It seems ironic that while Hong Kong's property market remains stuck in the doldrums, just a few miles away Guangdong Province's real estate sector is booming. In the first six months of 2002, residential and commercial property sales in the province grew 17 per cent, while vacancies for residential housing dropped by 1.4 per cent to about 26 per cent.

Hong Kong residents have helped drive demand for properties across the border. Advertisements promoting spacious "houses" at more affordable prices than flats in Hong Kong are featured daily in the local media. Often endorsed by local stars, Hong Kong residents see the properties as an ideal way to improve their standard of living.

A government survey showed that Hongkongers own 189,000 flats in Mainland China, of which 88 per cent, or 166,000 units, are in Guangdong, mainly in Dongguan and Shenzhen.

Hongkongers' interest in purchasing homes in the Mainland fell through the floor with the start of the Asian financial crisis in 1997 and didn't start to recover until 2000.

Hong Kong residents are now more cautious when it comes to buying property after being burnt by the bursting of the local real estate bubble and "uncompleted flats" in the Mainland.

But according to Colliers International, the number of Hong Kong residents who are purchasing and investing in the Southern China luxury residential market, especially Shenzhen, is growing.

Echo Wong of Colliers International's Guangzhou office estimates that around 18 per cent of total luxury residential supply, or nearly 3,000 units, are owned by Hong Kong investors, as of the end of the third quarter.

Out of the HK$8.7 billion worth of property transactions involving Hong Kong residents last year, only round HK$1 billion stemmed from bank loans. This suggests that most homes were paid for in renminbi by Hongkongers working in the Mainland. According to the Census and Statistics Department's figures, about 165,000 Hong Kong residents work in Guangdong, of which 80 per cent are managers who have strong purchasing power and need to buy a home in the province.

Half of the homes bought in the Mainland by Hong Kong residents are for their own day-to-day use. The remaining buyers do not work or have no intention of living in the Mainland. This begs the question, are they speculating on the Mainland property market?

Advertisements for Mainland properties all have one thing in common: they all try to capitalise on the fact that they are in lush, suburban areas, and that their residents enjoy a leisurely lifestyle within easy reach of Hong Kong and nearby Mainland cities.

The developers of these properties are not targeting Hongkongers who work in the Mainland, because convenience is their top priority, but rather Hong Kong residents looking to buy a holiday home.

"Hong Kong residents see the attraction of buying residential property in Shenzhen largely for a holiday home. With the easy accessibility into China and the cheaper cost of living, people are often finding it valuable to have a home in Southern China," Ms Wong said.

Dr K W Chau, chair professor of the Hong Kong University Department of Real Estate and Construction, said that with the maturing of the Mainland property market, the number of Hongkongers purchasing homes in China will continue to rise, especially given the desire to spend their holidays there.

Guangdong's residents are still the main buyers of properties in the province -- Hong Kong's homebuyers represent about 10 per cent of buyers. The Central Government's new monetary housing policy of encouraging citizens to buy their home, instead of distributing houses as a form of social welfare, means this trend is expected to grow.

Last year, a total of RMB1.307 billion was granted housing subsidies. Though the figure represents only 2 per cent of total sales, rising per capita income of Guangdong residents, which grew 7.6 per cent in 2001 over the previous year, has prompted commercial banks to aggressively advertise home mortgage loans.

China's decades-long planned economy, however, means the notion of borrowing money from banks to buy a house will take some time to catch on. Moreover, traditional Chinese customs of "don't spend future money" and "living within one's means" are forcing banks to work hard to win borrowers.

The shear size of the market however, means the banks who have ventured into the mortgage business in the past few years have enjoyed rapid growth. The Mainland's emerging rich and confidence in the economic prospects among ordinary citizens is also encouraging borrowing. This is one of the major forces that has driven the growth of Guangdong's property sector.

The province's secondary market has also picked up this year, and sales of second-hand properties have increased to 28.5 per cent of total property sales.

In 2001, RMB97.23 billion was invested in property developments in Guangdong Province, up 13 per cent over last year. The growth is gaining momentum this year. Between January and July, private property investments reached RMB41.4 billion, up 39.3 per cent over the same period last year. Such huge investments are a result of developers' optimistic outlook for the market.

Interestingly, foreign investment in the sector accounted for only 2.6 per cent of that total. Furthermore, in 2001, foreign investment in property developments slid 5.2 per cent compared to 2000.

Hong Kong's sluggish real estate market is tempting some of the territory's property developers to look for markets across the border. Hong Kong's major developers, including Cheung Kong Holdings, Sun Hung Kai Properties, Henderson Land, Wharf and New World Developments, all have property developments in the Mainland. However, they are taking a cautious approach to the market.

Sun Hung Kai Properties' latest annual report showed that less than 10 per cent of its turnover came from outside Hong Kong. Cheung Kong has a number of projects in China, including Guangzhou, Shenzhen, Dongguan and Zhuhai in South China. It also has operations in eight Mainland cities, but again these operations contribute a small percentage, just 7 per cent, of the group's total turnover. Similarly, Wharf's property business in China contributes not more than 6 per cent of the group's total. Only Henderson Land and New World Developments' China business exceeds 10 per cent of their total business.

Interestingly, Hong Kong's lesser-known developers have a larger share of the China property business. For example, Hopson Development Holdings and Sinolink Worldwide Holdings are very active in Guangdong. However, they have successfully localised their name to the extent that few Mainlanders consider them Hong Kong developers.

Part of the reason for Hong Kong developers' cautious approach to the Mainland market is obviously because China's real estate market has yet to be fully regulated, which means relationships between developers and local governments remain very important. Also, land auction prices are generally 20 per cent higher than the government's agreed selling prices, and in Guangdong, not all plots are sold by public auction, though this is starting to change under the government's housing reforms.

China's rapid economic growth, rising per capita income and flood of foreign investment into the country are all creating opportunities for the real estate sector. However, investments in the sector in the first half of this year grew at a much faster pace than sales. Early last year, analysts were already asking if a bubble in southern China's property market might be forming.

Strong demand has done little to dampen developers' interest in the market, mainly because the real estate sector remains highly profitable in China with annual profit margins averaging 20 per cent, double the average profit ratio of other industries.

But is Guangdong Province's property market really in danger of becoming a bubble market?

China's existing residential property vacancy rate stands at around 26 per cent, while it is about 7 per cent for the United States and 3 to 4 per cent for Hong Kong. The international alarm vacancy level is 10 per cent. Guangdong's vacant housing represents 20 per cent of the country's total.

The high vacancy rate, however, is a result of the expensive, low-quality, "dead" housing left over from the planned economy. This is clearly reflected in the low vacancy rate among private developers' properties. It also explains why housing prices have remained stable in the face of a technically high vacancy rate.

Mainland investments in the real estate sector hinge on the government's macro-economic strategies, because the real estate sector contributes about 1.6 percent to China's GDP growth. In Guangdong, real estate investment has increased 39.6 per cent so far this year, while investments in other infrastructure projects have decreased by 3 per cent. This over supply of property obviously exceeds demand, and has forced residential property prices to fall 3.3 per cent in the first half of this year.

So far, property speculators have shunned Guangdong, which has kept prices relatively stable, in favour of more lucrative returns in other parts of the country, particularly Shanghai. There, speculators are believed to be responsible for over half of all property sales. In Guangdong, buyers are usually looking for a home for their own use, rather than for speculation.

With South China's real estate market supported by Mainland and Hong Kong investors, supply and demand in the market is expected to remain strong in the coming few years in light of the steady supply. Prices are expected to remain relatively stable so long as supply and demand are kept in check and speculators continue to prefer to look further north.