China’s stock market started 2012 pessimistically but ended on a strong note. So it was with the residential market as well, where transaction volumes rose by 39.3% from a year ago for the 20 cities we monitor, as detailed in the chart below. As we expected, industry consolidation accelerated throughout the year as the top developers continued to outperform their peers. According to the data from China Real Estate Information Corporation, sales revenues of the top 10 developers in China increased 30.6% y-o-y to RMB 822.2 billion in 2012, with their combined market share growing approximately 2 percentage points to 12.8% in 2012.

Source: CREIS

The top developers’ rising sales revenue allowed them to step up their budgets for land acquisitions in the second half of 2012. For instance, Vanke, China’s largest developer by market value, spent about RMB 70 billion on land acquisitions in the second half of 2012. Similarly, Poly spent nearly RMB 30 billion on land acquisitions in 4Q12 alone. According to the data from CREIS, the total expenditure on land acquisitions by the top 10 developers reached RMB 175.3 billion in 2H12, up 50% from 1H12. In addition to the renewed interest by developers for land acquisitions, there also was a noticeable change in developers’ strategies in 2012. After several years’ aggressive expansion into lower-tier cities, the top developers are now switching back to top Tier I and II cities, such as Shanghai, Beijing, Hangzhou, Chengdu, Chongqing and Wuhan. A key reason for this change lies in the fact that the market fundamentals in the higher-tier cities look much healthier in the short to medium term than in the lower-tier cities.

Despite the high land costs, the supply pipeline in top Tier I and II cities is much more manageable than in lower-tier cities. A significant portion of Tier I and II cities’ populations are composed of college graduates from other cities and provinces seeking a place in the growing white-collar workforce in which salaries are higher and opportunities greater than back home. Jobs in many smaller cities offer less potential for career growth, and are considered to be less meritocratic. Shanghai, a top Tier 1 city, is viewed as the land of opportunity where the private sector is very large and the playing field is more flat. Immigrants thus provide a steady pool of potential buyers to the residential market in top Tier I and II cities. In contrast, lower tier cities often face very large supply pipelines relative to their pools of potential buyers. In the short to medium term, lower-tier cities’ large pipelines are likely to result in further price corrections, while in the top Tier I and II cities, developers can gain competitive advantage by developing high quality projects instead of only lowering prices. That said, the lower tier cities do offer several promising prospects in the long run, such as fast-rising urbanisation rates and low land costs.

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