Date: 6 June 2012
Source: South China Morning Post
Section: Property – Concrete Analysis
Headline: High five have best prospects

Property developers and investors polled by the Urban Land Institute picked five cities – Chengdu, Shanghai, Hangzhou, Wuhan and Shenzhen – as having the best real estate investment prospects on the mainland in the short term.

Their opinions, along with those of lenders, brokers, and advisers, were canvassed for the “ULI Mainland China Real Estate Markets 2012” survey released on May 18.

Of the five, Chengdu and Shanghai retained their top-five ranking from last year, while the other three rose through the ranks.

In keeping with what Leo Tolstoy wrote in Anna Karenina, namely: “Happy families are all alike; every unhappy family is unhappy in its own way”, the “happy” cities in the top five enjoy a certain commonality.

To wit, they are generally not merely home to vibrant economies, but have furthermore established the perception among observers that they are attractive places in which to live and work, or to visit.

By contrast the four “unhappy” cities that slipped in the rankings, namely Beijing, Chongqing, Dalian, and Nanjing, were each perceived by the survey respondents to have lost some of their appeal as investment destinations, but for rather different reasons.

In the case of Beijing and Dalian, the declines were related to a sense of frustration about gaining favourable access to investment markets, rather than a loss of attractiveness.

Chongqing arguably lost some of its appeal due both to the dark cloud it came under during its period of political turmoil in the first quarter of the year and to the fact it was never securely perched in its top ranking for 2011.

Nanjing’s fall was arguably related to its failure to create the kind of irresistible drawing power that Hangzhou has excelled at, in order to counteract sentiment that had turned slightly less favourable to the cities of the eastern seaboard.

Of all of the cities on the mainland, Beijing has amongst the highest demonstrated demand for grade-A offices, shopping malls, high-end serviced apartments, and five-star hotel accommodation. So for it to drop from fourth to ninth place in the latest rankings would appear to be an anomaly.

However, the vigour shown by Beijing over the past two years in imposing restrictions on home purchases troubled questionnaire respondents, of whom nearly 60 per cent were developers from the Asia region or international private equity funds. Their perception was that when the restrictions are eventually relaxed, Beijing will be among the last to loosen up, mindful, as it is, that it should lead by example.

In the meantime, however, Beijing’s desire to be a “model city”, and the fact that pent-up demand for quality housing in the capital has remained strong, has meant that prices for apartments within the Fourth Ring Road have in fact remained remarkably stable over the past two years.

By giving the capital city a lower ranking this year, survey respondents were therefore arguably making a judgment on the current relatively high level of its commercial asset prices, prime office rents having spiked up by 40 per cent in 2011 and carried capital values up long with them.

Also, respondents would have been aware that, while Beijing serves as the focus of a huge concentration of political power and wealth, it is not a particularly easy market in which to access investment opportunities and in which leading developers are highly selective about the companies with whom they partner.

Viewed in this context, Beijing’s decline in the rankings arguably has more to do with frustration over market access than a sense that its prospects have dimmed.

By the standards of second-tier cities in the north, Dalian has a fairly enlightened municipal government, and has not made a substantial number of sites available for urban regeneration. This has driven up the cost of such development land which has become available, and made it a relatively expensive location in which to undertake development compared to its peers. At the same time, the city’s real estate market conditions have remained generally favourable and, in a manner not dissimilar to Beijing, the downgrading of Dalian should be taken more as an indication of frustration at gaining access to projects providing good risk-adjusted returns.

The fact that Chongqing tumbled so sharply from No3 to No6 in the rankings following its political shake-up in March hints at the probability that its previous ranking was never secure to begin with.

Its direct rival, Chengdu, on the other hand, enjoys a more strategic geographical location, provides ready access to six surrounding provinces and one autonomous region, and has historically served as Sichuan’s administrative centre.

Nanjing, the fourth city in the quartet that fell in the rankings – from 5th to 7th place – was not the subject of any particularly bad news.

But in the opinion of one of the respondents to the ULI survey, it appeared to be “a city which is somewhat confused about communicating its identity”; another said it had been less successful at leveraging its history as a resource for promoting tourism, and by extension the hospitality and retailing industries.

Andrew Ness is an independent consultant of the Urban Land Institute
[email protected]
South China Morning Post Publishers Limited