Developers Retreating to Major Markets as Emerging Cities Disappoint

According to a recently released report from JP Morgan Chase & Co, residential real estate in China’s major cities should significantly outperform smaller communities during 2013. And apparently, China’s real estate developers concur, as the major players are increasingly concentrating their investment in the country’s biggest cities.

The JP Morgan report by analyst Haibin Zhu foresees pressure on the residential space in emerging cities, particularly in third and fourth tier centres. And an echo of the report’s findings can be seen in the performance of China’s biggest developers.

Developers whose business focused on first and second tier cities have reported better figures than those whose business focused on third and fourth tier cities. The latter group’s performance was worse than the market as whole.

The benefits of investing in the first-tier markets can also be seen in residential pricing figures released by the Chinese government. During 2012, home price increases were mostly seen in first and second tier cities while decreases took place in third and fourth tier cities, according to the National Bureau of Statistics that tracks 70 large and midsized cities.

An October 2012 report from China Real Estate Information Corp (CRIC) ranked cities by investment risk, and the 50 riskiest candidates were all third and fourth tier cities, like Jiuquan in Gansu and Ordos in Inner Mongolia, citing smaller population, lower income and excess land supply as adverse factors. The largest cities were the least risky.

The golden period for third and fourth tier cities was 2010 and 2011 as developers flocked there as the ¥4 trillion stimulus package was rolled out.

China Vanke Co (SHE: 000002), Poly Real Estate Group Co (SHA: 600048) and China Overseas Land & Investment Ltd (HKG: 0688), China’s top three developers by revenue, collect 60% of revenues and 70% of profits from first and second tier cities, industry experts say.