Developers told to diversify portfolios

Mainland developers need to optimise their land bank portfolios because while first- and second-tier cities are safer bets, some exposure to selected third-tier and even fourth-tier cities is necessary to counter policy and industry headwinds in the next few years, analysts said.

A private report in July on the 50 riskiest cities for property investment - all third-tier including Ordos, Lhasa and Quzhou - sparked concerns about oversupply and stagnating sales in the mainland's many lower-tier cities. Some developers, including Evergrande, the country's fifth-largest homebuilder by sales, reacted by snapping up land plots in top-tier cities this year to diversify their geographical mix. However, others remain confident about their growth prospects in smaller cities during the next phase of urbanisation.

"Many mayors [of third- and fourth-tier cities] want to build their own cities into the superstars in the neighbourhood. So there will be winners and losers," said Harry Lu, president of Century 21 China Real Estate. "Those losing the battle will end up with oversupply.

"First- and second-tier cities are safer but the entry barrier is relatively high," he added, referring to soaring land prices in the four first-tier cities - Beijing, Shanghai, Shenzhen and Guangzhou - as well as second-tier cities, which are mainly provincial capitals such as Hangzhou and Nanjing.

Economists predict that successful developers in third- and fourth-tier cities will benefit from the mainland's new urbanisation push and its efforts to overhaul the rural land system, with farmers to be granted a bigger share from sales of collectively owned land and encouraged to move to small, nearby cities instead of bigger cities. Some young families unable to cope with record-high home prices in big cities may also want an easier life in smaller cities.

At a meeting on urbanisation last week, the leadership rolled out guidelines for the next decade that will restrict population growth in big cities such as Beijing, Shanghai and Guangzhou, and boost the development of regional hubs in the northeast and southwest, including Shenyang, Harbin, Chengdu, Xian, Wuhan and Chongqing.

While demand for housing is strong in top-tier cities, they are also more vulnerable to policy curbs once home prices surge beyond the comfort zone of top leaders. That was how lower-tier cities caught the attention of developers in 2011 and last year, after several dozen big cities introduced tightening measures to check housing inflation and temporarily choked off property transactions.