By Tanner Brown

After nearly four years of turmoil, China's property market is no longer collapsing. But it isn't exactly recovering, either.

Instead, a clear divergence has emerged between the country's top-tier cities -- Beijing, Shanghai, Shenzhen, and Guangzhou -- and its vast network of smaller, so-called "lower-tier" cities. While demand is picking up in a few urban hubs, the rest of the country remains mired in oversupply, falling prices, and weak sentiment.

For investors and developers, the message is clear: China's real estate recovery isn't a national story -- it's a regional one.

There's no better illustration of the divide than Shanghai's luxury market. In late May, a German-style villa in the city's Changning district sold for 270 million yuan (about $38 million), or roughly 500,000 yuan per square meter. It was one of the most expensive residential transactions in recent memory, drawing national media attention and a flurry of copycat listings.

Sales in Shanghai have now risen year-over-year for several consecutive months, and inventory in the city is falling. According to data from China Real Estate Information Corp., it would take developers about 12.5 months to sell off existing inventory in tier-one cities at current rates -- down from 20 months in mid-2024 and approaching the historical average of 10 months seen between 2016 and 2019.

In some neighborhoods, new developments are selling out the day they hit the market. Greentown China Holdings sold all 120 units of a luxury project on launch day in May, generating nearly seven billion yuan (roughly $1 billion) in revenue.

Analysts say local demand, improved buyer confidence, and supportive policies -- like mortgage rate cuts and local government subsidies -- are helping to stabilize first-tier cities. "Prices of new and second-hand homes in tier one cities began increasing on a monthly basis, " Moody's Ratings noted earlier this year, calling it "a key indicator of a sustainable recovery."

That optimism, however, fades quickly outside the country's most developed metros.

In places like Wenzhou and other third- and fourth-tier cities, price declines are still steep, and demand remains soft. Massive overbuilding during the boom years left tens of millions of homes empty. Developers in these areas continue to offer steep discounts -- sometimes over 50% -- to attract buyers.

One agent, Liu Renhe, at real estate brokerage Lianjia, in Wenzhou, told Barron's his team of five were devoid of work. "We sit around on our scooters," he said. "But the customers aren't coming."

The imbalance is structural. In many small cities, housing needs have already been met. Populations are shrinking, and households often already own two or three homes. Property is no longer seen as a safe investment -- especially amid rising economic uncertainty and a weaker labor market.

"The property sector is no longer seen as a key economic stabilizer," said Dan Wang, director at Eurasia Group. That is a stark shift from the pre-crisis period, when real estate contributed nearly 25% of GDP and served as a central pillar of China's growth model.

According to a recent Reuters poll of analysts, average home prices are expected to fall 4.8% in 2025 -- nearly double the decline forecast earlier this year. Sales are expected to shrink by 5%, and property investment is set to drop more than 8%.

The pain is most acute in lower-tier cities. Yingxue Ren, associate director at S&P Global Ratings, said recent stimulus measures have had "limited impact" in these areas, where confidence remains low and the preference is shifting toward properties in bigger cities.

This regional divergence is creating both risk and opportunity. Developers that were heavily invested in third- and fourth-tier cities -- especially private firms with weak balance sheets -- remain exposed to prolonged downturns. Meanwhile, state-backed developers with portfolios concentrated in first-tier cities are showing early signs of stabilization.

From an investor's perspective, this means avoiding broad-brush assumptions about China's property market. The downturn isn't over everywhere -- but it might be over somewhere.

S&P forecasts that prices in first-tier cities will be flat this year, with modest growth of 1% in 2026. In contrast, prices in lower-tier cities are expected to fall another 4% this year and 2% next year.

"Things are not getting much worse but they will probably not get better without more government support," Larry Hu, chief China economist at Macquarie Group, wrote in a note.

For global investors, the bifurcation means rethinking exposure to Chinese real estate. Funds or companies tied to luxury developers in top cities may now offer better upside potential. Meanwhile, any bets on a nationwide turnaround should be made with caution.

There's also a lesson for policymakers: blanket stimulus may not be enough. Some analysts, including those at EH Consulting, are calling for more "targeted and nuanced" approaches to better match local supply and demand conditions.

The crisis that began in 2021 may be bottoming out -- but it's doing so unevenly. Investors who assume "China property" is one story risk missing what's really going on: a tale of two markets, moving in opposite directions.

Write to editors@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 20, 2025 11:30 ET (15:30 GMT)

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