Less wealthy Chinese cities may lose their advantage this year, as their land prices soar, said Credit Suisse Group AG.
In some less affluent Chinese cities, land prices surged faster than residential prices, putting property developers’ profit margins under pressure, said analysts, headed by Du Jinsong, in a report.
Chinese cities such as Jinan, Kunming and Nanjing followed Beijing in implementing local curbs on home purchases in February, in response to measures announced by the central government. This year, China increased the minimum down payment for second-home purchases and imposed taxes on residential properties in Chongqing and Shanghai.
“With government limits on home purchases being rolled out nationwide, the second-tier cities will no longer have an advantage,” said Mr. Du.
Credit Suisse kept its “underweight” rating on China’s real estate industry.
Property developers, including China Overseas Land & Investment Ltd and Guangzhou R&F Properties Co, are likely to be severely affected, said Credit Suisse.
First-tier cities include the richer Beijing, Shanghai and Guangzhou, second-tier cities comprise provincial capitals and third-tier cities consist of smaller cities, according to China’s National Bureau of Statistics.
“The conventional wisdom of favouring developers’ exposure to Tier 2 cities is wrong,” said Credit Suisse in the report. “Many of these cities are value traps due to low development margins and an oversupply situation there.”
China-based property developers are building more homes in cities throughout the country, away from Shanghai and Beijing, which may be hardly affected by the government measures aimed at curbing real estate prices.