Residential property investment in China is dominated by Chinese nationals and has been extremely active, because real estate has always been viewed as a reliable store of wealth. Savings rates in China are exceptionally high by global standards. Gross savings as a percentage of GDP stand at 51%, according to World Bank Data (the figure is 17% in US and 13% in UK).

This, and the rapid growth of Chinese wealth, fuelled a massive wave of investment into residential real estate over the last two decades. Between 2003 and 2010 the Chinese economy enjoyed close to double digit annual growth, and the average price per square metre of new dwellings in China more than doubled.

In efforts to curb this rapid growth and keep affordability levels in check, the government introduced a series of policies to curb investment purchases. First tier cities, such as Shanghai, have seen high levels of both local and inward investment from other regions. The city has attracted some of the strictest of the new controls, which include higher deposit requirements and limitations on second property purchases.

Recent slowing economic growth meant price growth fell to very low rates by Chinese standards across the country, just 1.4% in 2014. However, consecutive interest rate reductions and a pick up in sentiment have stoked transactional activity in leading cities and resulted in strong price growth.

27 out of 70 cities tracked by the National Bureau of Statistics recorded a month-on-month increase in new build residential prices in June 2015 (compared to only one city Shenzhen seeing price growth at the beginning of 2015). The outlook remains positive as the pick up in sales volumes and a stabilisation of pricing are expected to lower the inventory level. This should result in a healthier market in the mid to long run.

^{Source: National Bureau of Statistics}

Shanghai

Shanghai is China’s largest city and a global financial centre. It is host to the world’s busiest container port and plays a key role in China’s industry. The city attracts migrants from across the country looking to take advantage of its job opportunities. These factors have driven its success in recent decades and continue to underpin its prospects for the future as the Chinese workforce becomes increasingly mobile at the national and international level.

While Shanghai is an international city, it is still dominated by domestic businesses, investors and occupiers. This means its residential markets are driven mainly by domestic factors. The average price of apartments in the city rose from RMB9,313 per sq m ($138psft) in January 2006 to a high of RMB30,016 per sq m ($446psft) in December 2014, an increase of 222% in just eight years. As at June 2015, average prices stood 14% above this level, the result of easing policies and improving sentiments. Rental growth has failed to keep pace with capital value growth, and gross yields have been pushed down to 2.3%.

The government is taking steps – directly or indirectly – to support the market by easing policies such as giving priorities to mortgages for first-home buyers and relaxing the definition of ordinary housing. Sentiment has improved due to lower borrowing costs and taxes.

Against this, new supply is likely to continue to be delivered but at a slower rate than previously, meaning prices are likely to hold up much more than in regions where building has been unfettered. Developers’ confidence in the Shanghai residential market, and the general wariness of investing in lower-tier cities, means demand for new land plots will likely remain fierce. This means Shanghai is unlikely to see the oversupply that is said to dog some Chinese cities.

Shanghai has seen strong growth in the value of small apartments as large numbers of young professional migrants seek city-centre living. A shortage of this type of unit has pushed up prices and forced this group into secondary locations. To combat this, Shanghai is using large scale infrastructure investment to unlock these decentralised business districts as it strives to meet the demands of a rapidly expanding population and economy.

One of the most successful infrastructure investments has been the Shanghai metro. Despite being one of the newest systems – the line only opened in 1993 – it is one of the most heavily used, with 2.5 billion journeys taken each year.

Such pressure on transport has led to a trend toward decentralisation in Shanghai. Investors are looking to locations such as Hongqiao Transportation Hub, at the centre of which the largest railway station in Asia by floor space, linking together local, high-speed intercity rail and metro. New mixed-use developments also anchor these decentralised communities, providing employment centres and ancillary community and shopping facilities.