The recent rebound in Chinese house prices marks a new phase of China’s two-year property tightening campaign, and has increased speculation that Beijing will take further measures to deflate prices. With policy uncertainty continuing to plague the onshore residential sector, some investors are seeking opportunities in alternative types of project in China, while others are taking it as an opportunity to build out their international real estate portfolios.

 Clearly, something has changed in Chinese RE markets. The growth rate of RE fixed-asset investment has more-than-halved over the past year to 15.4%, while construction starts were down 13.4% yoy in July. Myriad investor schemes have closed and property developers have been forced to roll out widespread discounting.

 Assessing the market, Joel Rothstein, a partner specialising in RE at Paul Hastings  in Beijing, told IPA: “There won’t be any policy change in the short-term. They’ll continue current policies with a focus on residential prices. It’s clear that the days of strata-title model, the backbone of Chinese RE markets, for foreign investors are over.”

 The question is how far Beijing is prepared to pursue its tightening campaign at the expense of overall economic growth. Given the importance of construction to the economy, Beijing has already surprised many by holding firm for this long. Signals of an easing earlier in the year - when a number of locations pared back price control measures and increased support for first-time buyers - led to a sizeable bounce in transaction volumes and June and July witnessed price rebounds on a nationwide basis.

 “The recent price bounce has a strong psychological element,” says Rothstein. “There’s a sense that the market has bottomed. Both speculators and first time buyers have come back to the market, hence we saw transaction volumes recover.”

 The recovery has prompted speculation Beijing will once again crank up the tightening pressure. A 17 July notice from the ministries of land and housing reaffirmed its commitment to preventing speculative investment and meeting affordable housing targets. The State Council has since spent inspection teams to major property markets, with reports in the local media indicating the bias towards additional measures in some markets.

 Moreover, the government has made it clear that even after current restrictions are lifted, the long term objective is to keep housing prices in line with inflation and filling out the previously neglected lower and middle range of the cost curve.

 For investors, there are various responses to this reality. Some are seeking opportunities in alternative real estate investments, such as mixed-use developments or speciality projects in favoured sectors such as health-care and technology parks according to Rothstein. “Commercial property is performing well; office rents in Beijing are approaching New York levels. There’s been a sharp spike in the past 12 months due to tight supply.”

 However, this tightness of supply, coupled with general regulatory restrictions, are also reflective of the fact that non-residential opportunities are limited in China, and to a greater extent than ever, more capital is chasing fewer deals.

 Other local investors are looking offshore for opportunities to build out their portfolios.

 “Asian institutional investors like real estate and there’s anecdotal evidence to suggest they are investing more in Europe,” Joseph Pacini, head of BlackRock’s Alternative Investment Strategy, tells IPA. “The trend is partly attributable to Chinese domestic regulations, but also because there are distressed sellers in Europe and Asian institutions have cash-in-hand. ”

 Asian investors are reacting to the global slowdown and a period of deleveraging in the developed world, particularly in Europe. Alternative opportunities remain limited onshore, be it by regulatory constraints or limited supply of high-quality projects, while other growth markets in Asia have become more risky for less reward.

 Blackrock estimated in a recent study that Asian investors accounted for £1.7bn ($2.7bn) worth of transactions in central London during 2011 - a 150% yoy growth rate, and were behind approximately 40% of all deals over £100m in London in 2011, suggesting a considerable flow of capital from east to west.

 In Europe, where Blackrock estimate that €200m ($246m) per year of RE refinancing is due in 2015, there are likely to be on-going opportunities for new buyers in the market. In reality, the process of deleveraging in Europe is only just beginning in Europe, and any kind of crisis resolution is likely to create further opportunities in distressed asset markets.

“We particularly like the risk-return characteristics of Mezzanine debt,” says Pacini, “but there is also significant opportunity in the senior lending space too for investors looking for lower risk-returns.”

 Europe, led by London, appears to be the most sought-after destination for Asian investors. Sovereign wealth funds, HNWIs and retail funds are all increasing their exposure to new frontiers in RE markets.

 “Australia and New Zealand have historically been interesting markets to Asian investors, but not to the same extent as London,” concludes Pacini. “We’ve seen some transactions in the US, but there are still serious tax restrictions on investing into the US. There is some discussion of a temporary change in these regulations, but for the moment there’s more inte