• Foreign investors' interest in China's property sector has shown no signs of abating, despite the Chinese government's continuing efforts to cool the property market. Greater transparency in the land sales system has helped boost interest in the market among foreign property developers.
  
  
• Limited availability of urban sites in first-tier cities, including Shanghai, Beijing, Guangzhou and Shenzhen, has increasingly driven foreign developers to shift their investment towards second-tier cities.
  
  
• However, in the short term, first-tier cities will continue to be the preferred location for foreign investors looking for en-bloc properties to hold over the long term, given the small stock of quality properties in second-tier cities.
  
  
• Many foreign developers prefer residential projects because of their relatively short payback period, but competition in the residential sector is intensifying. Local developers have been catching up fast in acquiring the know-how for developing quality residential schemes.
  
  
• Demand for Grade-A offices in many second-tier cities has to date remained weak, but the continual influx of multinational corporations will stimulate the demand for quality office space in cities that have the potential to become a regional service centre. Cities with this potential include Tianjin, Nanjing, Wuhan, Qingdao, Dalian, Chongqing and Chengdu.

Where are international property investors heading in China?

Foreign investors have continued to pour billions of dollars into China's property sector despite the central government's heightened clampdown on the property market. In 2007, foreign direct investment in the real estate sector rose year-on-year by 108% to USD17 billion following an increase of 52% in 2006.

Significant upside in capital values, attractive rental yields and the expectations for further appreciation of the renminbi are the key forces that lie behind foreign investors' foray into China's property market. Furthermore, increasing foreign developers attracted by the improving transparency of the land sales system, which now requires all government land to be sold by public tender or auction, also contributed to the surge in foreign investment in China's property sector.

Click here to download full report.