Xinyuan Real Estate [NYSE:XIN] has issued its IPO last Wednesday and trades well despite low IPO atmosphere. The company develops residential projects for mid-income people in tier 2 cities in China.

Residential construction projects abound. But not all will be successful

I think that this stock might be a good medium-term investment (read: 1-2 years). The real estate sector rode the wave with other sectors in China. However, the real estate market is fragmented into different types of urban areas, traditionally referred as tier 1 or tier 2 cities. Properties in tier 1 cities such as Shanghai and Beijing are already very expensive, to the point that the Chinese government set measures in place to curb housing price inflation. Consequently, I think that there is not much room left for growth in tier 1 cities. However, rising income as well as continuing migration of population from rural to urban areas might still offer high potential for residential real estate in tier 2 cities. So when analysts say that Chinese real estate is "bubbling", it doesn't mean much. We have to look at the different tiers separately.

Another strength of Xinyuan Real Estate is that it diversifies in 5 different cities. Indeed local regulations can easily overheat or hammer down a local market. Regulations are a significant risk for real estate investors in China. If tier 2 cities follow the pattern of their tier 1 predecessors, investors should have a few good years ahead of them before the government interferes with housing prices.

Additionally, Xinyuan Real Estate has several big projects in the pipeline, which should provide them with steady revenues at least until the end of 2008. I also noticed that the company operates since 1997. It is very important to invest in real estate companies that have a history, because the quality of real estate projects can only be proved with time. For example, sloppy construction work can translate into disputes and bad reputation years after the project is completed. The fact that the company operates profitably since 10 years makes me believe that they know what they are doing.

As for the company's financials, I only read the opinions of other analysts (see sources at the end of this post). They are good and more importantly the company has good liquidity and solvency.

Finally, the management team is made of seasoned industry professionals and managers. In particular, Mr. Yong Zhang, Xinyuan's CEO, has strong relationships with government, which is critical to overcome bureaucratic and regulatory obstacles in China.

Last but not least, Xinyuan is the first Chinese company targeting tier 2 cities that is listed in US markets. As a result, it will capture the attention - and the capital - of many investors who are thinking about the Chinese real estate market.

Sources:

• China Housing & Land Captures The Hot Chinese Real Estate Market (Seeking Alpha)
• China's Real Estate Market Comes Off Boil (Forbes)
• Xinyuan Real Estate IPO Analysis: Poised for a Strong 2008 (Seeking Alpha)
• China Real Estate IPO: Xinyuan Real Estate Co. (Seeking Alpha)
• Xinyuan's prospectus filed with SEC
• Educated guess