The recovery of the global commercial property market has seen huge sums of capital flood into so-called supercities like London, New York and Hong Kong. In these locations values have soared as businesses, developers and investors scramble to make the most of the opportunities available. But away from the headline-grabbing deals in the supercities, second-tier cities around the world are proving they are no longer second choice, with improving infrastructure, simpler regulatory laws and lower business costs making them increasingly popular locations.
Supercities are usually defined as those with populations over 10 million, but what constitutes a second-tier city is not as clear-cut. Generally they are defined as regional centres with strong economies but smaller populations than supercities.
However, in a feature included in the latest FT Global Property Insight, Stanley Chang, of accountancy group Grant Thornton, points out that many second-tier cities in China have larger populations than cities regarded as first-tier locations elsewhere in the world.
“Chengdu, for example,” he says, “has a population of 14 miliion; this is not a small city.”
Despite anomalies of this nature, the characteristics second-tier cities appear to share include enhanced infrastructure, lower employment costs, growth and a high percentage of skilled workers under the age of 35.
This demographic group is one of the factors fuelling the rise in popularity of big secondary cities says Hans Vrensen, of property advisor DTZ. Here they can find affordable housing, a greener environment, cultural amenities and a growing retail and leisure offer.
Increasingly high end retailers and restaurants are discovering the advantages of opening branches in these locations where, in the past, they perhaps believed the consumer base was not sophisticated enough to warrant their presence.
For businesses, the advantages of having this skilled ‘millennial’ workforce at their disposal are obvious, as are the reduced employment costs. Another advantage is that the cost of renting or buying commercial property is frequently significantly lower than in first-tier cities.
There may also be incentives in place to encourage businesses to relocate. In the UK, Enterprise Zones offer superfast broadband and up to a 100 per cent, five year, business rates discount. Enhanced capital allowances are also available in certain circumstances.
Developers will find an appetite for change in second-tier cities, which are often seeking to reposition themselves following the decline of traditional industries. This creates a ‘can-do’ environment, in which prime areas of land are earmarked for development and planning applications are processed quickly.
All these factors, together with the overheating of the markets in the bigger cities and the prospect of higher returns, are attracting investors to second-tier locations in increasing numbers.
“Up until recently, 50 per cent of all property investment across the world was in only 30 cities and those were dominated by supercities,” says Rosemary Feenan, director of global research at JLL.
“Since the financial crisis we have seen almost 60 cities move in and out of the top 30 places and there are several second-tier cities in that list.”
But while second-tier-cities can be a first-rate choice for businesses, developers and investors, this does not signal a shift away from the traditional property hot-spots.
“Just because there is good value in the second tier doesn’t mean we forecast that these cities will overtake capitals,” explains Vrenson. “Centralisation is a runaway train which seems hard to stop.”
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