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Shanghai is viewed as one of the two
most mature, deepest, and most liquid markets
in China, strong in all sectors.
Shanghai—China’s most populated city—moved up to score a first-place ranking for both investment and development prospects in Mainland China Real Estate Markets 2013: ULI Analysis of City Investment Prospects, a report released in early June at the ULI Asia Pacific Summit in Shanghai. The city had come in second to Chengdu in both categories for the last two years. Shanghai is viewed as one of the most mature, deepest, and most liquid markets in China, strong in all sectors. The maturity of Shanghai as a real estate market is reflected by the fact that the city’s residential prices—while clearly still on an upward trend overall—are among the less volatile, according to the report.

The annual report examines real estate development and investment prospects in 36 of the largest Mainland China cities and related issues from the perspective of real estate industry leaders active in the country. This year’s report revealed that respondents were decidedly more upbeat with regard to prospects for China’s real estate markets than they were at the beginning of last year.

However, underlying the optimism about prospects for China’s real estate markets in a year of revival, the in-person interviews provided a clear sense of respondents’ frustration with government’s increasing willingness to intervene directly in the residential market sales and pricing mechanism going forward. The effect of this, as commonly voiced by the interviewees, is that developing residential property profitably in China is, if anything, getting harder rather than easier, as the central government has repeatedly dug in its heels about halting the rise in the capital value of housing.

Investment rating scores for this year’s four top-ranked cities—Shanghai, Suzhou, Beijing, and Wuhan, in descending order—are all higher than the investment rating awarded to top-ranked Chengdu in 2012.

Development ratings for Suzhou and Guangzhou—the second- and third-rated cities for development prospects this year, respectively—exceed all 2012 development scores, save those of Chengdu.


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Investment rating scores for this year’s four top-ranked cities—Shanghai,
Suzhou, Beijing, and Wuhan (shown), in descending order—are all higher
than the investment rating awarded to top-ranked Chengdu in 2012.
Suzhou saw a jump in its investment rating score that brought its ranking up a dramatic 11 places—from 13th to second place for investment prospects. The jump in its development rating score brought it up 12 places—from 14th to second place for development prospects. With a substantial concentration of high-tech manufacturing, Suzhou is Shanghai’s largest industrial satellite and a vibrant, expanding city in its own right.

Beijing also rose dramatically in ranking of investment prospects, from ninth to third place, and in development prospects, from 16th to fifth place. The country’s capital and second-largest city, Beijing drew attention for its maturing and sophisticated office sector, which includes the Grade A office market in the central business district (CBD) but also growing decentralized suburban fringe office nodes and urban fringe business parks.

Previous feelings of ennui toward some solid first- and second-tier markets like Guangzhou, Suzhou, and Wuhan were replaced by a new attitude of “yes, we’ll have a look at that,” particularly following the recent revival of the residential sales market in many strong second-tier cities.


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Chengdu.
Chengdu—the top-ranked city for both investment and development prospects the last two years—fell to eighth and seventh place, respectively, this year. Although its ratings shifted only slightly downward, it was outdone by other cities’ quick ascent. The recent rapid development in Chengdu has led to concerns about oversupply of CBD commercial development, although this was viewed as somewhat temporary as Chengdu is the most economically dominant city in southwest China.

Sector Engagement

The biggest changes among respondents have taken place within the industrial/distribution sector, with involvement increasing from just over 40 percent of the survey respondents in 2010 to almost 60 percent expected by the end of 2013. Reponses reflect a broad and growing interest in the industrial/distribution sector, responding to China’s critical lack of modern warehousing and distribution facilities.

Respondents were clearly alert to the fact that e-commerce transactions have soared, and this is driving an acute, partially unsatisfied need for more e-commerce distribution facilities. This sector, however, is not easily entered into in China due to the lack of sufficient quantities of industrial/distribution-zoned land made available by local government.

While e-commerce/distribution centers received the highest rating in the survey, the in-person interviews indicated that this may be mostly aspirational due to the difficulty of gaining access to logistics-zoned land sites. Still, the high rating of e-commerce/distribution centers reflected respondents’ interest in all areas where the growing use of information technology is stimulating demand for real estate, as high-tech/cyber/knowledge parks and business parks emerged as third and fifth in niche markets.

Respondents rated seniors’ housing second to e-commerce/distribution centers, aware of the acute shortfall that China faces over the next two to three decades. The huge frustrated demand that the continued imposition of home purchase restrictions (HPRs) has created has resulted in developers creating luxury housing abroad, which is emerging as the fourth-most-popular niche market.

Livability Rankings

In giving Hangzhou, Xiamen, Chengdu, and Qingdao top ranking in terms of livability, respondents clearly showed a preference for scenic beauty, attractive heritage architecture, sense of scale, reasonably good environmental quality, and, finally, laid-back atmosphere and well-developed consumerist culture.

The big surprise was Beijing, ranked 31 out of the 36 cities, despite China’s capital ranking number three in investment prospects. This finding suggests that in light of the city’s deteriorating environmental quality and persisting traffic problems, this was an urban center in which it was desirable to own prime commercial assets for leasing, but not to live oneself.