The news that Shanghai is to limit the number of tall buildings has set the local real estate market on the boil.

Although the developers well knew that the city would not tolerate the continuous proliferation of high-rise buildings for much longer, the sudden decision to call a halt was not expected.

According to officials from the Shanghai Urban Planning Administrative Bureau, as long ago as August last year, Mayor Han Zheng advocated imposing a limit on the number of high-rise buildings and a reduction in building density - that is, the number of constructions that would be allowed in a given area.

Under the proposed new regulations to be put before the Municipal People's Congress next month, the "bulk rate" of residential buildings in the downtown area should be kept within a ratio of 2.5.

This means that the ratio between the total floor area of a building and the land area on which it stands must not exceed 2.5 for residential sites, and four for office blocks.

The new regulations will be a big blow to real estate developers.

"It has cut almost a third from the old practice," said Ji Baohong, the head of Shanghai Wangyuan Real Estate Co.

"For the same area in the past we could build 3,000 square metres of floor space. Now we will be allowed to construct only 2,000 square metres."

Real estate industry insiders said the new policy would spark a new round of price rises for housing in the city.

But any rise in prices can't be too much as the current level is already high and the top end of the market is tight.

And last year the city introduced a bidding system for land lease. The price of land will be carefully assessed before going to auction.

"The time of making huge profits because developers could obtain land at a lower price by building up a good relationship with certain government officials is over," said business insiders.

"To the developers, the new policy is like throwing petrol on the already high fire and may force some real estate developers to leave the city."

Unprofitable re-construction

This is something the city may not want to see as the local real estate sector for several years has contributed up to 30 per cent of growth in tertiary industry.

"Yet to ensure the city's sustainable growth, some short-term losses are inevitable," said Zhu Ronglin, an expert from the State Council's Development and Research Centre, who is also a Congress deputy.

However, some issues remain that are still worrying Zhu and other Congress deputies.

One of the toughest will be implementing the new standard when reconstructing the city's old quarters.

According to statistics, there are more than 10,000 square metres of old quarters which may need the help of the real estate industry in rebuilding developments.

Currently in the city, the areas with the highest density of tall buildings are mostly in the old quarters.

However, the government today may still not have the finance to move residents out of their old houses in order to replace them with new buildings.

Under former preferential policies, the city gave this job to real estate developers.

But the large population living in the old quarters means that if the developers are not allowed to increase the floor space in a new re-housing project, they won't be able to make much profit.

The Brilliant City development along Suzhou Creek is one such example.

The original plan allowed by the government was to construct 1 million square metres of housing in the Liangwan area.

However, due to cost pressures, a weak real estate market at the time and the fact that the cost of moving people out was higher than expected, the developer had to increase the floor area to more than 1.5 million square metres. This was achieved by arranging the buildings more densely and building higher.

Given the new floor space-land area ratio, real estate developers won't be likely to buy into ventures offering only a low return.

For the past decade, most of the work of urban reconstruction has been focused to the south of Suzhou Creek. Much of housing in the area to the north of the creek remains in a dilapidated condition.

However, a senior official in the Shanghai Urban Planning Bureau said this would not be sufficient reason to allow an increase in building density in the area - much to the disappointment of some in the industry who are still interested in the re-development of the old quarters.

Privileged rich

Another worry resulting from the new standards is a fear that they might lead to urban areas becoming the home of the rich. Less well-off residents who cannot afford the higher prices may be forced to move to the outer suburbs.

"Such a division is surely not a healthy social structure, especially as nowadays when infrastructure in the suburbs - including public transportation, medical service and schools - are still relatively under-developed," Zhang Shaoliang of the Urban Construction Commission told a meeting organized by the Municipal Congress.

The new policy has not been put before Congress so its final form is not yet clear.

But one encouraging aspect is that the new policy will be based on an in-depth study, as the legislators had promised.

All the issues and any suggestions from local residents and experts will be considered when the proposed legislation is debated.

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