Shenzhen real estate in short supply
By Chen Hong (China Business Weekly)
Updated: 2004-04-28 14:50

Stable housing prices in the South China boomtown of Shenzhen, which have stood at about 2 per cent growth for years, recorded an unusual surge of 6.6 per cent year-on-year in the first quarter of this year, according to the latest official figures.

Shenzhen Municipal Planning and Land Bureau warned that the housing market is experiencing a price hike caused by reduced land supply, strong demand and the diminishing price gap in and out of the Special Economic Zone.

However, real estate agencies and analysts say the market remains healthy and the prices will go up steadily and reasonably.

Data released by the bureau showed that the average price of residential houses reached 5,780 yuan (US$698.10) in the first quarter of this year, compared with 5,422 yuan (US$654.80) in the corresponding period of last year, and 5,680 yuan (US$686) for the full 2003 year.

Supply sharply decreased while demand stayed strong, the data indicated.

The total area of completed residential property dropped 32.5 per cent year-on-year to about 15.3 million square metres in the first quarter. Meanwhile aggregated sales of residential floor space rose to 22.3 million square metres during the same period, up 7.7 per cent from a year ago.

"The government has stopped providing additional land for real estate development in the Special Economic Zone since 2003. That led to a shortage of supply in the area and pushed up the housing price there, which finally resulted in an obvious surge in the overall housing prices in the city," said the bureau in a research report.

The city was divided into two parts in the early 1980s by frontier stations along the border to make sure the 375-square-kilometre Special Economic Zone could enjoy multiple preferential policies. People have to enter the zone with special passports. But the function of the frontier stations has been gradually weakened to help the development of the rest of the 1800-square-kilometre area.

Since then, people have begun buying properties outside the Special Economic Zone where there are more choices. Government figures showed that the total floor area sold in Nanshan District and Bao'an District -- both outside the Special Economic Zone -- increased by 71 per cent and 30 per cent respectively in the first quarter. The price gap in and outside the Special Economic Zone is expected to narrow, and that will also affect overall housing prices, said the bureau.

The average price of the residential houses in Nanshan and Bao'an districts were 6,033 yuan (US$726.87) and 3,899 yuan (US$469.76) respectively, compared with 7,796 yuan (US$939.28) and 8,025 yuan (US$966.87) for the Luohu and Futian districts inside the zone, the figures showed.

Realizing that its limited land resources might be used up in the next 10 years, the government restrained its land policy at the beginning of 2003 by cutting the total supply from 17 square kilometres to about 12 square kilometres last year. Of this,9.16 per cent, or 1.1 square kilometres, were for residential construction.

Under the new land policy, developers have to fight each other for every piece of land put on auction, especially in the Special Economic Zone, to enrich their land banks.

At an auction on April 16, a lot of 93,544 square metres in the Honey Lake area, the last lot for residential development in a promising area for upper-end home buyers, attracted 16 bidders including the strongest local and Hong Kong developers.

China Overseas Estate Co, a subsidiary of the Hong Kong-listed China Overseas Land & Investment Ltd, teaming up with Sino Land China Investment Group, a subsidiary of Hong Kong-listed Sino Land Co, beat down other competitors to win the lot with a bid of 950 million yuan (US$114.7 million). This was 250 million yuan (US$30.2 million) above the reserve price of 700 million yuan (US$84.5 million).

That means the land cost alone of the development hit 7,250 yuan (US$875.60) per square metre, given the 131,000 square metre floor area of the design.

"The per square metre cost will be more than 10,000 yuan (US$1,207.70) after the project completes. We expect the average price for the development will be no less than 13,000 yuan (US$1,570)," said Zhang Ai'ai, executive director of World Union Properties Consultancy (China) Ltd, a Hong Kong-headquartered real estate agency.

Wang Feng, director of Shenzhen Real Estate Research Institute, said the cost of land for residential development surged 10 to 15 per cent year-on-year in 2003.

However, both Zhang and Wang said they believed the market is in good shape and rules out the possibility of rising speculation as happened in East China's Yangtze River Delta region.

In Shanghai and some rich cities in the Yangtze River Delta, housing prices have kept a two-digit growth rate over the past three years. Local residents complain that it is caused by speculative property investment made by out-of-town buyers.

"As China's most-developed real estate market, Shenzhen leaves little room for the speculators," said Zhang. "Developers have to do the best in every procedure to make sure of good performance in the fiercely competitive market. The speculators are hardly able to earn a 15-20 per cent margin from the stable market in the short term."

More than 90 per cent of the home buyers in Shenzhen bought for living or leasing, and that will prop up the housing prices steadily, she said. "I expect the growth for 2004 could be modest, around 6-7 per cent."

Although supply in the Special Economic Zone will fall, Zhang forecast more buyers will go to the second-hand housing market.

The official figures showed that 1.48 million square metres of floor area in the secondary residential housing market was sold in the first quarter, up 68.8 per cent from a year ago and nearly equal to the full year of 1999.

Y. C. Lee, general manager of Shenzhen Centaline Property Consultants, a subsidiary of Hong Kong-based real estate agency Centaline, told China Business Weekly that overall prices in Shenzhen's housing market in 2004 could grow about 5 per cent.

"We observe that 95 per cent of the units were bought for living instead of speculation. The market provides all kinds of products at different price levels for the buyers," said Lee.

With improved transportation, Lee said more people will choose to live in the outskirt area of the city which could help ease the price hike in the Special Economic Zone.

He Jin, an analyst with Guoxin Securities, a local brokerage firm, said Shenzhen's housing prices will keep climbing at 3-4 per cent in the next two or three years. He said that at the beginning of next year, the price may dip a little as a result of speedy construction in 2003 and government polices to restrain housing mortgages.

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