Zoe Zhang, a 38-year-old housewife from Shanghai, plans to spend as much as 2 million yuan ($326,000) to breathe a little clean air.

Since December, Zhang has been shopping for a home in Sanya on Hainan, a tropical island in the South China Sea that has been compared to Hawaii because of its sandy beaches and balmy weather. It also has some of China’s cleanest air.

“Air quality has never been so bad in Shanghai,” Zhang said. “I simply want to have a place in Sanya for my baby and parents to fly down and stay during those heavily polluted days.”

China’s smog-clogged cities, where pollution regularly exceeds World Health Organization levels considered safe, are proving a boon for Sanya, lifting home prices that slumped more than 60 percent in 2011 recover. Home sales rose 48 percent last year from 2012, the biggest gain since the market crash in 2011, according to Centaline Property Agency Ltd., China’s biggest real estate brokerage.

“A lot of buyers from the mainland need to spend winter here and clear out their lungs,” said Fu Zelong, a researcher at Centaline in Haikou, the provincial capital and biggest city on Hainan. “There used to be a lot of speculative money in Sanya’s property market, but what’s driving the market today is real demand for holiday homes.”

More than 80 percent of property agent Wei Yongfeng’s clients last year said they bought homes in the city for its clean air. Most were buying second or third properties outside their home cities, said Wei, who works for Verdure International Holdings Ltd., a closely held Nanjing-based developer.

“What do rich people fear the most? It’s death,” said Wei, the agent for the Phoenix Watertown luxury residential complex, which includes a five-star hotel and villas facing Sanya Bay. “Hainan can offer them the best air and sunshine in China. Unlike in previous years, their first priority is no longer seeking the best investment returns.”

Prices Stabilize

Sanya, which is on about the same latitude as Hawaii and Miami, was China’s best-performing property market in 2010, with prices jumping 48 percent thanks to a two-year lending binge spurred by government plans to transform Hainan into a tourism destination.

That came to a halt the following year, sending values down 66 percent, after the Chinese government tightened property policies to weed out speculators.

Now prices are stabilizing. They climbed 4.5 percent in January from a year earlier to 25,046 yuan per square meter, according to SouFun Holdings Ltd., China’s biggest real estate website. That was compared with an 11 percent decline in the same period last year.

Fresh Air

Air quality in Haikou was the third best among 74 cities the government tracked in January, while Beijing ranked 39th and Shanghai 12th, according to China National Environment Monitoring Center. Sanya, excluded from the environment ministry’s survey, reported just one “slightly polluted” day in the fourth quarter, while Beijing’s residents suffered 189 days of polluted or heavily polluted air last year, according to the cities’ authorities.

Beijing’s air pollution reached more than 18 times WHO levels, topping the organization’s hazardous threshold for a sixth day on Feb. 25, and Shanghai’s exceeded it by more than five times the same day.

Chinese President Xi Jinping said last week that pollution was Beijing’s biggest challenge. Smog will be on the agenda as lawmakers gather for the meeting of the National People’s Congress this week in Beijing after pledging to ease pollution around the country.

China currently uses coal for about 65 percent of its energy. People in northern China may be dying five years sooner than expected because of diseases caused by air pollution, an unintended result of a decades-old policy providing free coal for heat, according to a study led by the Massachusetts Institute of Technology published in July.

Rich Playground

The winter temperature on Hainan averages 19.2 degrees Celsius (67 degrees Fahrenheit). That compares with 6.9 degrees Celsius in Shanghai and minus 2.9 degrees Celsius in Beijing.

The government unveiled a plan in December 2009 to build Hainan into an international tourism center, luring hotel chains such as Starwood Hotels & Resorts Worldwide Inc. and Marriott International Inc., which now line Yalong Bay to Sanya’s east.

The island’s status as a playground for the wealthy was enhanced with the arrival of billionaires such as Wang Dafu, the chairman of property developer Visun Group who built a marina in Sanya, 400 miles (644 kilometers) southwest of Hong Kong. Visun Royal Yacht Hotel, which opened in 2008 overlooking Sanya Bay, has 216 berths and Wang, with a net worth of $1.1 billion on the Bloomberg Billionaires Index, invested 380 million yuan to set up Hainan’s first jockey club in 2012.

Least Hospitable

The island has hosted the Boao Forum for Asia, a gathering of government and business leaders modeled on the World Economic Forum and the forum in Davos, Switzerland. It also is home to Hainan Airlines Co., backed by billionaire George Soros.

Zhang, the housewife, said she is looking for a 100-square-meter (1,076-square-foot), two-bedroom holiday home in the tropical city, a three-hour flight from Shanghai. She plans to rent the place out when her family isn’t staying there.

Because most housing sales in Sanya involve holiday homes, few buyers take out mortgages, according to broker Savills Plc and Centaline.

Pollution in Beijing and Shanghai place them among the least hospitable of 40 international cities in a February report by the Shanghai Academy of Social Sciences.

The study, which evaluates cities on factors including air quality, the cost of living and security, ranked Beijing 39th as pollution in the Chinese capital is “close to extreme.” Shanghai was 36th. Moscow was rated the least hospitable.

Slowing Growth

China’s pace of economic growth is slowing. Gross domestic product will expand 7.5 percent this year, the least since 1990, according to the median estimate in a Bloomberg News survey from Feb. 14 to Feb. 19. Meanwhile, the central bank aims to cut debt levels by making borrowing costs more expensive.

That may jeopardize the recovery in Sanya’s property market, which rebounded as property prices around the country jumped last year, according to analyst Jack Gong.

“There remains a question mark over whether such a recovery will be sustained,” said Gong, a Hong Kong-based property analyst at Orient Finance who went on a work trip to the island in December. “Even though buyers don’t take on mortgage loans for holiday homes in Sanya, the slower economy and tighter liquidity will gradually show an impact.”

‘Relaxing Lifestyle’

Hainan, with an economy largely dependent on real estate and tourism, saw property investment rise 35 percent to 120 billion yuan last year from 2012, while the sales value jumped 40 percent to 103 billion yuan, according to the statistics bureau of the province. That was compared with the nation’s 20 percent increase in property investment and 27 percent jump in sales in 2013, according to the National Bureau of Statistics.

Agile Property Holdings Ltd., the developer controlled by Chinese billionaire Chen Zhuolin, said it sold 7.8 billion yuan at its biggest project in Sanya last year, a 30 percent increase from a year earlier. The Clearwater Bay is a 20 billion-yuan investment with residential apartments, villas, five-star hotels, a yacht club, shopping mall and golf course.

Boom, Bust

Hainan is no stranger to booms and busts. In 1993, home prices on the 34,000-square-kilometer (13,127-square-mile) island exceeded those in Beijing and Shanghai by as much a two to three times after the province was spun off from Guangdong province to become China’s biggest Special Economic Zone at the time, according to Mizuho Securities Asia Ltd.

When the bubble burst in 1995, as Beijing tightened monetary policy and prodded banks into canceling loans, some developers went bankrupt, leaving unfinished real estate projects and a decade-long subdued market on Hainan.

An increasing middle and wealthy class is now helping underpin demand for vacation homes, according to Savills.

“Obviously there’s still a certain degree of investment sentiment today, but what you see a lot more now is actually some form of self-use as well,” said James Macdonald, Shanghai- based head of China research for Savills. “It is quite clear why people go to Sanya: It is because of the beaches, the weather, the seafood, and the luxury relaxing lifestyle. With the size of China, you need to have something unique to be able to stand out and sustain certain demand to support your property market.”

Bonnie Cao, with assistance from Daryl Loo in Beijing. Editor: Andreea Papuc, Rob Urban. To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net. To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net. 

Photo Credit: A surfer in Hainan. Reuters