The Pearl River Delta Is On The Verge Of Redefining ItselfFor many years, the Pearl River Delta was the jewel in China’s manufacturing crown. Beginning in Hong Kong and spreading out farther in Guangdong Province, as the area’s economies matured so did what those economies were comprised of. With labour and materials costs in China allegedly rising and prompting multinationals to try their hands in Vietnam, Indonesia and Cambodia, China and the PRD have branched into services, high-end manufacturing and IT and tourism. The emergence of the Qianhai to the chain around Hong Kong, Macau, Guangzhou, Shenzhen, Zhuhai and Dongguan — as well as competition from second- and third-tier cities on the Mainland — could shake up the PRD and it’s property markets.

Uneven Flow
The growth of the Pearl River Delta has been well documented and suitably boggled over. Nearly 60 million people now call it home and the region’s GDP rivals that of many small countries: roughly US$500 billion per year. But the PRD is not alone; China has scores of “special zones” and “manufacturing” (or other industry) centres, each with their own strengths and characteristics. “Beijing, the political hub, is where the SOEs are and is considered a more local market, whereas Shanghai has a multinational corporate focus,” explains James Macdonald, director and head of China research for Savills in Shanghai. “Shenzhen and Guangzhou have strong ties with Hong Kong which used to be quite a strong manufacturing base, however I get the sense a lot more financial and IT companies are moving in. The Sichuan Basin is the headquarters of west China and can be considered the new manufacturing base. If you considered adding a fifth market, it would most likely be central China lead by Wuhan … who to a certain extent already competes.”

They are unique but they do compete with each other to a degree, though in a planned economy what Beijing says, ultimately, goes. The Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, or simply Qianhai, has big plans for the coming years. One of those goals is to make it over into a so-called Asian Manhattan. The State Council-approved plan (launched in 2010) involves over US$60 billion in government investment to 2020 and using Qianhai as a test ground for financial reform and liberalising the Renminbi. It’s called a cooperation zone, but there’s no denying the banking angle butts up against Hong Kong’s current stock in trade.

The area is currently in stage two of its development with basic infrastructure creation and construction well under way (the plan is to be finished by 2015). Land auctions have begun and final product — chiefly offices — sales are on the horizon. In the next few years, upwards of 170 million square feet of Grade A office space will come online — three times what is currently available in Hong Kong. Should the SAR be worried? The expected rents, after all, would fall well short of the “bargains” in East Kowloon. Colliers International’s The Rise of Qianhai: an Opportunity or a Challenge report states, “This additional office supply could alleviate the severe shortage in Hong Kong and complement the city in terms of land resources. In addition, Hong Kong will benefit from the rise of RMB businesses with the establishment of Qianhai as a test field for RMB internationalisation. Essentially, instead of posing a potential threat, Qianhai provides Hong Kong with an exceptional opportunity in an environment where strong collaboration is key.”

Healthy Competition?
Some aspects of the property market are already responding to the unknown future. The first two plots auctioned for development in July 2013 sold for between US$240 per square foot to US$420 (HK$1,860 to $3,250). A year later in May 2014, the next four plots sold for between US$120 and $200 (HK$930 to $1,500). According to Colliers, the price dip was less a sign of poor fundamentals and a shaky idea than an indication of the second group of plots’ locations and applicant restrictions. The pricier plots went to New York-based property management firm, as an example, and other branded businesses (like IT) that would add long-term value to Qianhai’s designated central business district.

Investors bet on higher-than-average yields. The first low-rise office project developed by China Vanke, namely Enterprise Dream Park, adopted a build-operate-transfer investment model and achieved full lease-out with an average rental of US$42-45 per square metre per month,” said Colliers. At that rental rate — which sits at the lower end of the spectrum — and a sale price of US$10,400 (Futian’s higher end), it translates “Into a conservative indicative yield of around 5 percent, which is still higher than an average yield of 4 percent in Futian … [We] believe that this figure is supported by the rent and price potential in Qianhai and will attract investors aiming for long-term rental income and strong capital gains.”

Of course, this is still theory right now. Qianhai development also includes residential space (15 percent of its total 280 million square feet of floor area), 9 percent commercial and 10 percent simply designated as other. Offices are where the attention is going. There are other trading zones betting on currency reform and “world class” financial services sectors, chiefly the Shanghai Free Trade Zone launched last year. Last November Credit Suisse reported rumours of many multinationals reassessing Qianhai, though in September 1,700 firms were still planning on opening offices in Qianhai. There’s plenty of competition for Hong Kong to go around. Whether it’s healthy depends on if there are enough occupiers to go around too.