Lake StakesHangzhou has always been something of a hidden gem in Asia. A tranquil vacation jewel that people forgot was there. But after A West Lake Moment was released in 2004 the quasi-sleepy town — if a city of 10 million could ever be called sleepy — jumped to the forefront of regional pop culture and became a destination for all things romantic.

The Zhejiang capital, however, has been a hotbed of industry, trade and tourism for hundreds of years. It’s been the inspiration for poets, painters and musicians and its position in the heart of the Yangtze Delta has helped the city maintain its international flavour, arguably longer than Shanghai or Beijing have. The defining West Lake (a UNESCO site) sits at the centre of the city’s tourist trade, but Hangzhou’s reputation as one of the Mainland’s most beautiful cities with a bounty of historical and natural attractions has kept visitor arrivals at healthy levels. In 2009 the city attracted 53 million tourists, over 2 million of those international travellers. It is no surprise that global brands like the Four Seasons, Sofitel, the Hyatt and the Shangri-La ring the lake.

But Hangzhou is also a booming industrial centre, and the city’s GDP has tripled over the last eight years. Its three economic zones have increasingly turned their attention to elite manufacturing — in medicine, IT, electronics, telecommunications, fine chemicals, chemical fibre and food processing among others — which is spurring on Hangzhou’s real estate sector. According to Colliers International’s first quarter analysis for Hangzhou, “Investment in Hangzhou’s real estate sector in January and February grew by 45.6 percent year on year to total RMB13.44 billion. The growth rate was 12.9 percentage points higher than Zhejiang province’s average level, ranking Hangzhou fourth highest in the province in terms of real estate investment value.” Demand for premium office space also rose, with office investment soaring 82 percent from the same time a year earlier to RMB1.771 billion.

But despite the upward swing in office demand and the assumed staff for those offices, the residential market took a hit. Sales for the same period in the residential sector dropped by a whopping 64 percent, values by almost 80 percent and residential prices in Hangzhou were at their lowest since 2009 in February. Though a crowded holiday schedule that typically brings activity to a near halt played a role in those numbers, anti-speculation policies didn’t help. Some banks lowered their lending rates for first-time buyers in an effort to stimulate demand but that didn’t stop developers from offering discounts on projects as well in an attempt to push up transaction volume. Global property consultancy DTZ agrees, pointing out that those discounts created new internal capital for developers that didn’t require bank borrowing. “Lessened financial pressure along with the traditionally slow season surrounding the Chinese New Year holiday saw developers continue to hold back project launches. Thus, the Hangzhou residential market witnessed no new high-end supply this quarter,” stated DTZ’s Property Times for Hangzhou.

The second-hand market performed better, with vendors dialing down aggressive pricing and exploiting the latent market similar to Hong Kong’s. Although currently near a record low, Hangzhou’s residential prices remain the fourth highest in China, which could pave the way for more discounting over the next few quarters, and 2012 may be a good time to investigate new projects like Ludu Jiafeng Mansion, Rose and Ginkgo Town and Yefeng Xiandai.

“Looking forward, developers are cautious about acquiring new land and an increasing number, which were previously waiting for an easing of government restrictions, are realising that the government stance is firm and they can no longer hold inventory at the expense of the bottom line. While large-sized developers who have already secured cash reserves through discounts may be in a stronger position, some smaller cash strapped developers are now likely to have no option but to dump inventory and offer discounts in order to boost transaction volumes. In turn it is likely that first time home buyers will be particularly active in the market in the second quarter of 2012,” predicted Colliers.

Hangzhou’s long history as a major trading centre and its strategic geography have all its major economic indicators pointing toward continued growth: exports in the same period grew 1.9 percent to US$5.7 billion in a shaky economic environment and foreign direct investment topped US$990 million. And even if major corporations weren’t operating in the city, that lake isn’t going anywhere.