| HONG KONG
HONG KONG Nov 22 Chinese developers such as
China Overseas Land & Investment Ltd and Country
Garden Holdings Company Ltd are likely to build bigger
apartments in smaller cities to take advantage of Beijing's new
The vast majority of land these companies have purchased for
development is in medium-sized cities with fast-growing
economies, known as Tier 2 and Tier 3. China has more than 50
cities that fit that description, many of them in the Pearl
River Delta and western China, home to thousands of factories
feeding the country's vast, labour-intensive export business.
Those cities, with populations up to 10 million, are
expected to see an influx of potential property buyers in the
coming years after China announced last week that it was
revising its hukou residency registration system. Under existing
rules, migrant workers who move to cities for jobs are not
eligible for social services and cannot buy real estate.
As the policy is gradually eased, allowing more migrants to
own property and tap social services, about 100 million people
will likely move into cities over the next 17 years, according
to rating agency Moody's.
"There are great opportunities in second-tier capital
cities," said Liu Zhuogen, executive director at Tonic
Industries Holdings Ltd, a Hong Kong-listed overseas
platform for mainland developer China Merchants Property
"They have more room for growth and lower risk," he said.
His company is focusing on medium-sized cities in the Pearl
River and Yangtze River deltas but avoiding smaller non-capital
cities because of concerns about oversupply.
Before the policy changes were announced last week, many
mainland developers were holding back, in part because of
worries that Beijing would crack down on real estate speculation
that has driven up prices in major cities.
The biggest developers were sitting on $25 billion in cash
as of midyear, giving them plenty of money to ramp up
construction now that the policy shifts are becoming clearer.
China Overseas Land, Country Garden and Shimao Property
Holdings Ltd each have more than 93 percent of their
land banks in smaller cities, according to BNP Paribas, putting
them 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, either
by choice or by force," the research firm wrote in a note to
Over the past three years, property developers have
concentrated on major cities along the wealthy eastern and
southern coasts, avoiding small cities for fear of over-supply.
But as empty land becomes scarce, they have ventured into less
crowded markets, and the hukou reforms are making those small
cities popular once again.
The next phase of development will shift further west,
following the manufacturing industry that is moving inland in
search of cheaper labour.
Longfor Properties Co Ltd has 36 percent of its
land bank in western China, and 37 percent in the Bohai Rim area
surrounding Beijing and nearby Tianjin. Greentown China Holdings
Ltd has about one-third of its land around Bohai Rim
and another third in Zhejiang province, a coastal region
"From a longer-term perspective, developers definitely have
to deploy in Tier 2 and Tier 3 cities if they want higher profit
margins," said Lina Wong, China investment services managing
director at real estate services company Colliers.
"If developers want to catch the demand, they can go to Tier
2 and Tier 3 cities and design their products according to the
needs of farmers who first move to the city."
Last week's economic and social reforms also included easing
China's one-child policy, which is expected to provide a double
benefit for developers as some parents upgrade to larger units.
The policy shift will translate into about 9.5 million
additional babies over the next five years, BofA Merrill Lynch
"Relaxation of one-child policies should boost upgrade
demand. Mid-size property units of 90-140 square meters should
benefit the most from this," said Wee Liat Lee, property analyst
at BNP Paribas.
While many analysts said larger families will spur upgrade
demand and mitigate the downside risk to property demand, some
cautioned that the shift could take time. That is reflected in
the stock prices of Chinese property developers, which have seen
little benefit from the reform news.
Shares of Country Garden have slipped 7.2 percent since
Friday, when the reform plans were unveiled, while China
Overseas Land has risen 1.5 percent and Evergrande has gained
2.5 percent. That compares with a 5.9 percent gain for the index
of Chinese companies listed in Hong Kong.
"(The reform) is good news. Developers will take this factor
into consideration and launch more three-bedroom units,"
Colliers' Wong said.
"But there is still a long way to go. They may decide to buy
the house 20 years after now."