An investment approach to the emerging housing markets in 2nd tier Chinese cities

Understanding the economics of grouping and ranking cities and their property markets is proven an important issue from the real estate investment and the urban economics/planning perspectives. It appears that little research attention has been placed on the so-called "second tier city" property investment markets in emerging markets such as China. From the macro strategic investment point of view, it implies a lack of understanding of this "would-be" significant investment sector for both domestic and international investors. And it is also relevant to China's Macroeconomic Regulation and Control to the country's booming property sector. This paper critically reviews the concept of 2nd tier cities in China and conducts statistical analysis of the commercially viable investment grade residential property markets of selected Chinese cities, using historical market return data and standard methodology for international real estate investments e.g. (Newell and Webb, 1996). The paper discusses the consistency of the way markets are grouped and the standard way to determine an investment strategy, including defining features (e.g. maturity) of property markets, relative to the context of cities/markets. Performance and diversification benefits of these market groups are examined. The results suggest evidence of the selected housing markets as being effective investment vehicles in terms of risk-adjusted returns and diversification benefits. Note that the conclusion is subject to the condition that certain market/policy specifications are effectively in place. It seems that there is a lack of theory about the correlations among different city 'groups' in the urban development and property investment contexts. Equally weak is a lack of 'theory' on the sustainable growth in Chinese housing market. This paper hopes to stimulate further research under this path.