Chinese developers are building more homes in cities across the nation away from the financial hub of Shanghai and the capital Beijing, which may be the hardest hit by government measures to curb property prices.
China Vanke Co., the country’s biggest developer by market value, said an expansion into central and western Chinese cities, including Wuhan and Chengdu, helped 2010 revenue exceed 100 billion yuan ($15 billion), a target it had set for 2014, while Evergrande Real Estate Group Ltd. counted on towns in the nation’s interior to boost sales.
Cheaper land and rising incomes in inland cities are luring developers as the government targets speculators, focused on Shanghai and Beijing, with stricter mortgage requirements and property taxes. Land investment in less affluent cities jumped 35.4 percent in the past year, according to data from China Real Estate Information Corp., which tracks 40 publicly traded developers.
“Absolutely policy is a driver of this, both because the policy’s footing in more developed cities is stricter and also because there is tremendous unmet demand for modern housing in these second-tier cities where incomes are rising quickly,” said Michael Klibaner, head of China research at Jones Lang LaSalle Inc. in Shanghai.
First-tier cities include wealthier Shanghai, Beijing and Guangzhou, in southern China, according to China’s National Bureau of Statistics. The second tier includes provincial capitals and the third includes smaller cities.
Residential land costs in the central city of Wuhan averaged 1,662 yuan per square meter in January, compared with Beijing’s 4,145 yuan and 5,692 yuan in Shanghai, according to SouFun Holdings Ltd., China’s biggest real estate website.
“Everyone agrees that opportunities lie in second- and third-tier cities, including us,” said Yang Haisong, a Hong Kong-based spokesman for China Overseas Land & Investment Ltd., a state-owned developer. “There are more cities in that category and their home prices have more room to rise.”
Hong Kong-based China Overseas, which started expanding in the country’s interior five years ago, posted its biggest increase in sales volume in northern China in December. It sold 1.5 million square meters (16 million square feet), a 67 percent jump from the same period a earlier, in the region that includes Shenyang, Changchun, Dalian and Qingdao.
“Top cities are increasingly mature: people are actually going to be second-, third- or fourth-time buyers,” said Wee Liat Lee, a Hong Kong-based property analyst at Samsung Securities Co. “If you go to these lower-tier cities, a lot of them are first-time buyers. You are tapping into fundamental demand, with no restrictions.”
Per capita net income in rural areas rose 10.9 percent to 5,919 yuan last year -- the biggest gain since 1984. Average disposable income in urban areas rose 7.8 percent. China’s economy grew 10.3 percent in 2010.
The average disposable income rose 10.4 percent in Shanghai to 31,838 yuan and 8.7 percent in Beijing to 29,073 yuan in 2010, compared with 13.2 percent in Wuhan to 20,806 yuan and 11.3 percent in Chongqing to 17,532 yuan, according to data from the local statistics bureaus.
The second- and third-tier cities will remain growth engines for developers in 2011, according to Christie Ju at Jefferies Equity Research in Hong Kong.
“China is a combination of cities: Beijing and Shanghai, which are equivalent to those in developed countries, and the smaller cities, like those in emerging markets,” said Ju, head of Hong Kong and China research at Jefferies, a New York-based firm. “Developers realized that many people need quality housing and not everyone lives in Beijing or Shanghai.”
Still, the government has expanded property curbs to limit the risk of asset bubbles in the world’s fastest-growing major economy, and the central bank raised interest rates on Feb. 8 for the third time since mid-October.
“The property market is a huge bubble,” Andy Xie, an independent economist, said in a Bloomberg Television interview in Hong Kong yesterday. China may raise interest rates four more times this year to curb inflation, Xie added.
“The government is trying to engineer a soft landing,” he said. “The property market will turn.”
Vanke said yesterday it expects a “sharp” drop in sales this month after revenue in January more than tripled to a record 20.1 billion yuan. The company will pay close attention to the market’s reaction to the government curbs, Tan Huajie, the company’s board secretary, said in a statement.
China’s real estate prices rose 6.4 percent in December from a year earlier, increasing for a 19th month, the country’s statistics bureau said Jan. 17.
Home prices rose 21.4 percent in Shanghai in January from a year earlier, 25 percent in Beijing, 27.8 percent in Chongqing and 16.1 percent in Wuhan, according to SouFun.
Last month, policy makers approved property tax trials on some homes in Shanghai and the western city of Chongqing, raised the minimum down payment for second-home purchases, and asked local authorities to set price targets for new properties and boost land supply.
“We believe this round of tightening is in response to recent rises in property prices, especially in some tier-2/3 cities, and reveals the government’s low tolerance of further rises at this stage,” said Hong Kong-based Peng Wensheng, chief economist at China International Capital Corp., in a Feb. 1 e- mailed report.
China last year restricted loans to developers, and some cities including Beijing limited the number of homes local residents can buy.
Less affluent cities will offer more opportunities for developers this year because they may not fully implement government tightening policies, said Samsung Securities’ Lee.
“The local governments will have much less incentives to really execute what the central government wants,” he said. “A lot of these cities still rely heavily on land sales for their funding.”
To boost sales, Shenzhen-based Vanke said it entered inland cities such as Kunming in the south and Guiyang in the west last year, and the smaller cities of Wuhu and Qinhuangdao in January. Vanke’s strategy of moving into smaller cities may drive their growth further this year, said Du Jinsong, a Hong Kong-based property analyst at Credit Suisse Group AG, today.
Evergrande, based in Guangzhou, sold the second-most properties following Vanke in China by volume last year, with the sales value increasing 66.4 percent to 50.4 billion yuan from 2009. More than 90 percent of its sales came from central and western cities including Changsha, Chongqing, Chengdu and Wuhan, the company said on Jan 10.
“The government’s property tightening took place in the top cities, but our sales in second- and third-tier cities are doing very well and drove our sales higher,” Xia Haijun, Evergrande chief executive officer, said at a Hong Kong briefing on Dec. 8.
In Wuhan, the new transportation hub for China’s high-speed trains, billboards line the highway offering homes from companies, including Vanke, Shanghai Forte Land Co., and Shanghai Greenland Group, the developer of the world’s third- tallest building in the city. Land sales in Wuhan rose 163 percent to 78.2 billion yuan last year from 2009, according to SouFun.
“Home prices in Wuhan were much lower compared with Shanghai and Beijing and have more room to grow,” said Li Guozheng, an analyst at the central China branch of SouFun in the city.
While China Overseas is seeking a “more balanced strategy” with expansion into smaller cities, “top cities still command a higher margin,” said Yang.
Developers should pay attention to factors such as the cities’ growth rates, infrastructure and job creation when expanding, said Klibaner at Chicago-based Jones Lang LaSalle.
“It’s a decade-long process and we are still at the earliest stage,” said Klibaner, who forecasts more Chinese developers will expand outside Beijing, Shanghai, Guangzhou and top-ranked tier-two cities. The trend is “in line with China’s overall economic growth,” he said.
--Bonnie Cao. Editors: Linus Chua, Andreea Papuc
To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at +86-21-6104-3035 or email@example.com
To contact the editor responsible for this story: Andreea Papuc at firstname.lastname@example.org