International institutional investors and domestic developers are strengthening their exploration into China's second- and third-tier cities as the comparatively lower price and the quickened urbanization process offer them lower risks amid continuous tightening real estate policies.

Everbright Ashmore (Beijing) Real Estate Investment Consultancy Co Ltd, the property investment arm of Hong Kong-based China Everbright Ltd, will target the residential and commercial property market in second- and third-tier cities, according to its Chief Executive Officer James Pan.

"We are particularly interested in Chengdu, Chongqing and other second- and third-tier cities in the Yangtze River and Pearl River delta regions," said Pan.

"Despite the rigorous real estate policies in the residential sector, we believe there are still investment opportunities in second- and third-tier cities' residential projects. In fact, opportunities usually emerge at bad times instead of good times," he said.

The fund is expected to close next month and raise $250 million. Its first investment, valued at around $25 million, was a commercial project in Chongqing.

Meanwhile, to fuel its investment in the commercial sector, Everbright Ashmore set up an asset management company with T&C Asset Management Consulting Ltd.

Earlier this month, Citic Capital Holdings Ltd invested 1.5 billion yuan ($224 million) in a commercial property project in Changsha, Hunan province. US private equity companies Blackstone and Aetos have invested $50 million in realty projects in Dalian, Liaoning province.

Domestic property developers have stepped up efforts in tapping second- and third-tier cities to diversify risks, especially in the commercial property sector.

Beijing-based Capital Land, has joined forces with Outlet (China) Ltd to launch seven to eight commercial complexes in second-tier cities over the next five to 10 years. Currently, the company has such projects in Huzhou, Zhejiang province, and Foshan, Guangdong province.

"We expect the revenue from our commercial complex project Ballet Town will account for 40 to 50 percent of our real estate business," said Liu Xiaoguang, president of Capital Group.

Chongqing-based Sincere Group is also looking at second- and third-tier cities in Southwest China and the Yangtze River Delta. The company has land parcels worth 110 million yuan in Suzhou, Jiangsu province.

Despite the tightening real estate policies, the company is expected to notch up sales of 6 billion yuan this year compared with 2.8 billion yuan last year.

"The policies' impact on second- and third-tier cities is limited. But the quickened urbanization process provides huge demand for housing and we expect sales to reach 10 billion yuan next year," said Wu Xu, president of Sincere Group.

According to the Chinese Academy of Social Sciences, China's urbanization rate during the 12th Five-Year Plan period (2011-2015) will grow by 0.8 to 1 percent each year, indicating that more than 10 million rural residents will move to cities and towns annually - a process that is expected to contribute 4 percentage points to the country's GDP growth each year.

Out of the 4 percentage points, 3.6 percentage points will come from newly added housing demand of 1.2 trillion yuan and 0.4 percentage points is expected to come from people's improved income of 120 billion yuan, said the academy.