China's tropical getaway becomes latest property boom

HONG KONG (MarketWatch) -- It's home to a submarine base, a recent host for the Miss World beauty pageant, and it draws the likes of action hero Jackie Chan and legendary financier George Soros. And now China's southern island of Hainan can add another distinction -- the nation's newest hot property market.

Real-estate prices on the island, where white-sand beaches and jungle-covered mountains have earned it associations with Hawaii, have jumped by more than one-third in the last five weeks.

And in Sanya, one of the island's main resort cities, luxury condos have risen as much as 40% since the start of the year, bringing prices close to similar properties in Beijing and Shanghai.

A good part of the real-estate spike comes from Beijing's announcement in early January that the island would be developed into a major international tourism destination by 2020.

In addition to a slew of new golf courses and five-star hotels, the government may also loosen visa rules and could allow Hainan to become the first Chinese territory outside Macau to license casinos.

"A lot of developers are looking at Hainan very seriously because of the government's policy," said Margaret Ng, a senior China analyst with CB Richard Ellis in Hong Kong.

Local Communist Party head Wei Liucheng said he was taken off guard by the sudden rise, calling it an "unexpected response" to the tourism plan, according to Chinese news reports.

Provincial committee head of the Communist Party Wei Liucheng, who unveiled the new rules, said he was taken off guard by the sudden rise, calling it an "unexpected response" to the tourism plan, according to Chinese news reports.

In a bid to curb speculation, authorities suspended land sales and approvals of new building projects in January. But instead of cooling the market, many believe the suspensions incited a second wave of gains, as developers and land owners moved to hoard property in the expectation of higher prices.

"There is a bubble forming, and it is bound to burst if effective measures are not applied soon," the state-run China Daily quoted China Real Estate Association Vice Secretary He Qi as saying.

Among concerns is the number of vacant apartments -- estimated to be as high as 30% in Sanya -- raising the prospect that prices could tumble if confidence turns.

Ng said it was hard to get an accurate impression of the scale of the Hainan boom as there are few reliable data-tacking indexes.

Large property consulting companies tend to focus more on China's 70 largest cities, she said, but judging by anecdotal reports and her own visits to the island, the boom looks like the latest incredible chapter in China's ongoing love affair with real estate.

Research by Standard Chartered published earlier this week estimated nationwide land prices more than doubled in 2009, but that figure is likely well below the true rate of gains, the report's authors said.

For one thing, the report excluded some bizarrely inflated data. Standard Chartered's Shanghai-based head of research Steven Green said that figures showing an 880% rise in the eastern Chinese city of Wenzhou were axed from his analysis, as were "similarly crazy" data for Hainan's provincial capital Haikou.

"The level of appreciation was so high, we took them off the chart," Green said.

Even so, they found land prices in seven cities tripled -- based on their projected value when developed -- while those for a gauge of 10 cities, including Beijing and Shanghai, rose an average of 147%.

China's official statistics are also indicating a heated market, though the gains look less spectacular. Property prices in 70 major cities were up 9.5% in January from a year earlier, accelerating from a 7.8% rise in December on year.