The period between 2001 and 2010, amid China's continuously expanding economy with the GDP compounded annual growth rate (CAGR) reaching 15.4 percent, has attracted rising foreign direct investment (FDI). Over the past 10 years, China's FDI CAGR averaged 9.5 percent.

Coupled with the continued appreciation of the Chinese currency against the US dollar, these have boosted the interest of overseas investors in China, especially in real estate. In spite of the central government's recent credit-tightening and loan-control policies, many overseas investors continue to be or have become more active in sourcing deals.

Take Beijing's office property market as an example. Transacted office gross floor area undertaken by overseas investors increased eightfold, from 51,623 square meters in 2001 to 413,498 sq m in 2010, peaking at 466,200 sq m in 2007.

Although the global financial crisis slowed down the buying momentum in 2008, purchasing activities by overseas investors resumed rapidly in 2009. The investors were more active in indirect real estate investment, such as financing in various forms, to avoid government restrictions on foreign investment in real estate.

Foreign investors are shifting their focus from first- to second-tier cities for several key reasons. First, the government is tightening control over their investment in first-tier cities by restricting the approval of wholly foreign-owned enterprise setups. Second, yield compression in first-tier cities has become a scam, making deals less workable and achievable.

The growth in economy and urbanization in smaller cities warrants a large enough real estate market development scale, which, combined with sophisticated infrastructure establishments, will attract more overseas investments.

Apparently, the negative impact of the global financial crisis on some international banks' and investors' offshore business yielded disposition of their investment assets in China, but this was seen more in Shanghai. With the central government promulgating stricter policies constraining overseas investments since 2008, overseas investors have encountered growing difficulties in purchasing assets directly in the market. Hence, acquiring the offshore holding structure of an asset and creating a joint venture with locals to develop projects in second-tier cities and providing financing services, have become the ultimate investment channel.

John Wong is director of Investment Services, North China, for Colliers International.