I have thought about this issue quite a bit in recent months - and though I am by no means an expert and haven't done substantial analysis on the markets yet - my preliminary answer is: not yet. Why? Well, keeping things simple, the reasons are as follows:
1. Developement vs Investment - well, as anyone knows who's looked at China property, if you are really serious about investing in this area, you have to do development. There just isn't enough investment-grade existing property to buy. It's a massive underbuilt market (duh) so development is really the only game here.
2. Luxury Residential - this is the area that initially appeared to be most attractive. High unlevered IRRs (even assuming no rental increases) because condo buyers front the cash to the developer before building begins. Short duration - you get your money back in about two years. But the problem here is increased regulation and taxes. Like, every single month for the last six months a new regulation and a new tax. The reason is that the government wants to emphasize middle income housing and de-emphasize luxury housing. I think its a losing proposition to invest in an area the government doesn't support - not to mention where the rules are changing every month. Pass.
3. Middle Income Residential - this has some promise, especially in second and third tier cities. The government is supportive. Put this one in the "has potential" column.
4. Commercial - toughest for me to get my arms around. The yields look okay and the rents aren't crazy but new supply appears substantial at least in certain cities. According to Q1 Jones Lang LaSalle report, Shanghai (Puxi) is about 8% cap rates with $35/square foot rents and 5% vacancy; Beijing 9% yields, $30/sf rents, but 15% vacancy; Guangzhou 10%, $12/sf, and 19%; Chengdu 12% and $10 (vacancy N/A). The flood of money into this opportunity is well underway and set to accelerate (don't act surprised). I read in the JLL report that Chinese insurance companies will soon be allowed to invest in commercial property. They have $240B in assets so $25-30 will come into property. New supply is expected to be extremely large. JLL expects 1.5M square meters of new supply this year which looks like about the same amount as the total of the last three years (do we need office buildings for the olympics?). Similar wave of supply in Guangzhou - and of course both markets are starting with relatively high vacancy rates. I am no expert on this market but these numbers look worrisome to me. Only Shanghai, with pretty much unlimited demand (have YOU opened your Shanghai office yet??) and a low vacancy rate would seem to be able to absorb lots of new supply.
Looking at the opportunity overall, the returns are okay but not amazing. China funds are promising 25-30% gross IRRs. Is this worth the risk? Compared to my favorite China opportunity, mid-market growth PE, where capital continues to be relatively scarce and potential returns higher, I begin to lose interest in China real estate. Plus, the biggest problem of all: who to invest with. There are only 3 or so US Funds targeting China. There are several HK based funds targeting China but I've never heard of them. As with all investments in China, the whole game depends on finding local partners that you can trust with your life (or US funds that you trust will be able to find local partners that THEY can trust 100%). If you don't feel it in your gut, don't play. And I'll throw one more negative into the mix: complexity. There are only so many hours in the day. You have to understand a whole new set of players, regulations, taxes, return dynamics, etc. For 20-25% net? Not yet.