January 25, 2008 -- The real estate boom has moved inland, driven by recently unleashed market demands in the second- and third-tier cities, and market saturation in the first-tier metropolises.

In December, the city with the highest prices increase in China was Urumqi, with a rise of 25.3 percent, according to the National Development and Reform Commission, China's state media reported last week. Urumqi was followed by Beihai, with a rise of 19.3 percent. Prices in Beijing were up 17.5 percent in December, and the prices in southwest China's Chongqing municipality were up 15.9 percent.

''The prices in the first-tier cities as well as the coastal cities have already experienced rapid increases," Yun Cheng, an analyst with Caida Securities, told Emerging China. "Now the second- and third-tier cities are in the line for the next wave of the bull market. I think the current round of price increases has not yet finished -- in 2008 it will continue.''

It will be balanced, however, by increased regulatory controls, she added. These include restrictions on the purchase of second homes, and crack-downs on "hoarding and profiteering.

Second-tier cities also pose other risks for investors, warned Xiaoyuan Chen, vice director of the market development department at Beijing's Green Rivers Manor Real Estate Development Co.

'The overwhelming majority of second-tier urban housing is aimed at local residents, the sales cycle may be too long, and there are default risks," Chen told Emerging China.

This is balanced out by higher returns, he added. First-tier cities average 7 to 8 percent returns, he said, while second-tier cities -- such as the recent project in Shi Jia Zhuang -- can offer returns of up to 30 percent, similar to what Beijing experienced during its initial real estate boom.

However, the central government policies aimed at cooling down the market will be felt in inland cities as well.

"The increase in down payments and higher interest rates limit investors," said Mingyang Sun, a spokesman for Hebei-based Risesun Real Estate Co., Ltd. "The increase in investment costs may make them give up their investment plans."

But the industry outlook in long term is still optimistic, Sun said.

''Although the macro regulation and control of the city property market are even more unfavorable, we are still seeing balanced growth in our city,'' Sun said. ''Sale prices are steadily and slowly rising. Despite the government policies designed to suppress investment demand, there are still domestic real estate investment opportunities for us. N addition to residential projects, there are also some good quality commercial projects that can show good returns.''