Buying & Selling in China

[camden]

Hello all,
The housing market in China has become highly regulated as the government acted to cool overheating. Anyone thinking of buying and selling again in a short period is likely to face penalty taxes.

The Shanghai market, after several years of appreciation at around 30% per annum, appears to be in decline now. So there may be good buying opportunities in the future. The values of my apartments Nanjing have still kept slightly ahead of inflation over the past year and a half, since regulations slowed the market.

It seems that many people are sitting and waiting to see what the government will do with regulation. The purchase price of a property in China effectively includes 30 to 40 years of council rates paid up front, which provide a huge temptation for government departments to spend. There has been talk for some time now of changing the pricing structure so that the "rates" component is paid of over the term of the land usage title. There is an article out on this issue today:

Survey finds housing sector at all-time low

Whilst it is still pretty easy to generate positive rental returns, the percentages are not as good as a few years ago. Nevertheless, based on numbers the market is more attractive than Hong Kong.

Regards,

 

[cameron]

Hello Camden,
I wouldn't suggest buying in China unless you were able to keep check on things yourself. I've been working in China for some years now, so it's not a problem. Taking profits is also a problem as the currency is not yet fully convertible, although it is likely to substantially appreciate.

The market is an interesting one to watch. It's also a lot of fun setting up and renovating apartments where the cost of decorating is relatively cheap and so many products are available.
See you soon

 

[stevehem]

I think that the market is not so gloomy as you suggest. Maybe the really expensive, Tier 1 cities are now unattractive as investment locations, but the smaller cities still have a long way to go. Infrastructure is being built at a frenetic pace, and more workers are moving in from the countryside. Although things are not perfect, the Chinese economy now is strong enough to withstand a slight downturn in the US economy, especially since it produces a lot of cheaper manufactures that will not suffer as much as the luxury sectors even if there is a recession in the US. China does not produce BMWs or Rolex watches.

The other factor which is very important to an overseas investor is the currency play. The US dollar is dropping sharply against other major currencies (e.g. the Euro). The authorities will try to keep the RMB pegged to a trading basket of currencies, but at a rate that favours China exporters. The RMB will be allowed to rise against the USD for years to come (with strong pressure from the US authorities),which will mean that for a US-based investor (or a GBP or Euro one, in practice) even a flat real estate market in China represents an opportunity to make money.

If RMB assets can be combined with USD liabilities (e.g. the purchase of a China apartment is funded by re-mortgaging the family home) then the profits from the currency play are magnified!

 

[Edward Briggs]

Over the past 15 years I have spent quite a lot of time around Hong Kong and Shen Zhen across the border on the mainland. This area is absolutely on fire, I have never seen anything like it. I don't know the complexities of buying property there but in the nicer areas I would think that there would be enormous potential.

 

[stevehem]

Over the past 15 years I have spent quite a lot of time around Hong Kong and Shen Zhen across the border on the mainland. This area is absolutely on fire, I have never seen anything like it. I don't know the complexities of buying property there but in the nicer areas I would think that there would be enormous potential.

Edward,

The complexities are not so great really. Before you can buy then you need to get yourself a Chinese Name, since the property register will only accept Chinese names! (The biggest problem I had was practicing writing it over and over. My colleague says that I still write it like a 5-year old!) This is the only prerequisite to owning property on the mainland. However it is recommended that you sign a Power of Attorney to grant to a trusted individual (e.g. a lawyer) the power to sign registration, tax and legal docs on your behalf.

Shenzhen is out of bounds to non-resident foreigners. I cannot buy there because I am based in the UK, for example. If you are based there, you are permitted to buy one property, to live in. The other big advantage of being a resident foreigner is that you can borrow money to finance the purchase (up to 70% if memory serves me right - the banks all fall into line). There are no problems with smaller neighbouring cities such as Dongguan and Zhuhai.

As far as Hong Kong goes, the whole system is based closely on the British system. There is absolutely no restriction on foreigners buying, and no problem for a foreigner (i.e. someone without HK ID) borrowing to finance the purchase of a rental property. This makes the HK property market red hot, because now funding rates, pegged to the dollar, are coming down every time the Fed tries to avert another crisis.

 

[Edward Briggs]

ShenZhen Real Estate

Stevehem, thanks for the excellent post. I take it that it is not possible to for a non-Chinese citizen to purchase commercial real estate in this area. Is that correct?

 

[stevehem]

Stevehem, thanks for the excellent post. I take it that it is not possible to for a non-Chinese citizen to purchase commercial real estate in this area. Is that correct?

Edward,

I understand that there are no special restrictions on foreigners buying commercial investment property. I am trying to confirm this. I myself purchased a small office in Zhuhai for the purpose of renting to a business without any problems. Renting out commercial premises is slightly more complicated because the tenant will probably insist on full documentation for his own tax accounts.

 

[Edward Briggs]

Thanks Stevehem

Stevehem, that is good information to know. I think on my next trip over I may look into investing there a bit more. I had thought in the past that it might pay me to have an apartment in this area since some of my stays were months long.

 

[rcroome]

I live in Shanghai and the pace of residential building where I live (Minhang),has to be seen to be believed. About 200,000 2 bedroom apartments (about 1000 now, but the rest of the land has been bulldozed),are being built within a kilometer of me. From the outside it looks like they are for middle class Chinese. I suppose there will be enough demand for these, however with the way the Chinese are so bullish about economic growth, even a small hiccup could mean serious problems for people who buy now regardless of who you are.

 

[rcroome]

The thing I find so unnerving about investing in China is the lack of transparency in the market.

 

[stevehem]

I live in Shanghai and the pace of residential building where I live (Minhang),has to be seen to be believed. About 200,000 2 bedroom apartments (about 1000 now, but the rest of the land has been bulldozed),are being built within a kilometer of me. From the outside it looks like they are for middle class Chinese. I suppose there will be enough demand for these, however with the way the Chinese are so bullish about economic growth, even a small hiccup could mean serious problems for people who buy now regardless of who you are.

There is certainly something akin to an irrational exuberance about the China real estate market right now. I spent the last couple of weeks looking around nice new apartments in and around Zhuhai. There are a lot of them (fewer than in Shanghai, for sure, but still a lot),a lot that are empty, and - what is worse - there are a lot which are still empty five years after being built. There are also some pretty scary variations in price even in the central area of Zhuhai. Some properties can be picked up for not much more than RMB 3K psm, others (admittedly villas) are selling at up to RMB 30K psm. The cheap ones are old, of course, but this is not necessarily a disadvantage as long as the location is extremely central. If the block gets knocked down the leaseholders will be bought out at a premium to the market price. I have heard of this happening recently: the developer needs to get control of a building before he can knock it down.

Having said that, I think that it is quite possible that Hong Kong, especially in the Central area of HK Island is the best way of taking a bet on the China real estate. The markets are strongly correlated, but in HK nearly all the political and 'legal uncertainty' risk is eliminated. Not only that, but Lloyds TSB are happy to finance an investment purchase.

 

[mkellerman]

I am resident in Shanghai and own property here with a mortgage from a Chinese bank. In the past it has been possible to get foreign currency mortgages from branches of foreign banks here in China, but I think this is not possible right now (this might change in June).

I'm wondering about buying property in Hong Kong. What kind of property is a good investment?

 

[stevehem]

In my view the best area is definitely Hong Kong Island, especially near Central. Even more specifically I'd recommend 'central midlevels near the escalator'. Soho West, nearby is pretty good. I would recommend an older walkup block with redevelopment potential. These places go for a slight premium over those with no potential but offer a "lottery ticket" bonus, because if someone does want to redevelop he will have to persuade at least 90% of leaseholders to sell.

It is relatively easy for a foreigner to obtain finance for this kind of purchase both from HK and overseas banks, lending up to 70% of value. The interest rates (courtesy of Ben Bernanke) that are payable mean that there is usually no problem at all with interest cover. Yields are around 6.5%.

 

[mkellerman]

In my view the best area is definitely Hong Kong Island, especially near Central. Even more specifically I'd recommend 'central midlevels near the escalator'. Soho West, nearby is pretty good. I would recommend an older walkup block with redevelopment potential. These places go for a slight premium over those with no potential but offer a "lottery ticket" bonus, because if someone does want to redevelop he will have to persuade at least 90% of leaseholders to sell.

It is relatively easy for a foreigner to obtain finance for this kind of purchase both from HK and overseas banks, lending up to 70% of value. The interest rates (courtesy of Ben Bernanke) that are payable mean that there is usually no problem at all with interest cover. Yields are around 6.5%.

thanks for that