The Texan test

Will Guiyang be China’s next real estate disaster?

The Texan test

Guiyang: build and they will come

Fort Worth avoided the worst of the US housing bubble. Prices went down a little after the financial crisis broke but they had never got completely out of control in the Texan city in the first place. “Forth Worth and Tarrant County didn’t experience what the rest of the country did,” an estate agent told local newspaper Star-Telegram this summer. “Sales were down, but not like the rest of the country.”

Despite being 18,000 kilometres away (and, culturally, a lot more distant than that) Fort Worth’s twin town of Guiyang in southwest China might want to take some notice.

That’s because it looks like a city in need of lessons in avoiding housing market excess, as it continues a property binge on an extraordinary scale.

The fact that Guiyang is the capital of one of China’s poorest provinces, Guizhou, has not stopped developers embarking on a number of spectacularly large projects.

The largest is Huaguoyuan, which has a total construction area of 18.3 million square metres, reports International Finance News. To put this single development into perspective, only a few years ago, a housing project larger than 200,000 square metres in Guiyang was considered a monster. The Huaguoyuan project will also be capable of housing 10% of Guiyang’s current population (or about two thirds of the citizens of Fort Worth, should they fancy hanging their ten-gallon hats somewhere new).

Huaguoyuan’s 18.3 million square dream also makes some of China’s largest developers look like pygmies. China Vanke, one of the titans of the real estate industry, has sold 8 million square metres of property so far this year.

One such project would be impressive on its own. But Guiyang appears to be awash with giant developments. Future Ark will cover another 9.3 million square metres, and is just one of 13 projects of a million square metres or more. Once completed, they will be able to house more than a million people.

So, the obvious question: will a million people buy into the dream?

That looks unlikely. Although the market has picked up as the year has progressed, sales volumes have usually been dependent on developers lowering prices. Guiyang’s unsold housing inventory was already 34.9 million square metres as of September and if the buying stays at the pace of the first half of the year, it will take four years to clear the current backlog.

So it’s no wonder that people are starting to compare Guiyang with Erdos, the city in Inner Mongolia now famous as a ghost town of unoccupied housing. “The rebound in Guiyang’s property market in the first half of the year was the result of housing developers trading prices for sales volume,” financial commentator Wu Qilun told International Finance News. “This rally will not last. Guiyang’s property market’s status quo is serious oversupply.”

In response, the local government in Guizhou is trying to come up with ideas for filling the thousands of empty apartments. In September it introduced new rules that granted anyone that bought a property in the city a local hukou or residence permit. This incentive applies not only to residential homes but also to commercial space, reports CBN, meaning that out-of-town purchasers will receive the same municipal benefits as locals in healthcare and education.

Quite how Guiyang’s developers – or the government planners who must have signed off on the construction binge – ever expected to fill all the new projects is left unsaid in the Chinese media. But new incentives for buyers will go against Beijing’s efforts to cool the property market down. Guiyang might find itself repeating the experience of cities like Zhuhai, which tried to boost sales in the summer by removing controls introduced last year. But the local government was soon slapped back into line, with the rules re-applied within a couple of hours. Does Guiyang have many other options? Perhaps its best hope is the embarrassment factor: that the authorities in Beijing give it some leeway to avoid hundreds of foreign journalists turning up to write about another vast ghost town.

Keeping track: in WiC168 we asked whether Guiyang would be China’s next real estate disaster, thank to massive overbuilding of apartment blocks. Last week Oriental Outlook picked up on the same theme, saying the provincial capital of Guizhou had become well known throughout the country for offering a coveted hukou (household registration permit) to anyone who bought an apartment. It noted that excess supply had already impacted prices. The city’s most prominent development Huaguoyuan was sold in 2010 for Rmb8,000 per square metre (and due to speculation peaked at Rmb17,000 per square metre). Oriental Outlook says that today the average selling price is Rmb4,000. (Dec 14, 2012)

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