Real estates prices have been plunging in China’s Hainan Province, despite the bright future of the island as a “tourism free trade zone.” In May, real estate sales were down 41 percent compared to last year, and down 14 percent compared to April of this year. Real estate agents are understandably frustrated as they have long capitalized on the province’s popularity as a domestic Chinese beach resort to drive sales, with prices increasing at breakneck speeds. An announcement that the province would be further promoting tourism should have only contributed to the growth of prices, but state intervention has firmly halted this growth and now prices are in sharp decline. Some agents have opted to leave the island to pursue more lucrative markets.

Despite the province’s new status as a tourism free trade zone, prices for real estate plunged 41 percent in May YoY

The reason for the lack of pressure on real estate prices has been the new regulations introduced within Hainan to restrict real estate sales. Non-residents can no longer simply walk in and purchase real estate. Instead, they have to demonstrate that they are willing to make a real commitment to the province instead of merely participating in real estate speculation.

This “commitment” has taken the form of contributions to a local security fund, but the duration of the contributions before an individual is eligible to purchase property varies. In many areas, an individual must contribute to the fund for at least two years, in the provinces two primary urban areas of Haikou and Sanya this extends to five years, and in some areas non-residents are wholly banned from owning property.

While this is undoubtedly frustrating for real estate agents and non-resident buyers looking for a lucrative investment or vacation property, it’s certainly better for residents of all income levels. It’s also good news for the development of the tourism industry, at least to an extent. It should help keep the cost of accommodation lower and make the island more accessible for middle-class Chinese tourists and the international tourists China is looking to attract as well.

State policies keeping the prices of Hainan real estate relatively low should allow residents to continue to benefit from tourism, or at least not be pushed out of areas by investors looking to cash in on yet another tourism boom

For Hainan residents that rent the property their businesses (tourist-oriented or otherwise) operate on, it should help keep rent more stable and reduce the chances that these business-owners will be priced out of areas. Prices have been on an unimpeded ascent since with the growth of domestic Chinese tourism. It also increases the chances that locals with businesses that cater to tourists will have a greater opportunity to continue to benefit from the already sizable number of tourists, along with any potential growth.

Of course, there are downsides. By keeping Hainan relatively affordable for middle-class Chinese tourists, the overall volume of travelers will inevitably increase. The thrust of the new free trade zone seems to be promoting Hainan as a luxury destination for both wealthy Chinese and international travelers alike. Keeping real estate prices relatively low will only make the soon-to-be higher profile Hainan Island an even more alluring tourist destination for non-luxury travelers. Economically, it sounds like a win-win.

However, the province is still quite small at 13,700 square miles, a bit bigger than the state of Maryland, with a relatively population of 9.2 million. Moreover, much of the island covered by mountains. The small, populous island already attracts a massive number of tourists. In 2016, Hainan reportedly received 60 million tourists, and the new free trade zone will only increase this number. Even higher growth could put some severe strain on the island’s environment, whose cleaner air has been a significant draw for domestic tourists.

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