China's real estate development sector is gradually being dominated by leading developers, but barriers still remain and are blocking the expansion of national conglomerates.

"The localization of real estate development will enable smaller real estate developers to exist in certain areas. They will co-exist with national real estate conglomerates," said Luo Hongbo, marketing director of Beijing Urban Construction Investment and Development Co Ltd.

Luo made the remarks late last month during a ceremony in which China's blue-chip real estate developers were recognized as the best in China.

The criteria upon which they were judged included development scale, profitability, brand recognition and financial stability.

The ceremony was hosted by Economic Observer and Beijing Youth Daily.

During the event, 18 real estate developers -- including Beijing Urban Construction, Shenzhen Vanke Group, Shenzhen-based China Merchants Real Estate, Hong Kong-listed red-chip developer China Overseas Property Development and Guangzhou-based Topson Group -- were recognized as blue-chip real estate developers.

That is a prestigious honour, as it indicates the firms are large, stable and nationally famous entities.

"China's real estate sector has become ripe ... for producing national blue-chip developers," Zhao Min, president of Beijing-based Sinotrust Management Consulting, told China Business Weekly.

With the exception of Beijing Urban Construction and Beijing Tianhong Co Ltd, the other 16 newly designated blue-chip developers have developments across China.

Since 2001, Beijing, China's most profitable real estate market, has attracted dozens of leading developers from Fujian and Guangdong provinces.

Since late 2001, developers from Jiangsu and Zhejiang provinces have rushed into Shanghai, China's financial hub, to tap the city's fast-expanding real estate market.

In recent years, however, few out-of-town developers have entered the real estate markets in Guangzhou and Shenzhen, which are among China's most-advanced markets.

Many of the so-called local developers in China are controlled by Beijing-based or Hong Kong-listed State-owned conglomerates, such as China Overseas Property and China Merchants Real Estate.

Developers from Hong Kong and Shanghai -- such as Shui On Holdings Ltd and HKI Development Co Ltd -- have rushed into Chongqing, which is one of China's economically challenged municipalities.

Investments in China's real estate development sector reached 492.4 billion yuan (US$59.47 billion) in the year's first half. That marked a 28.7-per-cent, year-on-year, increase.

Real estate development is one of China's most booming sectors.

But the real estate sector -- with more than 30,000 developers -- is also one of China's most irregular industries.

"In the past, those who were favoured by the government were able to become a developer and receive inexpensive land," Luo said.

"With greater transparency, in terms of the application of land-use regulations, and the establishment of a nationwide land-auction system ... real estate development across China is inevitable."

The Ministry of Land and Resources recently issued an order that requires the land-use rights of all properties to be used for business purposes be transferred publicly, either through auction or public tender, before August 31.

China's ongoing macroeconomic adjustment has fuelled the expansions of several major real estate developers, experts said.

The People's Bank of China (PBOC), the nation's central bank, released tightened mortgage regulations in June 2003.

PBOC's policy, in late April, was strengthened by a China Banking Regulatory Commission (CBRC) circular that required banks to be cautious when extending loans to real estate developers.

PBOC and CBRC, the banking sector's watchdogs, also urged commercial banks not to lend money to real estate developers unless they provided 30 per cent of the capital for their developments.

As a result, many developers' cash flows were cut off. Generally, at least 70 per cent of the capital for a real estate development is raised through loans from banks.

That situation has made it easier for leading developers in China, with better capital reserves, to expand.

Liu Xiaoguang, chairman of Beijing Capital Group, which owns Hong Kong-listed developer Beijing Capital Land, said his firm is constantly negotiating potential deals to merge with or acquire other developers.

"Some of them want to become subsidiaries, while others want to exit the sector and sell their land reserves and unfinished developments to us," Liu said during the ceremony.

Leading real estate developers' expansions might not be as easy as first thought.

Wang Shi, chairman of Shenzhen Vanke Group, said cities' individual situations and characteristics make it difficult for developers to expand nationwide.

"We have been pursuing nationwide expansion for 10 years. It is not easy," Wang said.

The ongoing macroeconomic adjustment presents both opportunities and challenges to leading developers, Wang added.

When confronted with tighter credit sources, small developers can either suspend their developments until they have better capital resources, or they can terminate their businesses.

Major developers, however, have no option but to make their developments sustainable. Otherwise, the market will not feel confident about them. That would result in greater pressure on those firms, Wang said.