Foreign institutional investors have increasingly been exploring China's third- and even forth-tier cities, even though the central government is considering a list of smaller cities that will see home purchase restrictions.

Deutsche Bank is planning to finance a large-scale property project in Tieling, a small city in Northeast China's Liaoning province, industry sources told China Daily on Friday.

And Deutsche Bank is not the only foreign investor that has shown interest there. At the end of 2009, Hong Kong-based Henderson Land Development Co Ltd paid 807 million yuan ($124 million) for two land parcels in Tieling, and its total investment in the project it is developing is expected to reach 3.3 billion yuan.

"It is not surprising for foreign institutional investors to tap China's lower-tier cities, because the demand there remains strong as a result of a lower urbanization rate, and the local governments are more willing to cooperate with them," said Carlby Xie, head of research and consulting for North China at Colliers International.

Urumqi, capital of the Xinjiang Uygur autonomous region, posted the biggest gain in property prices at 9.2 percent in June. In Lanzhou, capital of Gansu province, prices rose 8.2 percent year-on-year last month.

To tackle escalating property prices in smaller cities, the State Council, or the Cabinet, said in mid-July that it will extend restrictions on home purchases from major cities to smaller ones. The government is drawing up a list of these cities, according to a source close to the Ministry of Housing and Urban-Rural Development who wished to remain anonymous.

"Though investors' profit margin may be a bit lower in lower-tier cities, a larger scale of development can help to offset the difference," Xie said.

Much the same is happening in South China. Singapore's Mapletree Investments just began developing a commercial-property project in Foshan, a third-tier city in Guangdong province, with a total investment of 1 billion yuan. Morgan Stanley and Merrill Lynch both have residential projects in the city.

Despite the government's strictest real estate policies to date, foreign institutional investors' interests in China's property market haven't diminished.

According to Loh Shyh, CEO of Mapletree China, Mapletree Investments -- the subsidiary of Temasek Holdings Pte Ltd -- will launch a $1 billion real estate fund in China in the coming months, with an eye on investment opportunities in residential and commercial property sectors. It will be Mapletree's second fund focusing on China.

Ascendas Real Estate Investment Trust hopes to increase its assets in the country to about $1 billion over the next three to five years, Reuters reported on Tuesday.

According to the real estate service provider CBRE, the property investment market was brisk in the first half of the year, with transaction values reaching 54.5 billion yuan.

"Though domestic investors still dominate the market, the proportion of overseas institutional investors, including those from Hong Kong, Taiwan and Macao, is picking up," said Danny Ma, senior director of CBRE Research China

About 45 percent of real estate investment deals in China in the first half of 2011 were made by overseas institutional investors, according to CBRE.

"As strict real estate policies continue and financing channels are further tightened in the second half year, lots of opportunities are emerging," said Wu Tao, managing director of Wins Investment Management Co Ltd.

John Wong, director of investment services at Colliers International, said many more property project owners are now contacting them to seek buyers because of the tighter cash flow.

"Prices are usually reasonable or even attractive now," Wong said .

Meanwhile, land prices are expected to fall in the second half of the year, creating more opportunities for investors.

"To support the local financing and the development of affordable housing, local governments will put more land parcels on the market in the coming months, but at more reasonable prices," said Frank Liu, vice-president of E-Commercial (Shanghai) Real Estate Advisory Co.

Residential land prices across 130 cities fell by 13 percent year-on-year in the first half of 2011, according to data from the China Real Estate Index System.