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China’s Second Cities
Beijing, Shanghai and Guangzhou may be hotbeds of investment but China’s smaller urban centres offer better value
China’s Second Cities
| Text : Elizabeth Kerr | Photo : www.thinkstockphotos.com |
China’s property market is hot, there’s not denying that. Luxury and mid-range developments — both residential and retail — are springing up seemingly everyday, and investors from all over the world are keen to get in on the action. But on the heels of fears of a bubble, Beijing has proposed measures to tighten bank lending for property, particularly in prime markets like Beijing, Shanghai, Guangzhou and even Shenzhen. In April, the central government moved to cool down property prices due to speculation (largely from overseas) chiefly through a new regulation demanding a minimum 50 percent down payment on second homes and 30 percent for first-time buyers of flats larger than 90 square metres (970 square feet) and raising mortgage rates.
The key markets in Mainland China have seen soaring prices — Xinhua reported prices going up almost 12 percent in March — over the last few years but many property agents believe the measures have worked so far, and that rampant speculation has dropped. For investors, however, there are a host of other cities poised to become the next big thing if Shanghai, Beijing and their ilk continue to hover at prices that are unfeasible.
Cities like Tianjin, Chongqing, Kunming, Chengdu, Hangzhou and Shenyang are growing at record paces and attracting investor interest along with newly affluent native buyers. A prime example of that is Chengdu, in Sichuan, where Beijing is investing heavily. “Sichuan received around 1,000 billion RMB on economic development, and as the capital of Sichuan province, Chengdu’s market, especially the real estate market, is doing well. There is a sufficient capital supply in the market and fewer investors,” explains Jacky Tsai, General Manager Colliers International’s Chengdu office.
Despite rumours that prices dropped approximately 15 percent after the tightening measures, “demand for residential properties in Tianjin continues to be strong and primarily driven by the local residents as a result of continued growing urbanisation and aspirations of an improved living standard … in spite of limited external demand from neighbour cities, such as Beijing,” explains Carlby Xie, Head of Research & Advisory, North China, also at Colliers. Tsai agrees, pointing out that Chengdu’s residential market is still attracting, “first-time buyers, people out of Sichuan and [some] investors.”
With China continuing its development on all fronts, the second tiers will continue to experience economic growth and will need to meet a demand by residents. Tianjin is home to vast natural resource deposits and Airbus opened an assembly plant there in 2009. Aside from local industry, Chengdu counts Motorola, Siemens, Sony and BNP Paribas among the multi-nationals that keep offices or manufacturing bases in the city. Dalian is the northeast’s financial backbone, and Qingdao is a major port; the list goes on. And the staff for all these organisations need homes.
China has also been nearly immune to the turmoil in the global economy of the past two years, and has maintained steady growth. That steadiness has trickled down to the property markets too. To Xie’s mind, purchasing patterns are more heavily influenced by “income growth and market confidence,” which has remained reasonably healthy despite the general downturn.
Local buyers that are likely to occupy their properties currently drive second tier city markets in China, but these cities also provide greater relative value for the investment dollar. When comparing the likes of Chengdu and Harbin to each other it’s especially true. Prices are low — when factoring in similar or identical quality and location factors — when compared to Beijing. “That said, from an investment perspective, there should be a room for capital value appreciation over the mid- to long-term,” Xie states. Furthermore, the restrictions that came into effect in April, “arguably should divert the demand for residential investment to cities such as Tianjin from Beijing, considering the factors of proximity and the bigger growth margins,” Xie argues. Tsai goes further, pointing out that the moderate fluctuations in tier-two markets is actually a good thing. “From the view of investment stability, compared with bigger centres, the sales price is low and there is little fluctuation; the investing risks and the return in these second-tier cities may be low but as far as the investment value is concerned, the fluctuation is also low.”
Ultimately, all the markets will be dictated to some degree by Beijing’s cooling policies. Whether those policies will have as marked an effect on the second-tier cities as in pricey Shanghai remains to be seen. Xie believes they will, but to a limited degree. As long as the central government refrains from extending the measures to include issuing sales permits and/or limiting property titles by household in other cities, the impact should continue to be mild.
“It should be noted that investment channels for most Chinese people remains relatively limited, not to mention return expectations,” Xie theorises. On top of that, as much of a boom as there appears to be to the naked eye, supply is dwindling and that limited new supply proves the ideals of classical supply and demand economics. In light of new housing policies in Beijing, Xie also expects to see a rise in demand from both owner-occupiers and [investors] for residential properties in Tianjin and other cities like it. Bank lending controls should further inspire markets across the country to bottom at a consolidation cycle too. Xie succinctly sums up the second-tier as having a bright future. “One should anticipate a continued or sustained growth in property capital values … People who are rich in cash should continue to find investing in real estate a very effective approach for maintaining their capital and enjoying appreciation.”
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