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Investment in China climbs 78%

China's real estate sector has expanded in terms of investment deals, with $25bn of property transactions in the first half of the year. However it has been mainly driven by domestic investors. Deals by foreign firms declined by more than two-thirds over the past year.

Investment in Chinese real estate rose 78 percent in the first six months of the year compared to 2007, according to a report by property services firm DTZ.

However, the number of deals closed by foreign firms has declined substantially in the first six months of 2008 – down by more than 75 percent over the same period last year.

According to DTZ's first half market review, published today, the firm says a total of 318 major transactions of $10 million or more were recorded in the first six months of 2008, amounting to $25 billion. The vast majority involved site purchases for development.

The rise came despite growing economic uncertainly, intervention by the Chinese government to slow down the property sector and natural disasters.  Around one third of transactions took place in major cities such as Beijing, Shanghai, Guangzhou and Shenzhen.

The firm said cash-strapped property firms were the primary driver of increased investment after land prices, as well as prices for strata-title and en-bloc buildings, had fallen.

Mixed property assets, including hotels, dwarfed other real estate sectors in terms of the volume of transactions, the report went on to say, while residential deals comprised the second largest market. The residential sector was boosted by domestic developers, such as COFCO Property Group, which bought three sites in Beijing for $370 million. Meanwhile, the TS China Fund acquired a site in Shanghai for $952 million.

The report said retail saw the third largest deal volume, while the sector with the smallest deal flow was offices.

However, the number of deals by foreign firms substantially declined in the first half of the year, DTZ warned, with just four recorded transactions involving non-Chinese firms in the first six months of 2008 compared to 17 for the same period last year – a plunge of 75 percent.

The report said Chinese government measures to dampen the property market had discouraged foreign investors. Advocating the delegation of planning permission to municipal authorities on the mainland, DTZ said investors were still interested in Chinese opportunities, and were increasingly turning to second and third-tier cities.

Among those expanding their China real estate portfolios are The Blackstone Group, LaSalle Investment Management, Merrill Lynch, UK-based Grosvenor and international investor Mirae.