Progress of urbanization in China and its real estate investment

Citation

Zhida, F., Chengmao, S. and Xiaohong, Y. (2002), "Progress of urbanization in China and its real estate investment", Property Management, Vol. 20 No. 2. https://doi.org/10.1108/pm.2002.11320bab.008

Progress of urbanization in China and its real estate investment

Progress of urbanization in China and its real estate investment

One of the main tasks in the adjustment of economic structure in China's "10th Five-Year Plan" is "Pushing on the progress in urbanization". The real estate industry and its investment in China are developing together with the progress of urbanization. In the last 20 years, the level of urbanization in China has increased rapidly and in 1999, it reached 30.9 per cent. At the same time, the real estate industry is also developing quickly and real estate investment in 1999 amounted to 401.017 billion RMB. 1n the next 20 years the progress of urbanization will grow rapidly because of increasing economic development in industrialization in China. By 2010, the urban population should reach 570 million and the level of urbanization 40.7 per cent; and it is expected that the level of urbanization will be 52 per cent by 2020 (Xun, 2000). This is an excellent opportunity for the real estate industry to achieve major growth. But how the real estate investment can satisfy the needs of such fast progress in urbanization is a serious problem which needs to be studied.

The features of the progress in urbanization in China and its influences on the development of real estate investment

In the past 20 years, the level of urbanization in China has been growing rapidly, because of the "open-door" and "reform" policies adopted, thus bringing in a significant increase in the real estate investment. In the early 1950s, the urban population was only 61.69 million and the non-agriculture population in the cities was 27.406 million. At that time, there were only 132 cities and the level of urbanization was 12.5 per cent. Before 1978, the progress in urbanization had been slow and by 1978 there were only 193 cities; the level of urbanization was 17.92 per cent. After the "open-door" policy was adopted, the progress of urbanization increased rapidly and by 1999, the urban population became 389 million with a nonagricultural population of 214 million: the total number of cities was 688 and the level of urbanization increased to 30.9 per cent, 12.98 per cent more than in 1978 (refer to Table V). During that period, real estate investment dramatically increased, from 15,000 million RMB in 1978 to 401,017 millions RMB in 1999, 26.7 times more than that in 1978.

On the whole, the progress in urbanization in China is slow. The basic target of real estate investment in China is to improve the living condition of the citizens. Strict control of the development of big cities, reasonably developing the middle and small cities and encouraging the development of small towns is the basic policy adopted in China in guiding the process of urbanization in the past decades. Based on the Population Statistics Yearbook from the United Nations, in 1998 the level of urbanization was 76 per cent in USA, 86 per cent in UK, 78 per cent in Germany, 73 per cent in France, and 77 per cent in Japan. But in China the level of urbanization in 1999 was only 30.9 per cent, so the gap is really significant. Even in those countries which have almost the same income per head as China, the level of urbanization there varied from 42 per cent to 54 per cent, still higher than the level in China (Shimu, 2000). Although the urbanization level in India and Indonesia is almost the same as that in China, the industrialization level in both of these countries is a little lower, but the outcomes of the Third Industry (service industry) in these countries are higher than in China. This means that the relatively slow progress in urbanization in China has constrained the development of its Third Industry, including the real estate industry.

Table V. Urbanization level and the development of real estate investment

In the past decade, about 75 per cent of total real estate investment has been in housing projects, so that living conditions for Chinese citizens have been much improved. Table VI shows that during 1990-1998, the investment in existing housing reached 971.57 billion RMB and in newly-built residential areas increased to 2,915 million m². Some 5.2026 million families have been housed in their own apartments; thus living area per head in cities has risen from 6.7 m² in 1990 to 9.3 m² in 1998.

The scale of cities in China is relatively small (Xiaolu, 2000); 2.5 per cent of the total population in China live in the "big" cities, defined as having a population of between 0.5 million to 1 million, and 6 per cent of total population live in the metropolitan areas with a population of over 1 million (see Table VII).

International experiences show that big cities, especially metropolitan areas, will create a significant gathering effect in economic terms and thus bring in benefits of scale. For example, in the metropolitan areas in China which have a population over 1 million, the rate of employment in the Third Industry is up to 43 per cent and the real estate industry there is developing fast, but in the small cities with a population less than 200,000, the rate of employment in the Third Industry is only 23 per cent and the development of the real estate industry there is relatively slow. Therefore, it is concluded that the expansion of big cities facilitates the development of the Third Industry, including the real estate industry based there, and will provide more employment as well. However during the process of expanding big cities, the main concerns should also be focused on the negative effects caused by such quick expansion, e.g. pollution, overcrowded traffic, crime problems and the quality of life for the inhabitants. A good city plan, including infrastructure, mobility, city structure, waste management as well as good governance should be established and implemented in order to minimize the negative effects.

Table VI. Real estate investment and the living areas of citizens in 1990-1998

Based on the analysis model of the data from over 600 cities in China by some scholars, it is concluded that the benefits for the city are increasing together with the increase of city size. After the deduction of external costs, the cities with a population of between 100,000 to 10 million generally have a positive net scale effect, and the cities with a population of between 1 million to 4 million have the best scale effect, amounting to 17-19 per cent of the city's GDP. So we can conclude that such cities can be considered as "best cities" so far as the size is concerned for the development of the Third Industry, which includes the real estate industry. But in the past years, the development of such cities has been too slow, thus hindering the increase of both real estate investment and the real estate industry.

Table VIII illustrates the progress of urbanization in the east, middle and west areas of China. From Table VIII, it is evident that there is a big difference in the level of urbanization in these areas and this results from such factors as geographical conditions, historical reasons and a different level of economic and social development and population distribution. Based on the 1998 statistics, the level of urbanization in the east area is 38.5 per cent, in the middle area 28.1 per cent and in the west area 23.4 per cent. The territory of the east only occupies 14.2 per cent of the total nation area, but the number of cities (including many of the big cities and metropolitan areas) and the urban population is almost half of the total. In the middle area, the land occupies 29.2 per cent of the total nation area, but the number of cities (with an even distribution of big, middle-size and small cities) and the urban population is only one-third of the total. However the land in the west of China is 56.6 per cent of the total nation area and the number of cities (mainly the small cities) and the urban population is about one-sixth of the total. On the other hand, the difference in the levels of real estate investment and residential conditions in between these areas is significant. The real estate investment in east China area in 1998 is 76.46 per cent of the total, but the investment in middle China area and west China area only is 12.61 per cent and 10.92 per cent respectively.

Table VII. Distribution of population in China in 1998

Table VIII. The status of real estate investment and cities in the areas in 1998

The relative analysis on the urbanization level and the real estate investment in key cities in China

In order to study the relationship between real estate investment and the level of urbanization and other relevant economic indexes, we used the main 1997 economic indexes of the provincial capitals and key cities (in total 35 cities) as explanatory variables, and the total amount of real estate investment of the 35 cities as explained variables as detailed in Table IX. The level of urbanization is expressed by the ratio of the non-agricultural population to the total population. At the same time, scale of city, as we have defined it, is considered as a dumb variable. When the nonagriculture population is over two million in a city, the value of the dumb variable is 1, otherwise the value becomes 0.

In order to analyze the relevant relationship between the real estate investment and the above mentioned variables, the following codes are adopted:

• •

  Y: real estate investment in each city;

• •

  X1: rate of non-agriculture population and the total population in each city;

• •

  X2: expenses in local government budget;

• •

  X3: average savings from residents in cities and towns;

Table IX. Main economic indexes and real estate investment in province capitals and key cities in 1997

• •

  X4: average salary of staff and workers in each city;

• •

  X5: scale of each city.

Table X shows that the T value of X1 coefficient has passed the test of 5 per cent level significance, the T values of X2, X3, X4 coefficients have all passed the test of 1 per cent level significance, but only the T value of X5 coefficient is 0.16. It indicates that the level of urbanization, i.e. the rate of non-agriculture population in total population, has a significant effect on the level of real estate investment. Expenses from local government budget (X2 coefficient) and the average salary of staff and workers (X4 coefficient) both have high significant effects on the level of real estate investment. But the X3 coefficient is a negative value, indicating that the real estate investment has been impeded by the savings from residents in cities and towns. However, the scale of the city has no significant effect on the real estate investment.

The forecast of how the progress in urbanization in China affects the real estate investment

Relative analysis on the urbanization level and real estate investment in China from 1990 to 1999 was carried out and the strong linear relation between them has been found as shown in Figure 3. Based on the Linear Model in Figure 3 and our forecast of the progress in urbanization, Table XI shows our forecast of real estate investment in China in future.

From the forecast, it can be concluded that in the 10th "Five-year Plan", the increase in the level of urbanization will have a significant impact on the increase of real estate investment. By 2005, if the level of urbanization in China reaches 34.4 per cent, the total real estate investment in the 10th Five Year Plan Period should reach 727.147 billion RMB and the total value of real estate completed in accumulation from 2001 to 2005 will reach 3128.533 billion RMB.

Table X. Results of regression analysis on city real estate investment

Figure 3. Showing the relationship between urbanization level and real estate

Table XI. Forecast of future real estate investment in China

It is important for the policy makers and practitioners in the real estate industry to understand and to improve the relationship between the speed of progress in urbanization and real estate investment in China. The study report[1] reveals that in developing countries more than 50 per cent of all GDP now originates in cities while in advanced countries, it may exceed 80 per cent, and it also predicts that at least 60 per cent of the world's population will live in cities by 2030. In China, in order to improve farmers' living conditions, small villages are encouraged to link together into towns or big centers in the rural area; thus the real estate industry in the rural areas has experienced rapid progress in recent years. As to the growth of the cities, there should be a restriction in population increase in the megacities, especially in Beijing, Shanghai, Tianjin, to make them healthy and to produce wealth. The SPARK program in China over the past two decades has been effective in setting up agri-food and township enterprises to provide more employment to the surplus workforce in the countryside, thus reducing the migration of agri-population into the cities. Of course, it is also urgent for the policymakers and practitioners in the real estate industry to make a rational and scientific strategy to promote the healthy development of the real estate industry to support all of China's real estate needs.

Fang Zhida, Sheng Chengmao and Yu XiaohongSuzhou University of Science and Technology, P.R. China

Note1. Research report made by The SPEC Center for Technology Foresight in 2000.

ReferencesShimu, Y. (2000), ''Some key issues in the urbanization in the main Asian countries'', City Issues, No. 4, p. 3Xiaolu, W. (2000), ''The sustainable development in economics in China and its changes in economic system'', Economic Research, No. 7, pp. 8-9Xun, L. (2000), ''Suggestions to narrow the difference among the areas'', China Investment, No. 7, p. 31.