China’s top-tier cities such as Beijing and Shanghai may be well known to many U.S. real estate investors, but other lesser-known Chinese cities actually offer better development and investment opportunities, according to a newly published ULI report.
The report, China Cities Survey, surveyed nearly 100 real estate investors throughout Asia on the development and investment prospects for 16 of the Middle Kingdom’s leading cities, all considered Tier 1 or Tier 2 cities with populations ranging from 2 million to 16 million.
Based on this input, many of the higher-rated cities for future development turned out to be among the smaller cities in the group. One smaller city in particular—Chengdu in west-central China—earned number-one rankings in both development and investment prospects, as well as in several different property sectors.
“The results of the survey reflect trends that have been developing over the last couple of years,” says Sam Crispin, coauthor of the survey and director of real estate consulting for PricewaterhouseCoopers in Shanghai. “[Lower] tier cities are perceived as offering better opportunities because they have been late starters in property development. Many are benefiting from new infrastructure, such as high-speed rail, new highways, and development zones,” which are spurring real estate opportunities along with boosting economic and population growth rates.
Overall, there appears to be more enthusiasm and optimism about real estate opportunities in China than in North America or Europe. The China Cities Survey was similar to ULI surveys conducted for U.S. and European cities in recent months, with all three surveys asking different investors to rate cities’ real estate prospects on a low-to-high scale of 1 to 9.
All 16 Chinese cities received above-average ratings—above 6.0—for development opportunities, while none of the 51 U.S. cities and only one of the 27 European cities rated that high. Likewise, 75 percent of the Chinese cities rated above average for investment opportunities, compared with 18 percent of U.S. cities and 26 percent of European cities.
“This is not some blip on the radar—this represents a structural shift in their respective growth outlooks,” says Calvin Chou, managing director and head of real estate investing for Morgan Stanley in China. “The Chinese economy is growing at a rate that’s probably unsustainable, but it will continue to grow, and there’s an underlying need for new housing to serve the urbanization trend. If you think about that shift alone, it’s going to require substantial real estate investment.”
Indeed, real estate prospects are typically tied to economic and population growth, and China has been booming. As a whole, the 16 cities included in ULI’s survey nearly doubled in population from 1995 to 2010, with each growing 88 percent on average. And now China’s newest five-year plan, starting this year, has made domestic consumption a top growth priority, which will fuel real estate development in a variety of ways.
For instance, part of China’s plan involves making exports more competitive, so manufacturing bases are shifting to lower-cost areas, according to Henry Cheng, chief executive officer of Chongbang Development Ltd., a development and investment company in Shanghai. The beneficiaries of this shift are some of China’s lesser-known, second-tier interior cities, and the Chinese government is encouraging this shift by making job-creating infrastructure investments to improve these cities.
Chengdu, home to 4.96 million people and the capital of the Sichuan province, is one such city. According to a 2011 white paper prepared by the American Chamber of Commerce in the People’s Republic of China, Chengdu “is witnessing unparalleled growth and helping drive China forward,” partly through government incentives for industrial investment. In the ULI survey, when respondents were asked to give “buy,” “hold,” or “sell” investment recommendations for property categories in each city, Chengdu received the highest “buy” ratings of all cities in retail, apartments, hotels, and office properties.
“The investment and business climate is more welcoming than [that] in other cities,” says Ryan Botjer, senior managing director of Tishman Speyer China, which has an office in Chengdu and is developing mixed-use residential towers there. “You’re seeing a sense that Chengdu is an emerging global city for business. It has that momentum, and real estate developers and investors follow that.”
Other lesser-known cities that rated high in the survey include the following: Chongqing, population 9.4 million, which ranked second for development and third for investment; Wuhan, population 7.9 million, which ranked third for development and sixth for investment; and Nanjing, population 4.5 million, which ranked sixth for development and fifth for investment.
The largest cities included in ULI’s China survey—Shanghai and Beijing—ranked second and fourth, respectively, for investment prospects, but they earned only middle-of-the-pack ratings for development prospects.
In terms of market opportunities identified by survey respondents, the property sectors that received the most recommendations as buying opportunities—rather than holding or selling opportunities—were retail, industrial/distribution, and apartments.
For ULI members who may be interested in pursuing development or asset management opportunities in China, real estate and investment executives there suggest, above all, researching and understanding the local market before diving in. China is a big place, and just like the United States or Europe, it has distinct regions, traditions, and tastes. In addition, in the fastest-growing lesser-known markets, what’s hot in the retail or office markets changes quickly. In most cases, all this necessitates finding a local partner in each market.
“After 18 years in real estate development, I have come to subscribe to a four-letter [acronym] for doing business in China—FACT, which stands for Focus, Adaptability, Commitment, and Talent,” says Chongbang Development’s Cheng. “The best option for new entrants is to joint venture with local developers who have a proven track record of success and a level of corporate governance acceptable by international standards. Both are equally important.”
