NEW YORK (TheStreet) - We often read in Western media about "the Chinese real estate market" as if it was monolithic. But that's as absurd as talking about the U.S. housing market that way.

There are obviously differences between the price of an Upper East Side townhouse and a condo in Miami. Besides geography, there's a huge distinction between the low- and high-end of the market in America today. Just a week ago,

Barron's

profiled how Florida -- with thousands of foreclosed low-end properties continuing to be dumped onto the market -- was seeing high-end housing in places like Naples and Palm Beach firm and even move up in for some properties.

Business School market segmentation principles apply equally to China as they do here. China's real estate market has as many permutations -- from coastal cities to Tier 3 interior cities, and high-income to low-income -- as we do in America.

All the bluster from the China bears over the past year pointing to a real estate bubble has -- more precisely -- been focused on the upper-middle and high-end of the Chinese residential market in the Tier 1 cities of Beijing, Shanghai, Shenzhen and Guangzhou. Those markets were white hot last year and caused the Chinese government to take swift and draconian action, which almost immediately took effect on slowing things down.

Although I still don't believe that end of the market is expensive by major Western city standards (like New York, London, Moscow or Hong Kong), the bigger opportunity in the Chinese real estate at the moment is in low-income housing (LIH).

Looking at the bigger picture, China's government is motivated by the goal of social harmony in the Chinese society. It knows that if it does not achieve this goal, there will be social unrest and protests. This is the goal behind the "protect 8" policy of maintaining at least an 8% growth rate in the annual GDP.

When housing started to rise at the higher end of the residential market last year, it was a concern not just for being a bubble, which might burst down the road but for causing resentment from people at the low-end of the market who found housing less and less affordable.

Another concern for the Chinese government has been the rising cost of commodities (especially food) in the last year. A couple of weeks ago, when the riots and protests in Egypt broke out partially over the increased price of food in the last year, the Chinese government prevented users from searching the Chinese characters for "Egypt" on

Sina'

s

(SINA) - Get Report

popular Weibo service.

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To ensure that it maintains its goal of social harmony, the Chinese government has recently begun several policies to support the development of China's LIH market.

Since 2006, the Chinese government has started to pay attention to the LIH market. In 2007, the government budgeted 7.7 billion RMB to the LIH market, more than the total combined in all previous years.

In 2008, it injected another 18.2 billion RMB, and the LIH market became part of the government's annual report. In 2009, the government deployed 55.1 billion RMB in funding, and compensated local governments for LIH development.

By 2010, the government used 80.2 billion RMB and built 5.9 million units for LIH. From 2006 to 2010, the number of families living in LIH units increased from 329,000 to 15 million. In 2011, it is expected that another 10 million LIH units will be built.

The demand for LIH will remain fervent over the decade not only due to its current scarcity but also due to the 400 million migrant workers who are expected to move into cities over the next 20 years.

The LIH market in China can be broken down into three types: economic units, affordable rental units and special rental units. They are all typically 300 to 600 square feet.

Chinese LIH is either developed by the government directly or by government-corporate cooperation. In the case where it is government-built, the local government plans, builds and sells the LIH units.

However, due to the large funding needed to develop LIH units and the low profit margin available relative to higher-end housing, local governments typically get substantial help from the provincial or central government for financing.

However, more often, the local governments source the LIH market to local real estate companies. In exchange for taking over these projects, the government sells the land to the developer at a discounted price, and once the buildings are completed, the government will assure the smooth selling of units. This cooperation often brings friendly relationships between the government and developer.

The Chinese government hopes that the LIH market will ultimately cover more than 70% of low-income families over the next decade. At least then, they will feel secure in the affordability of their home. More specifically, the LIH market will comprise 20% of the total housing market in China. That would put it at a similar level to what France is experiencing today.

Such a goal would be much higher than where low income housing sits as a percentage of the U.S. market today (around 5%). However, China wishes to emulate Europe more in this area.

The bottom line is that there is a huge opportunity in Chinese LIH in the next five years, with the tailwind of supportive Chinese government policy behind it. I am taking advantage of it by investing directly into Hong Kong entities that have relationships with local real estate developers eager for capital to take advantage of the opportunities they see -- especially in the larger cities who have to continue to deal with an inflow of migrant workers from the country.

Our analyses show that the projects should return 20% to 30% after tax over a 12- to 18-month period. Those aren't as high as potential returns from the high-end of the Chinese real estate market but they are certainly very favorable with less risk thanks to the support of the government. The key is picking the right local real estate developer partner who can deliver.

At the time of publication, Jackson was long SINA and has direct investments in low income housing.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson