China Real Estate Return: 1st Tier versus 2nd Tier

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2008

(Based on Data from Soufun: China Real Estate Index System CREIS)

In recent years many real estate developers and investors, both local and overseas, involved in the China real estate market have been reported to switch their attention to or at least allocate more resources to the 2nd tier cities in China. Reasons cited include the expensive and tighter land market in the 1st tier cities and the emerging opportunities in the 2nd tier ones.

It is not the intention here to investigate or debate the pros and cons of such investment preferences or the like. Instead your humble author out of curiosity has assembled some simple price data and made some rough calculations to see if indeed the 2nd tier cities hold more promise, return-wise, than the 1st tier ones. Here are a few tables on prices per square meter of floor area of various cities and sectors from 2006 to 2007 to begin with: 

Residential Yuan / m2 Floor Area

2006

2007

Beijing

7,375.41

10,661.00

Shanghai

7,039.00

8,253.00

Guangzhou

6,149.31

7,993.00

Shenzhen

8,830.33

13,370.00

Tianjin

4,649.25

5,557.00

Chongqing

2,069.91

2,588.00

Wuhan

3,548.55

4,516.00

Nanjing

4,291.61

5,011.00

Hangzhou

5,971.02

7,434.00

Chengdu

3,436.84

4,190.00

 

Office Yuan / m2 Floor Area

2006

2007

Beijing

13,554.71

15,152.00

Shanghai

12,077.99

14,223.00

Guangzhou

10,178.06

12,669.00

Shenzhen

15,839.59

23,536.00

Tianjin

6,170.54

7,411.00

Chongqing

3,301.94

4,186.00

Wuhan

4,494.93

5,705.00

Nanjing

8,340.12

11,859.00

Hangzhou

8,671.79

10,412.00

Chengdu

4,579.20

5,828.00

 

Retail Yuan / m2 Floor Area

2006

2007

Beijing

14,964.64

17,584.00

Shanghai

6,479.00

6,613.00

Guangzhou

10,218.84

9,525.00

Shenzhen

14,292.70

19,099.00

Tianjin

6,258.98

8,880.00

Chongqing

4,552.87

5,135.00

Wuhan

8,122.24

8,369.00

Nanjing

7,025.19

8,468.00

Hangzhou

8,817.37

9,498.00

Chengdu

6,668.44

6,194.00

Using a simple formula of ([2007 unit price V 2006 unit price] / 2006 unit price) for each city and sector, we would get a simple profit or loss percentage. Here they are:

Residential % + / -

2006 to 2007

Beijing

45%

Shanghai

17%

Guangzhou

30%

Shenzhen

51%

Tianjin

20%

Chongqing

25%

Wuhan

27%

Nanjing

17%

Hangzhou

25%

Chengdu

22%

 

Office % + / -

2006 to 2007

Beijing

12%

Shanghai

18%

Guangzhou

24%

Shenzhen

49%

Tianjin

20%

Chongqing

27%

Wuhan

27%

Nanjing

42%

Hangzhou

20%

Chengdu

27%

 

Retail % + / -

2006 to 2007

Beijing

18%

Shanghai

2%

Guangzhou

-7%

Shenzhen

34%

Tianjin

42%

Chongqing

13%

Wuhan

3%

Nanjing

21%

Hangzhou

8%

Chengdu

-7%

The percentages above can be comprehended to mean that for every $100 invested in a particular city-sector (sector being residential, office, and retail), $X, where X is the percentage, positive or negative, indicated for that city-sector. Hence, assuming we have EQUAL investments (say $100 each) in ALL city-sectors listed above, then we can summarize the earnings into a) the 1st tier group, namely Beijing, Shanghai, Guangzhou, and Shenzhen, and b) the 2nd tier group, i.e. the remaining 6 cities. Here are the results:

Total percentages:

1st tier cities

2nd tier cities

Residential

$143 earned for $400 input, or $36 per city

$135 earned for $600 input, or $23 per city

Office

$103 ditto, or $26 per city

$163 ditto, or $27 per city

Retail

$46 ditto, or $12 per city

$79 ditto, or $13 per city

Briefly, an investor would have been better off investing in the 1st tier residential sector from 2006 to 2007. For the office and retail sectors, the 2nd tier city group do offer better prospects though one has to take into account that the 6 2nd tier cities are NOT the only ones in China, and there are many more, and this would tend to make investment selection, thus investment success, a higher calling. Furthermore, the $earnings per city in the 1st tier group are not much different from those in the 2nd tier group.

There is reason for staying in and sticking to the 1st tier cities after all.

Important points to note: a) the above price figures could be skewed toward the newly completed properties; b) the calculations have not taken into account the transaction costs such as taxes, fees etc; c) the 1 year trend from 2006 to 2007 may not be sufficient statistically or reflective of future possibilities.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.                                

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