PUDONG developer Shanghai Lujiazui Finance and Trade Development Zone Co is finding it has no option but to go with the flow. By expanding its investments and developing housing for the domestic market, the B-share company is seen as making a wise move to ensure profit growth. As the outlook for property sales in the foreign market remains gloomy, Shanghai Lujiazui, despite owning prime land in the Lujiazui Finance and Trade Development Zone, faces an uphill struggle. Being a government-appointed company charged with overseeing the development of the zone, touted as the financial and trade hub of the city and China, Shanghai Lujiazui is under great pressure to live up to the expectations of the central government. The depressed B-share market certainly does not help. So why not cash in on the huge domestic demand for housing? Vice-general manager Zhang Zhe said three housing estates were planned. The Tangdong and Yangdong estates with a total area of 66.7 hectares were originally planned for office developments but now will be used for housing with a total floor space of one million square metres. Property experts are concerned there could be an oversupply of office space in Pudong, with more than 50 office buildings under construction. A Sanwa Bank report said Lujiazui alone would have one million square metres of new top grade office space by 1998. Mr Zhang said another site planned for housing was Taolin estate on Pudong Road near Dongfang Road. He said they would be developed by a subsidiary - Lujiazui Real Estate Co, with an initial registered capital of 200 million yuan (about HK$186 million). Developers, Chinese and foreign alike, have begun investing in housing for the domestic market because of the austerity measures. Analysts said healthy profit growth for Shanghai Lujiazui would not be impossible this year but the challenge was to sustain growth. They said the company could meet its 28.8 per cent forecast profit growth this year to 550 million yuan only if it included in its books Japanese property giant Mori Building's plans for the US$750 million, 96-storey skyscraper approved last year. However, the momentous growth in profit of 1993 and 1994 would be a tough act to follow. Since its B-share listing on the Shanghai Stock Exchange in November last year, its share price has slipped on sluggish turnover despite reporting a 164 per cent jump in net profit on high profit margins through sales of prime land. After tax profit was 426.9 million yuan, up from 161.4 million yuan in 1993. Earnings per share was 0.58 yuan, up from 0.22 yuan. James Capel Research analyst Charles Huang said there would be an even bigger discrepancy between the company's net profit next year and 1994. 'This is because the peak period for land sales is long gone,' he said. Next year's growth rate would be maintained at this year's level, Mr Zhang said: 'Our concentration will remain on 'xiao Lujiazui' which is still attracting a lot of foreign interest.' The 1.5 square kilometre 'xiao Lujiazui' is the heart of the 28-sq km zone, directly across from the Bund, dedicated primarily to big names in domestic and foreign banking, finance and insurance. Since its establishment in 1992, Shanghai Lujiazui's main occupation has been to develop 'good quality' office and residential properties catering to foreign investors. In the wake of an economic slowdown in China brought about by Beijing's macro-economic controls to rein in the overheated economy, analysts believe Shanghai Lujiazui would do itself good by cutting down on the number of high-risk projects and concentrate on low-risk ones. Domestic housing is a far cry from the 25 per cent or more returns for commercial developments for the foreign market, but the upside is the government-guaranteed 15 per cent yield. For Shanghai Lujiazui the returns could be even more attractive because the price per square metre of units for domestic sales that will be developed is estimated to be at 7,000 yuan, a level analysts call 'relatively expensive'. Development and investment in office and residential properties for the higher end of the market would continue nevertheless, Mr Zhang said: 'But land supply for such projects will be controlled strictly by the company so as to prevent a stockpile. 'We still have many companies speaking to us about leasing land for office developments. But the amount of land to be leased will not be as much as the past few years.' He said the company would lease three to five lots of about 8,000 square metres in the next two years with land price increases adjusted only to match inflation. In 'xiao Lujiazui' district, land costs between US$550 and US$600 per square metre, dropping to US$350 per sq mt in areas further away from the central district. The first phase of development is about 1.5 square kilometres and only half the land has been sold.