July 9, 2007 -- High-end luxury residential property development is taking off in China's second and third tier cities. Chengdu, the strategically located western capital of Sichuan province and fifth largest city in China, is rapidly running out of land in the city center for new residences; while Wuhan, the logistics hub of Central China, has attracted internationally renowned architects including NOMADE and UDi to its residential sector.

"Foreign institutional investors are investing in China's residential property market through both joint-ventures and strategic partnerships with domestic developers in a variety of locations throughout China," Chris Brooke, President and CEO of Greater China at CB Richard Ellis in Beijing, told Emerging China. He explained foreign investors are interested in second and third tier cities because of the lower costs of entry, higher returns and what they see as a strategic market presence throughout China.

"Among major developers and overseas investors the main interest has been in second tier and tertiary cities, particularly in the Bohai Bay Area, Yangtze River Delta, Pearl River Delta, and the upper stream of the Yangtze River," Celia Ding, associate director of investment services in Cushman and Wakefield's Beijing office, told Emerging China. According to Ding, the interest in the western parts of the Yangtze River is due to the government's encouragement of development in Western China.

Ding further explained that only a minor portion of developer and investor activities is focused on detached or semi-detached single-family homes. The main focus is primarily concentrated on apartments or condominium developments in city centers.

Hong Kong-based Shimao Property for example, has invested in land throughout central and western China. In the first half of 2007, Shimao acquired properties in Fuzhou, Hangzhou, and Shenyang and in Wuhan.

"Shimao is one of the largest and best-performing pan-China real estate developers. Given its large land bank of over 200 million square feet, its strong management team, brand and execution record... Morgan Stanley Real Estate plans to remain a significant shareholder in the company," a Morgan Stanley representative said in statement. In April, Morgan Stanley, the New York-based financial services company, purchased a 29.99 percent stake in Shimao's Wuhan project. When contacted by Emerging China, Morgan Stanley declined to comment further.

Another company Hong Kong-based company that is going ahead with projects in the mainland is Swire Properties. Swire's first development in Mainland China is called Taikoo Hui and will open in Guangzhou in 2009.

"Swire's mixed-use developments are all retail led," Vivian Lo, Public Affairs Manager of Hong Kong-based Swire Properties told Emerging China. Swire's mixed-used developments incorporate residences, offices and hotels and the company has plans to expand in Mainland China. Lo also said that the company has plans for a similar development in Qingdao and will continue to pursue mixed-use projects throughout Mainland China.

Other foreign residential property developers are looking to China for growth. In June 2007, U.S. luxury home developer Toll Brothers announced interest in entering the Chinese market. The Ascott Group, the serviced apartment developer of Singapore-based CapitaLand, announced intentions earlier this year to have 10,000 units in China by 2010. As of June 2007, Ascott had 3,947 units.

The residential property sectors boom in second and third tier Chinese cities is proving popular among renters and buyers. According to Colliers, vacancy rates in luxury residential rentals in Chengdu dropped to an average of 2.2 percent in the first quarter of 2007.

In Chengdu, scarce land in the city center has pushed high-end and luxury residential development to the city's suburbs. The surrounding communities of Longquan and Wenjiang are seeing a rapid rise in residential property values as developers move into these communities. Both communities are slated to receive stations in the new Chengdu Metro's master plan after the system opens in 2010.

"I was happy that the residential developers took over the hottest zone of the city and finally giving us [the residents] the opportunity to own a modern apartment," Chen Dingdong, a long-time resident of Fuzhou, shared with Emerging China. Chen's family owned property in the city center that as development increased became increasingly valuable.

Demand for residences in cities has pushed apartment prices to as high as $20.50 per square meter in Shanghai. The rapid rise in residential property values prompted the Chinese government to implement measures to check the market.

In Beijing, the February 2007 Decision on Regulating Foreign Organizations and Foreign Purchase of Commercial Housing was released by the Beijing Municipal Construction Committee requiring foreigners to prove that they have either lived or studied in China for at least one year before they can buy property.

"A lot of people are moving into the city [Beijing] who do not pay attention to apartment prices and make it more expensive for ordinary people. Most people, like myself, will not be able to afford an apartment for some time," Rex Psang, a young professional from the Southern Guangxi province working in Beijing, told Emerging China.

China's urban population is projected to continue to grow. According to the United Nations Population Division, China's urban population grew from 40.5 percent in 2000 to 45.1 percent in 2005 and expected to grow another five percent by 2010. Overall population growth continues to slow, dropping from 0.9 percent in 2000 to 0.7 percent in 2005. As the populations of China's cities gradually grow, the din of building sites is set continue unabated.