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OVER supply in the residential sector in Guangdong has forced prices down by 20 per cent during the last year and further severe reductions cannot be ruled out, according to property specialists.

  Mr K. K. Yeung, of K. K. Yeung Management Consultants, which is monitoring the sector, said that in the third quarter of 1992, prices for flats in Shenzhen fell by five per cent.

  ''This vacancy market is a big problem and further problems can arise,'' he said.

  Mr Yeung's view is shared by top property analysts Richard Ellis, which agree there has been a ''downward adjustment'' in price.

   Richard Ellis director Mr Dominic Leung said the market was in a state of flux with ''a big structural adjustment already happening''.

  Figures supplied by Mr Yeung show the situation starkly. In Guangdong province, there are about 85,000 residential units on the market. Of these, 15,000 are completed and occupied, with a another 18,000 units pre-sold.

  With an absorption rate of, at most, 40 per cent, there are still about 50,000 units available.

  It is not, however, an ideal market for buyers.

  This situation is unhealthy, even without taking into account the certainty of more building, which would extend the market.

  In Shenzhen alone, according to Mr Yeung, there are plans for another 200 blocks of flats.

  Supply cannot be blamed in isolation, as demand has also played a crucial role.

  The problem is that mainlanders have a much tighter budget for accommodation than Hongkong residents.

  The minimum cost of any apartment just outside of Shenzhen was estimated by Mr Yeung to be $400 per square foot, which puts any reasonably sized apartment well beyond the cost of a mainland family, although it is comparatively cheap for Hongkong residents.

  There is little evidence to show that the Chinese authorities are attempting to solve the problem by creating an end-user market of mainland Chinese big enough to absorb much of the current building boom.

    Ms Eva Chow, from the international department of the Hongkong General Chamber of Commerce, accompanied a delegation to Panyu city last autumn. The delegation was sceptical that even a primary market would work.

  ''Local officials said the market isn't that mature for re-sale and that it was quite difficult for them to have secondary markets. They don't encourage them,'' Ms Chow said.

  Specialists have warned buyers to beware when purchasing residential property in China.

    They are advising clients that while a profit is still to be made, it will be less than might have been expected and will require some more thought.

  Mr Bob Broadfoot, a risk consultant, said that the price downturn was cyclical and would eventually be solved by the market.

   There was no place in the world where the adage ''buyer beware'' held more truth, he said.

  Mr Broadfoot said a potential investor in residential property over the border should consider the business advantages a purchase would offer before buying.

  Arguments for buying residential property in China can vary.

  Many buyers believe that owning an apartment or house works out cheaper than staying in a hotel for a frequent visitor to the mainland.

  A house is cheaper than a hotel and will save a lot of time in commuting for people working there.

  In addition, it can be rented out to mainland employees as part of their conditions of service.

  But Richard Ellis emphasised that investors buying residential property for any purpose should be cautious.

  The company advised against buying outside big cities, because there was not the support of an end-user market.

      . In Guangzhou, the separate markets of locals and foreigners are beginning to merge.

  ''We are seeing the gap closing but only in Guangzhou and a few other big cities,'' said Mr Leung.



Flat glut slashes prices in China