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Cablegate: No Bubble in South China Property Market Say Developers

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UNCLAS SECTION 01 OF 02 GUANGZHOU 000058

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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.
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

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