Friday Letter Next stop, second-tier

Chongqing is a hilly city in Western China that sits at the intersection of the Yangtze and Jialing Rivers. Despite being the home of more than 30 million people, the bustling metropolis is probably not particularly well-known to many in the West. 

But speaking with investors and developers at a conference in China last week, second-tier cities like Chongqing were the topic du jour—the conference itself was held at the Hilton hotel in the Western Chinese city. With the third-largest urban population in China, Chongqing is a major part of the central government’s push to encourage investment away from the country’s east coast and spread the roots of its unique brand of capitalism west.

In 1997, Chongqing was officially given municipality status (only Shanghai, Beijing and Tianjin share that distinction) when it became the staging area for the controversial, large-scale Three Gorges Dam project. As an established industrial center and transportation hub, the city has not surprisingly seen double-digit GDP growth over the past few years.

Meng Yi, the deputy director general of the municipality’s Administration of Land Resources and Real Estate, told the conference that the growth in the property market has been strong, but sensible. “There is no bubble in the real estate market in Chongqing,” he told attendees, promising that real estate will play a central role in the city’s growth. “The property market is the key market to Chongqing’s economy in the future.”

With groups like Dutch insurance company ING looking at investing in the city, Chongqing is just one of many far-flung areas in China attracting the eye of foreign investors. As competition continues to heat up in the first-tier markets, cities like Chengdu—described by one panelist as the “Melbourne of China”—and Wuhan, which has attracted more than one-third of all French investment in the country, are popping up on radar screens around the world.

But many developers and property experts were quick to point out that the margin for error in a second-tier city like Dalian, China’s most northerly, ice-free seaport, is quite small. If a foreign investor doesn’t know the market, for example, it could end up building a high-rise residential project for a population that prefers villa-style accommodations.

Even if a firm knows the market inside-out, many feel that the major headaches will come via local governments and onerous regulation, rather than market cycles or changing fundamentals. Both legal and political risks are increasingly a non-issue in established markets like Shanghai, but laws can still be selectively applied across the provinces.

“You don’t assume one rule applies, just because these are national policies,” said an executive at a large Hong Kong-based developer.

The early development of the real estate market has been an exciting time for opportunistic property investors, but things are no doubt just getting started as firms look for opportunity in these fast-growing secondary markets.

Better start by investing in a map.