No Bubble in South China Property Market Say Developers

UNCLAS SECTION 01 OF 02 GUANGZHOU 000058 SIPDIS SIPDIS SENSITIVE PACOM FOR FPA E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV SOCI CH SUBJECT: No Bubble in South China Property Market Say Developers ¶1. (SBU) Guangdong real estate developers and consultants are confident of continuing growth in the regional property market, and reject concerns about a potential real estate "bubble". Some maintain that affordability, at least among the region's professional class, is not on the decline, but likely increasing. They are generally satisfied with government regulation of the property sector and identified some positive regulatory trends, including greater bidding transparency and the government's move away from direct control toward a focus on regulating the market and shaping people's behavior with tools like a new tax structure on second-users of property. Acknowledging that the recently enacted New Property Law would increase demands on developers, some property market professionals believe it may provide some needed clarity. End Summary. No Bubble, Sound Fundamentals -------------- ¶2. (SBU) Despite a sharp fall in Guangzhou housing prices in the fourth quarter of 2007, local real estate developers and consultants believe the medium and long-term prospects for the Guangdong real estate market are good. C.K. Leung, Deputy General Manager of Hong Kong-based New World China Land, called the past twelve years a "golden age" for the Chinese economy; he expressed great confidence that growth in the Pearl River Delta would continue. New World added 8 million square meters to its land reserve in 2007 and is currently managing 36 projects in 20 "high growth" Chinese cities. Leung's company is heavily involved in the development of Guangzhou's Pearl River New City (Zhujiang Xin Cheng) and expects the area over the near term to become the central business district of not only Guangzhou, but of the Pan Pearl River Delta region, encompassing nine southern China provinces. New World China is also participating in the construction of the Guangzhou Towers, twin monoliths which, if completed today, would be the 4th tallest buildings in the world. ¶3. (SBU) Real estate professionals appear to agree that there is no property market "bubble," at least for the greater Guangzhou-Shenzhen urban corridor. Consultants, such as Guangzhou's Hopefluent Group Holdings, indicate that demand for south China real estate will remain strong, supported by a high personal savings rate and a continuing influx of college-educated professionals. �A;Double-digit home price appreciation in Guangdong's major cities has been matched by a similar increase in urban incomes. Hopefluent believes that affordability, at least among the region's professional class, is not on the decline, but likely increasing. ¶4. (SBU) Spencer Pang, Director of the Guangzhou office of DTZ, an international property consulting firm which has operated in China for 13 years, feels that the fundamentals of the local real estate market are sound. Guangzhou real estate prices are still a good value as compared to other first-tier cities like Shanghai, and the provincial government has expressed its desire to upgrade infrastructure to match international standards. Other government actions favorable to the real estate market, according to Pang, include a loosening of mortgage policy to make second mortgages easier to obtain. Satisfaction with Regulation, Changing for the Better -------------- -------------- ¶5. (SBU) South China real estate professionals are generally satisfied with government regulation in the regional property market and identified some positive regulatory trends. Hopefluent's president Fu Wai Chung discussed how new bidding requirements have increased transparency in land deals and have contributed to increased prices. The government has moved away from direct control toward a focus on regulating the market and shaping people's behavior with tools like a new tax structure on second-users of property. Mr. Fu also felt that the authorities appear willing to allow the market to become more consolidated, with several big companies accounting for the bulk of market share, possibly because such consolidation simplifies regulation. ¶6. (SBU) Real estate professionals are watching closely the implementation of the New Property Law, which went into force in October of last year. Although the legislation was initially publicized as providing greater protection to private property rights, subsequent interpretation has underscored the continuing ability of authorities to acquire land from residents in the name of public interest. This power was exhibited in late December, as Shenzhen police used high-pressure water cannons and tear gas to evict several property owners who had refused to make way for a subway project. ¶7. (SBU) Acknowledging that the law will make land acquisition less GUANGZHOU 00000058 002 OF 002 "smooth" for private developers, Fu Wai Chung sees a payback in terms of greater clarity. Fu commented that the new law could enhance the prospect of the rule of law and stability in the real estate market, compared to the previous environment in China. Developers accept this concept, per the consultants, but are waiting for more examples of the government putting the new statute into practice. In the meantime, says DTZ's Pang, they're advising clients to avoid land already occupied by tenants, and develop unoccupied real estate instead, "just to be safe". Land Supply - a Government Concern -------------- ¶8. (SBU) The greatest challenge in Pearl River Delta property markets is the availability of land for development. In addition to developers, government officials from the Guangzhou and Guangdong Land Bureaus also emphasized this issue. The provincial bureau forecasted continuing government support for lower-income housing and increased scrutiny on high-dollar projects such as villas and golf courses. Representatives from the city bureau focused on the need to balance economic development with maintaining adequate farmland. Guangzhou developers remain confident, but limited land supply could eventually impact their ambitious plans for growth. Goldberg