Developers' Guangzhou project faces test

GUANGZHOU: Nine months ago, three of Guangdong's largest developers joined forces and stunned the real estate market by buying a huge site in Guangzhou at a government auction for a record 25.5 billion yuan (RM11.77 billion).

That was the most ever paid for a development site in the mainland's land sale history.

The audacious move is now due to be put to the test as the first batch of residential units built on the site comes up for sale. Some would say that with the market under a policy cloud, the test could not have come at a worse time for the developers.

The site in Panyu, a satellite city of Guangzhou, was secured at auction in December last year by a consortium consisting of Guangzhou R&F Properties, Agile Property Holdings and Country Garden Holdings. In March, Shanghai-based Shimao Property Holdings and state-owned Citic Real Estate bought in, leaving each of the five developers holding 20 per cent in the project.

The project being developed on the site is called Asian Games City and will be used as the base of the Asian Games to be held from November 14 to 27. The project will cover 4.38 million square metres, mostly designated for residential use once the games are over.

It is about 11 times the size of Cyberport in Hong Kong's Pok Fu Lam.

About 1.06 million sq metres of the development, including 8,078 flats, have been built for use as dormitories by athletes and reporters at the Asian Games.

R&F Properties chairman Li Sze-lim said 4,331 of the flats could be released for sale at any time.

He said the average cost of the units would be about 11,800 yuan per square metre.

"We will not make any profit in the first batch put up for sale," said Li, who declined to reveal at what prices the first units would be sold.

But the consortium hopes to reap property sales of between five billion yuan and six billion yuan from the Asian Games City this year as the developers are required to pay a further 30% installment of the total land cost, or 7.55 billion yuan, by the end of this year.

"If they are sold at an average price slightly above 11,000 yuan per square metre, that would represent quite a good deal for buyers," said Lee Wee Liat, a regional property research head at Samsung Securities.

Lee said affordable housing in Guangzhou sold at about 8,000 yuan per square metre. "Buyers in this project (Asian Games City) will also benefit from large-scale infrastructure and amenities in the area," he said. "For the developers to price units at about 11,000 yuan per square metre implies they are cautious and are trying to get as much volume of sales as possible with a very thin margin."

By his rough calculation Lee said construction costs for units in the project would amount to about 3,000 yuan per square metre; land cost 5,800 yuan per square metre, and sales and marketing costs 10% of projected selling prices, or about 1,000 yuan per square metre. "So the margin will be very thin if the average selling price is slightly above 11,000 yuan per square metre and costs are about 9,800 yuan per square metre," he said.

But given the size of the project, it was normal for developers to sell initial phases at very low margins or even break-even prices, he said. "Also, in times of market uncertainty, they would like to err on the safe side in terms of pricing to get as much volume as possible for this very first launch."

The project will have 3.84 million sqmetres of residential space, 210,000 sqmetres of retail space and 323,600 sqmetres in public facilities. — South China Morning Post
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