To date, most of the focus has been in the big four growth cities of Shanghai, Beijing, Shenzhen and Guangzhou. Other cities have made headlines from time to time, particularly Tianjin and Chengdu, but their time in the spotlight has been intermittent at best.
However, beyond the big four, there are 167 other cities with more than 1 million people and another 489 that house 57% of the country’s 1.3 billion people. With little good land available for development in the top-tier cities, it is in these locations that the future profits in the real estate sector may lie.
“They are starting at quite a low level, which means there should be good growth,” said Stones Tse, CEO of SPG Land.
According to Jones Lang LaSalle research, some 30 cities classified as second-tier or below are already making a significant contribution to the market (See chart below). Those in the second tier have already developed robust local markets while the third-tier candidates are believed to have put in place “the conditions to create a solid economic profile and are beginning to have some success at creating real estate demand.”
From a regulatory perspective, the Wild West days of real estate development may be over. Developers now have to be careful what they build and where. Central government is getting stricter about enforcing regulations that, amongst other things, call for a specific proportion of affordable housing in every development. Meanwhile, at local level, more sales are being carried out by the book, relying on transparent auctions rather than opaque connections.
Beijing is already sending teams to track developments in first-tier cities and, by all accounts, second-tier cities are next.
However, Wee Liat Lee, head of China research at Jones Lang LaSalle, does not believe regulatory toughness will dampen the development prospects in the country’s relatively untested second-tier cities.
“I think in the first-tier cities, the growth momentum will moderate and the second-tier cities will catch up,” he said.