China Trade Hub Guangzhou Booms as New District Rises From Dirt

Nelson Ching/Bloomberg A restaurant overlooking high rise apartment buildings in Guangzhou, China. Guangzhou, a trading hub for China since the Ming Dynasty in the 16th century, is in the midst of the biggest commercial real estate boom in its history. Developers including Guangzhou R&F Properties Co. (2777) and Poly Real Estate Group Co. (600048) plan to add more than 1.7 million square meters (18.3 million square feet) of prime office space to the city this year -- enough for about 120,000 workers. Almost 90 percent of the new space will be built in Zhujiang Xincheng, a zone twice the size of the City of London that Guangzhou’s government earmarked as its new central business district almost a decade ago, according to Cushman & Wakefield Inc. “Back in 2004, out there it was all just dirt,” said Adrian Chan, assistant to the chairman at Guangzhou R&F, which has completed five office projects in the area since then, including the 160,000-square-meter, 54-story R&F Center, where the interview took place. “Today, it turns out to be a good winner.” Guangzhou R&F and its rivals will be seeking to fill the space at a time of slowing economic growth, with the nation’s expansion target for 2012 this month set at 7.5 percent, down from an 8 percent goal in place since 2005. China last week reported its biggest trade deficit in at least 22 years, the weakest January-February factory-production gain since 2009, and retail sales that trailed the median of economist estimates. The new developments may push the prime office vacancy rate in the city to above 20 percent by 2015, from 12 percent now, according to Chicago-based Jones Lang LaSalle Inc. “With that amount of new supply coming in, I don’t care how fast the absorption rate is, it will pull up vacancy,” said Alvin Lau, managing director for Southern China at CBRE Group Inc. “And if there isn’t enough demand, then rents will fall, though I don’t think there’ll be a crash.” Opium Trade Guangzhou, named Canton by Portuguese traders in the 16th century, hosts the China Import and Export Fair, or Canton Fair, in April every year. In the 19th century, British traders imported opium into China through the city until the Chinese government sought to ban it, triggering the Opium War that resulted in the ceding of Hong Kong. Guangzhou’s government in 2003 decided to turn the Zhujiang Xincheng district into a financial center rivaling Shanghai and Shenzhen. That was followed two years later by a 200 billion yuan ($32 billion) plan to upgrade the whole city’s infrastructure. GM, Tesco While finance firms didn’t respond, export and domestic- industrial companies have. The 6.6 square kilometer-district features the regional headquarters of China Mobile Ltd., the world’s biggest phone carrier by users, General Motors Co., the largest foreign automaker in China, and Tesco Plc, the U.K.’s biggest retailer. “It was never going to work as Guangzhou doesn’t even have a capital market,” said Eric Lam, managing director for Southern China at property adviser Colliers International. “The ones who ended up here are the South China or regional headquarters of companies, not banks. At the end it was the market that directed the district’s positioning.” Even with the new office supply, Lam said rents in top tier buildings will rise because of “very strong” demand. Average monthly rent at Zhujiang Xincheng was 279 yuan per square meter in the fourth quarter, compared with 255 yuan a square meter at Tianhe, Guangzhou’s former central business district, New York-based Cushman said. That compares with 507 yuan in Beijing and 414 yuan in Shanghai. Trading Hub China will overtake the U.S. as the world’s biggest trading nation by 2016 as intra-Asia commerce and rising demand from emerging markets boosts shipments, according to a report from HSBC Holdings Plc last month. “The government has always wanted to create a hub for trade operators,” said Donald Choi, managing director of Hong Kong-based Nan Fung Development Ltd., which is spending 6 billion yuan building commercial projects in the city. “So everything here, the excellent infrastructure, the policies, are all being backed by the government.” Zhujiang Xincheng, which means Pearl River New Town in Mandarin, is home to the Guangzhou Opera House, the biggest performing center in Southern China, and the 1,969-foot Canton Tower, an observation tower that was the world’s tallest when it was completed in 2010. Guangzhou, with a population of more than 12 million, is China’s third-largest city behind Shanghai and Beijing and is the capital of the Guangdong province. Nearby Foshan was identified by the World Health Organization as the probable source of outbreak of the 2003 Severe Acute Respiratory Syndrome epidemic, or SARS. Recovery Project While its economy was recovering from that outbreak, Guangzhou’s government began awarding land in Zhujiang Xincheng to developers including Guangzhou R&F, with the aim of building a financial hub that could replace the city’s existing downtown area of Tianhe. To encourage investment from developers, Guangzhou, a two- hour train ride north of Hong Kong, went on to spend about 200 billion yuan to build roads and subways in Zhujiang Xincheng. That includes a nine-stop, 4-kilometer long automated people mover similar to the light-rail system in Singapore. “If some guys say they’re going to put in $10 and ask you to put in only $2, that’s a good bargain,” said Guangzhou R&F’s Chan. “They were drilling all these subways and roads and they ask whether you want to be part of this. And we said OK, though back then it was a pretty big risk to take.” Zhujiang Xincheng Investment in real estate in Guangzhou jumped about 40 percent last year, according to estimates by Cushman. Guangzhou’s gross domestic product grew 11 percent in 2011 to 1.24 trillion yuan, ranking it third among all Chinese cities, according to the city government’s website. Guangzhou heeded central government calls in late 2010 to restrict foreigners from buying homes and offices in the city. It said this month the curbs on foreigners purchasing retail real estate remained in place, according to Zhai Zhongqi, a Centaline Property Agency Ltd. analyst based in the city. Almost 80 percent of the 2.8 million square meters of prime office space already under construction in Guangzhou is at Zhujiang Xincheng, Cushman said. The district had prime office space of about 1.2 million square meters at the end of 2011, over 50 percent more than the Tianhe district. “If domestic companies’ expansion continues, rental growth will probably be stable over the next few years,” said Marcos Chan, head of research for Greater Pearl River Delta at Jones Lang, the world’s second-biggest commercial broker by market value. “We’re talking about a market that hasn’t seen anything like this before. So when the new buildings are all in place, we may see a boom like what happening in Beijing last year.” Beijing’s central business district’s prime office rent surged 73 percent in 2011 to be Asia’s third most-expensive office market after Hong Kong and Tokyo, according to Cushman. Supply Glut Government-led commercial districts in some of China’s second-tier cities, including Chengdu and Hangzhou, “may face a market supply glut” because of over-building fueled by developers wanting to diversify from residential development, according to Cushman. The expectation of growing demand for office space in Zhujiang Xincheng has prompted the government to plan the development of another business district in Guangzhou’s Pazhou, the district where the venue of the Canton Fair is. Companies including Nan Fung are building at least 4.5 million square meters of commercial space there in addition to the 335,000 square meters already there. “Guangzhou’s market for convention and exhibition is still developing,” said Nan Fung’s Choi. “It’s the center of trading of southern China and we’re very confident in its future.” The company, one of Hong Kong’s two biggest closely held builders, is investing at least HK$6 billion ($773 million) building a hotel, exhibition venue, and an office building in the district. “The next five years in Pazhou will be like Zhujiang Xincheng five years ago,” said Colliers’ Lam. “At the moment there’ll still land available, but that’ll change fast.” To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net