Chinese property developers target bigger families in smaller cities

Reuters

By Yimou Lee and Umesh Desai

HONG KONG, Nov 22 (Reuters) - Chinese developers such asChina Overseas Land & Investment Ltd and CountryGarden Holdings Company Ltd are likely to build biggerapartments in smaller cities to take advantage of Beijing's newurbanisation drive.

The vast majority of land these companies have purchased fordevelopment is in medium-sized cities with fast-growingeconomies, known as Tier 2 and Tier 3. China has more than 50cities that fit that description, many of them in the PearlRiver Delta and western China, home to thousands of factoriesfeeding the country's vast, labour-intensive export business.

Those cities, with populations up to 10 million, areexpected to see an influx of potential property buyers in thecoming years after China announced last week that it wasrevising its hukou residency registration system. Under existingrules, migrant workers who move to cities for jobs are noteligible for social services and cannot buy real estate.

As the policy is gradually eased, allowing more migrants toown property and tap social services, about 100 million peoplewill likely move into cities over the next 17 years, accordingto rating agency Moody's.

"There are great opportunities in second-tier capitalcities," said Liu Zhuogen, executive director at TonicIndustries Holdings Ltd, a Hong Kong-listed overseasplatform for mainland developer China Merchants PropertyDevelopment.

"They have more room for growth and lower risk," he said.

His company is focusing on medium-sized cities in the PearlRiver and Yangtze River deltas but avoiding smaller non-capitalcities because of concerns about oversupply.

Before the policy changes were announced last week, manymainland developers were holding back, in part because ofworries that Beijing would crack down on real estate speculationthat has driven up prices in major cities.

The biggest developers were sitting on $25 billion in cashas of midyear, giving them plenty of money to ramp upconstruction now that the policy shifts are becoming clearer.

China Overseas Land, Country Garden and Shimao PropertyHoldings Ltd each have more than 93 percent of theirland banks in smaller cities, according to BNP Paribas, puttingthem in pole position to benefit.

The companies did not respond to requests for comment.

More than 90 percent of the new land that China Vanke Co Ltd and Evergrande Real Estate Group Ltd acquired last year was in second- and third-tier cities,research firm Lucror Analytics says.

"Developers are moving into smaller cities in China, eitherby choice or by force," the research firm wrote in a note toclients.

HEADING WEST

Over the past three years, property developers haveconcentrated on major cities along the wealthy eastern andsouthern coasts, avoiding small cities for fear of over-supply.But as empty land becomes scarce, they have ventured into lesscrowded markets, and the hukou reforms are making those smallcities popular once again.

The next phase of development will shift further west,following the manufacturing industry that is moving inland insearch of cheaper labour.

Longfor Properties Co Ltd has 36 percent of itsland bank in western China, and 37 percent in the Bohai Rim areasurrounding Beijing and nearby Tianjin. Greentown China HoldingsLtd has about one-third of its land around Bohai Rimand another third in Zhejiang province, a coastal regionbordering Shanghai.

"From a longer-term perspective, developers definitely haveto deploy in Tier 2 and Tier 3 cities if they want higher profitmargins," said Lina Wong, China investment services managingdirector at real estate services company Colliers.

"If developers want to catch the demand, they can go to Tier2 and Tier 3 cities and design their products according to theneeds of farmers who first move to the city."

ONE-CHILD POLICY

Last week's economic and social reforms also included easingChina's one-child policy, which is expected to provide a doublebenefit for developers as some parents upgrade to larger units.The policy shift will translate into about 9.5 millionadditional babies over the next five years, BofA Merrill Lynchsays.

"Relaxation of one-child policies should boost upgradedemand. Mid-size property units of 90-140 square meters shouldbenefit the most from this," said Wee Liat Lee, property analystat BNP Paribas.

While many analysts said larger families will spur upgradedemand and mitigate the downside risk to property demand, somecautioned that the shift could take time. That is reflected inthe stock prices of Chinese property developers, which have seenlittle benefit from the reform news.

Shares of Country Garden have slipped 7.2 percent sinceFriday, when the reform plans were unveiled, while ChinaOverseas Land has risen 1.5 percent and Evergrande has gained2.5 percent. That compares with a 5.9 percent gain for the indexof Chinese companies listed in Hong Kong.

"(The reform) is good news. Developers will take this factorinto consideration and launch more three-bedroom units,"Colliers' Wong said.

"But there is still a long way to go. They may decide to buythe house 20 years after now."

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