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PERE China: Tier 2 cities still hold promise

Contrary to the popular rhetoric, investment opportunities can still be found in Tier 2 Chinese cities, said panelists at PERE’s annual China forum in Shanghai.

Slowing economic growth and currency volatility has made foreign investors relatively more risk averse towards China but investment opportunities can still be found throughout the country.

And, contrary to popular perception these opportunities are not limited to only Tier 1 cities such as Shanghai and Beijing, according to the speakers on the opening panel at PERE's fifth annual real estate conference in China.

Tim Wang, managing director and head of real estate, China for The Blackstone Group said while the residential markets in most cities are in over-supply there are some exceptions. He said as per the first quarter property data Nanjing for instance is reported have recorded the highest volume of sales in the residential sector, creating “interesting investment opportunities” in such cities. On the other hand, cities in northern China such as Dalian, continue to deal with high unsold inventory.

The opportunities are not limited only to the residential sector. Blackstone for instance owns a logistics warehouse in Guiyang, a Tier 3 Chinese city. According to Wang the firm was able to lease the property instantly because this particular warehouse was the first one to have ever been built in the city.

For Benjamin Lee, managing partner at Phoenix Property Investors, there is also scope to invest in credit deals in Tier 2 markets.

“We are looking at Tier 2 cities that involve debt and mezzanine loans situations. That has gone through a cycle recently, and while this market is less attractive than three to four quarters ago there are still opportunities because some of the Tier 2 cities developers do not have access to good quality bank loans,” he said.

Alan Li, managing director, capital markets for Greater China, for property consultancy CBRE, who was also the moderator of the panel, said the volume of transactions and preference to invest in Tier 2 cities continues to increase. His view echoes findings from CBRE's investor intentions survey for Asia Pacific released earlier this year.

“China is a much more complex story today. One needs to take a block-by-block and city-by-city approach, just like US, Japan and other markets,” added Bryan Southergill, director and Asia head of real estate for KKR.

He said investment managers looking to invest in Tier 2 markets need to know what their angle is, and then find the right local partner who understands the city well enough.