting out their property for clearance sales on short-term leases at a 20 percent or 30 percent discount on the monthly rent. (Photo by Kuo-tai Liu)

SinoPac Holdings’ Chang, for his part, believes the government should use policy tools to force landlords to lower rents. In Hong Kong, for example, legislators recently suggested that the government set an annual rent increase cap and that the vacancy tax be doubled on commercial property that has not been rented out in more than six months.

“Many people say collecting taxes will not make a difference for the landlords, but using the tax revenue, the environment in the commercial districts can be improved. They could even come up with “social commercial districts” that are modeled after social housing that can only be rented but not sold, to keep the rents under control; only then can we create a better life for the next generation,” says Chang.

“There is a group of people who never sweat but take home 90 percent of the fruits of other people’s labor. The other group works themselves to death but the quality of their lives keeps deteriorating. This is not right,” says Chang.

However, Huang doubts that a vacancy tax would have the desired results, as “the landlords’ pockets are so deep you can’t see the bottom.” He thinks it might be better to wait until market forces have brought about a natural adjustment of commercial rent levels. The East District could become another Tianmu. It might not be the worst thing when stores move away because of high commercial rents if their exodus results in a more livable residential environment.

Translated by Susanne Ganz
Edited by Sharon Tseng

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