Developers Bid Adieu to First-Tier Markets

Wei said developer competition in Changzhou is limited to regional companies. Most buildings "are constructed by local developers," he said. "There are relatively few well-known developers and high-end developments."

According to a Centaline Property report, second- and third-tier cities comprised 81 percent of the land reserved by 10 leading real estate companies last year. The companies had 41 million square meters in first-tier cities and 175 million square meters in other cities, the report said.

But even second-tier cities may be beyond the grasp for some businesses. Some developers say housing prices are already quite high relative to income levels in second-tier locales such as Hangzhou, Tianjin, Chengdu and Changsha.

"Right now, developers are looking to get into a lot of these cities, but they can't," said Pan Jun, president of developer Fantasia Holdings Group. "Only in third- and fourth-tier cities can land be acquired (at prices) that guarantee profits."

Some industry experts who have declared the country's largest markets out of control are also starting to raise similar fears in smaller urban areas.

Yi Xiaodi, CEO of the developer Sunshine 100, recently declared first-tier cities overheated and warned that fire hoses should be turned on second-tier cities before developers fan the flames higher. In third-tier cities, he noted, local governments are going all-out to attract investment and drive up housing prices.

Indeed, Yi said, bubbles are emerging and growing in different ways in cities of all sizes across the country.
 
Development Factors

Some second- and third-tier cities that sensed growth potential started building so-called "new towns" two years ago, whetting the appetites of hungry developers who are now getting busy.

One example is the Shijiazhuang City Comprehensive Project in the capital of Hebei Province. China Metallurgical Co., the parent of MCC Real Estate, last year invested 50 billion yuan in the project. MCC is participating in first-stage development, urban infrastructure and subsidized housing in Shijiazhuang's new town.

For developers, the most attractive aspect of second and third-tier cities is that local governments can offer a relaxed policy environment. But that means real estate companies have to be self-disciplined, because some may be tempted to buy large swathes of land before looking realistically at development, funding and staffing issues.

"Developers coming to second- and third-tier cities should be looking at potential and prospects, the most important of which are transportation and infrastructure construction, followed by local economic growth, income levels and purchasing power issues," said Zhong Wenhui, a China Index Academy researcher.

The rush to smaller urban areas has raised questions about possible land hoarding, as well as whether developer funding chains and management capacity are strong enough.

Ministry of Land and Resources (MLR) Chief Inspector Xu Shaoshi recently warned about the importance of overseeing real estate companies and real estate development money that's started flowing into second- and third-tier cities.

Yet some developers learned how to beat MLR's supervision system, which relies on satellite images to enforce rules against hoarding. Developers who sit on vacant land can use MLR insiders to tip them to upcoming fly-overs, then hire temporary laborers to pretend to build on the land when a satellite camera passes overhead.

"MLR's satellite can only scan one area at a time," said a lawyer familiar with the hoarding issue. Developers can find out "when they want to scan a city's land ahead of time. They send out a few vehicles and pretend to dig. Once the satellites have moved on, the vehicles are called back."

Regardless of individual tactics, developers in general appear convinced that shifting away from high-priced, first-tier cities is the next big thing for the industry.

Ren Zhiqiang, president of developer Beijing Huayuan Group, said his company in the future would focus on second- and third-tier cities. His firm was defeated in the recent mega-bidding for Beijing land, dropping out after offers soared above 10,000 yuan per square meter – prices Ren called "unaffordable."

1 yuan = 14 U.S. cents