Rapid development of office, retail,
and residential space is still underway
in Beijing. Photo by: Elizabeth Razzi

China’s emerging inland cities such as Chengdu, Wuhan, Xi’an, and Changsha are gaining attention for real estate investment and development opportunities, a trend that suggests a pullback from some of China’s mature coastal markets that are perceived as overbuilt, according to a report released by ULI at its inaugural Asia Pacific Summit in Beijing in May.

Mainland China Real Estate Markets 2012: ULI Analysis of City Investment Prospects gauges investment and development prospects for 28 of China’s largest markets over the next 12 months. It includes seven cities with a population exceeding 8.5 million; 20 with a population ranging from 1.6 million to 6.4 million, and one, Sanya, with fewer than 750,000 people. The top-ranked city for investment possibilities was Chengdu, followed by Shanghai, Hangzhou, Wuhan, and Shenzhen. Chengdu also scored the highest for development potential, reflecting its appeal to corporations seeking to relocate operations from more expensive coastal sites.

Unlike some of the other major coastal markets, Shanghai and Shenzhen continue to draw investors because they are perceived as offering a high quality of life, the report says. “In their assessment of cities’ prospects, respondents clearly took into account the quality of life the cities provide. In an increasingly competitive labor market, with cities jockeying for position with respect to being able to recruit talent, a city’s ability to retain graduates from local universities is critical to its overall industrial competitiveness,” the report says. It points to the ability of inland city Hangzou to draw investors with its beauty and its lakefront location, giving it an advantage over cities that are perceived as having persistent environmental problems.

Top China Cities for Investment

1. Chengdu
2. Shanghai
3. Hangzhou
4. Wuhan
5. Shenzhen
6. Chongqing
7. Nanjing
8. Qingdao
9. Beijing
10. Changsha

Source: Mainland China Real Estate Markets 2012: ULI Analysis of City Investment Prospects.

Inland markets have become increasingly competitive due to a policy shift by China’s central government that over the past decade directed investment away from coastal hubs and toward the less-developed interior. In addition, as more inland markets have become hubs for information technology, they are better positioned as employment centers that appeal to young, well-educated, talented workers.

Mainland China Real Estate Markets is based on a survey conducted in the first two weeks of March that included responses from nearly 180 land use professionals, more than half of whom are based in mainland China, with the remainder based primarily in Hong Kong. The report suggests that a guardedly optimistic view is prevalent in China among practitioners looking past the immediate uncertainty that continues to affect the global economy.

“Overall, survey respondents and interviewees did not express concern for the medium- to longer-term outlook for China’s economy, although some parties said they would be more cautious about investing in projects in [industry] sectors or geographies that are heavily exposed to the vagaries of China’s foreign trade and external economy,” the report says.

Other high-ranking cities for investment prospects are Chong­qing, Nanjing, Qingdao, Beijing, and Changsha. In terms of development prospects, cities receiving a high ranking in addition to Chengdu were Shanghai, Wuhan, Chongqing, and Changsha. On a regional basis, southwest China emerged as a clear favorite for investment and development. Other regions attracting positive sentiment were eastern China and central China.

Overall, the retail and industrial/distribution sectors throughout China received the highest percentage of buy recommendations—rather than hold or sell—followed by the apartment residential, office, and hotel sectors.

In addition, survey respondents showed much interest in niche or emerging-market opportunities. With China’s aging population soaring, housing for seniors and retirement communities received the highest rating among niche sectors for investment prospects. Affordable housing was rated second, with interest fueled by the central government’s mandate that China’s cities increase their stock of lower-cost housing; serviced apartments rated third, reflecting increased demand for business-class hotels and apartments. Resort development was rated fourth, with interest growing in weekend getaway properties. Two niche markets that do not yet exist in China—housing targeted at younger people and self-storage warehousing—drew interest from survey respondents as areas that will emerge as China’s property markets continue to evolve.

Top China Cities for Development

1. Chengdu
2. Shanghai
3. Wuhan
4. Chonqing
5. Changsha
6. Wuxi
7 Nanjing
8. Xi’an
9. Fuzhou
10. Xiamen

Source: Mainland China Real Estate Markets 2012: ULI Analysis of City Investment Prospects.

Steps taken in 2010 by the central government to constrain soaring housing prices and curb what it perceived as unsustainable growth in the residential market have caused larger developers to increase the commercial component of their portfolios, while cash-strapped and smaller developers are increasing the volume of commercial properties they are selling to offset declining residential sales, the report states.