Property prices in the Yangtze River delta region beyond Shanghai are increasingly interdependent and have been greatly influenced by a series of new tax and credit policies implemented since March 2005. Herein lies the opportunity for investors. While property prices in Shanghai have fallen quite sharply in recent months, in nearby Suzhou, prices of high-end properties are still at historic highs and Hangzhou property prices have remained pretty steady.
Suzhou: cushioned market
Average property prices in downtown Suzhou remain the same as a few months ago. Even in the industrial park housing the high-end properties, the average price has changed little in the last 12 months. Prices of around RMB16,000 per sq m at 'Join in The Grand' phase II, the first international apartment development in Suzhou Industrial Park, are the same for which phase I sold last year, the first project in Suzhou marketed at over RMB15,000 per sq m.
Investment in Suzhou's real estate market got off to a slow start (see table), as was to be expected since smaller markets inevitably attract less attention. Suzhou's investment capital increased by 387% during the last four years, but the total size of investment over the same period is equivalent to the total investment in Shanghai in 2001. At this point the average property price in Suzhou and its five counties is less than RMB5,000 per sq m, and anything priced at over RMB8,000 per sq m is considered luxury. Strangely, this pricing does not tally with Suzhou's GDP, which now ranks fourth in China. One explanation could be that the proportion of short-term investors in Suzhou is fewer than in other cities and Suzhou residents are more conservative in their investment approach.
Suzhou's market, therefore, behaves more like Beijing's, that is, less extreme in terms of market movements. There have been relatively few signs of a ?bubble' in Suzhou, where prices have increased in recent years by only RMB800 sq m to RMB1,000 per sq m annually. Over the same period, Shanghai and Hangzhou have on many occasions seen price increases of RMB1,000 per sq m every two or three months. As in Shanghai, many Suzhou purchasers are currently taking a wait-and-see attitude following the implementation of the new policies. But the fall in market activity does not mean real demand has fallen; indeed, the upside potential of Suzhou is still large. There are many foreign enterprises in Suzhou, and the number of white-collar workers is increasing fast. As the private economy develops, entrepreneurs and white-collar workers will become the main source of demand for Suzhou's high-end properties.
Hangzhou: ?Life is like a dream'
Hangzhou's property prices have risen 15%-20% per year in recent years. Theoretically, property prices in Hangzhou should have dropped due to the new policies, yet the first quarter of 2005 saw prices rise by 13.8%. The average sales price of residential property being marketed was RMB6,241 per sq m in the first quarter of 2005 while the average price now is RMB7,000 per sq m. The price of some properties exceeds RMB12,000 per sq m and the grandest of them all commands the highest price.
There are four main reasons behind the relative stability of Hangzhou's real estate market. The economy of Zhejiang province has been experiencing a boom in recent years; 2004 GDP increase by 14.3% year-on-year to reach RMB112.4bn. Secondly, Hangzhou is increasingly being favored by the government of Zhejiang province, which has historically lacked a clear economic center, and this has increased the potential of its real estate market. Most real estate projects are found only in central downtown areas, but other cities such as Shanghai and Guangzhou also see many projects located in the suburbs. On this basis, the average price of land transacted in Hangzhou is relatively high, ranging from RMB5,000 sq m to RMB10,000 sq m (based on buildable area), which encourages high prices. Thirdly, Hangzhou is a city that attracts immigration – the number of non-local residents is over 1.5m out of a population of 6.9m. Demand has increased due to a brain gain of well-qualified workers who have been attracted by the city's economic progress. Finally, development of the property market started late, supply has been inadequate to meet the demand.
Another reason Hangzhou is resistant to downward market pressure is that the city government has been unwilling to see a down-turn in the property market and have indicated it may intervene as they did last year if the real estate market drops much following the new government policies effective June 2005.