GLOBAL - UK property firm Grosvenor will limit Chinese acquisitions for its luxury residential development programme to first-tier cities despite a limited supply of high-quality opportunities.

The AUM £10.9bn (€13bn) private company, which is also scouting similar opportunities in Hong Kong, said it would consider second cities "as they progress over the coming years".

Although he declined to provide details, a spokesman indicated that a number of deals were in progress in Shanghai and Beijing, cities in which the firm has a presence.

His emailed comments came after the firm announced two Japanese acquisitions - one for its residential acquisition programme, the other as part of a strategy to build up core assets via co-investment agreements with local and international partners. 

The first, a 99-unit Tokyo apartment block, the company acquired at the end of last year for an unspecified figure, but only announced in the past few days.

In a research note, Grosvenor head of research for Asia Harry Tan suggested that both macroeconomic and property-specific trends made a strong case for investment in Japanese residential.

While he acknowledged "considerable and widespread concerns" over Japan's prospects for recovery following a weaker than anticipated 0.7% contraction in 2011, Tan pointed to a normalising business environment, improved trade demand forecasts and the likely impact of positive policy tailwinds, including the Bank of Japan's commitment to additional debt purchases and a 1% inflation target.

At the same time, inward middle-class migration into the capital, the low cost of financing and tax breaks would create a "demographic sweet-spot" for the housing market over the next few years.

Currently, the need to refinance existing debt, the withdrawal of global capital and secondary oversupply holding down rents are dampening the recovery in the Tokyo property market. 

However, macroeconomic improvement would lead to a more robust and sustained rebound in demand conditions, Tan said.