Delta Blues?

Delta Blues?Guangzhou continues to boom, but will international debt and cautious investors win out?

Guangzhou is not the only urban centre in the so-called Pearl River Delta, but it’s the largest and quite possibly the most important. The capital of Guangdong province is the third biggest city on the mainland and a key port, as well as a major manufacturing centre and host of the massive Canton Fair. Given its major economic drivers, it’s no surprise that whatever goes on elsewhere in the world has a major influence on Guangzhou and by extension its property market.

To that end, Europe’s ongoing debt drama and a wobbly American economy are pressing down on the city, and with BP, LG, ExxonMobil, Siemens, Procter & Gamble, Volkswagen, Nestle and Bank of America among the alleged 160 Fortune 500 companies invested in Guangzhou the big picture is a valid concern.

In its second quarter Asia Luxury Residential MarketView report released in late August, CB Richard Ellis Research, Asia stated, “Tightened mortgage lending and rising interest rates continued to impact on buyer demand in most Asian markets in the second quarter of 2011.” Since the beginning of the year, Beijing has encouraged banks to restrict lending to developers, and raised down payment requirements and mortgage rates in an effort control home prices and cool the market. CBRE also noted the impact of foreign economies, stating, “Concern over the regional economic outlook rose as the economic situation in the United States and Eurozone worsened in July, and further deterioration could have a knock on effect on the Asian economy.”

Property consultancy DTZ noted sales volume in Guangzhou was down by almost 29 percent in July, but prices were up 2.4 percent from June. In general, “Fundamental demand in the market remains strong, notwithstanding the macro control policies and restrictive mortgage lending policies. Sales of new homes in Tier-1 cities slightly rose 0.3% in July,” its residential update for August 2011 stated. And though Beijing and Shenzhen accounted for the best showing of luxury residential sales, DTZ expects to see better sales in cities like Guangzhou and across the board when developers adjust their prices in line with reduced bank lending.

New supply will be concentrated in the Tianhe district if there are any investors willing to take chances right now. That’s the preferred location for office investment, where the market is robust, for multinationals moving into the city. In the second quarter of 2011, Colliers International reported major transactions involving Ochirly Information Technology, China Southern Power Grid Corporation and Danish brewing giant Carlsberg. Similar to the dynamic in Hong Kong, high-powered local and international executive staff are likely to drive the strong serviced apartment market in the area in the near future. Rents are up just under 2 percent quarter-onquarter, and vacancy levels are down.

But that’s where those government regulations — tightened bank credit among them — come into play for investors. Luxury residential investors are adopting wait and see attitudes and exercising caution. Combine that with interest rates climbing and delicate foreign economies and it becomes a question of whether this is the beginning of a sustained cool down in Guangzhou or if demand will carry the day?

“I think the residential sales market will remain very quiet through the rest of this year due mainly to [those] reasons. The majority of both buyers and landlords will likely hold a wait-and-see approach; for buyers they will likely defer any purchase decisions to until they see a clearer outlook of the global economy and when the government relieves some of the tightened measures,” theorises Marcos Chan, national director and head of research, Pearl River Delta at Jones Lang LaSalle. Chan estimates landlords will prefer holding onto properties, as the costs incurred there aren’t so high they need to dump them. Whether or not that means it’s a good time to pick up a bargain is always a matter of personal risk tolerance. But the sky isn’t falling quite yet. “If some of the smaller developers begin to face liquidity pressure, there will be chances of seeing them under cutting prices to chase for volume. Should this happen, overall prices may see a bit of downward pressure although the relatively good holding power position in the secondary market may help to prevent serious collapse.”