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To many, investment in China may seem like
a difficult prospect. Apart from language
and cultural differences, concerns may range
from laws and regulations which may not
be transparent, to complicated bureaucracy.
However, China has made huge progress since
it joined the UN and embraced a market-oriented
economy in the late 1970s. The country is
opening up to trade, has an increasingly
liberal global trade regime, and labour
costs are a fraction of what they are in
the West. China also showed its openness
to progress and development by joining the
World Trade Organisation (WTO) in 2001.
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A key element of China's new-found economic
freedom has been the introduction of property
rights. These property rights include laws
which state that the government may not
confiscate property without payment of compensation,
and allow for claims to be made against
the Chinese government (although this is
on a reciprocal basis - if the home State
of the claimant allows Chinese citizens
to make claims this will be allowed, if
not it won't). China also has dual taxation
agreements with 78 countries, including
the UK (further details of these agreements
can be found at www.chinatax.gov.cn/ssxd.jsp).
Due to these developments, China is seeing
extraordinary economic growth (averaging
approx 9.4% per year between 1978 and 2001).
In 2004, the Organisation for Economic Cooperation
and Development (OECD) predicted that the
Chinese economy would grow by 9.3% in 2005,
rising to 9.4% in 2006 and 9.5% in 2007.
The total GDP between January and June 2005
reached 6.7 trillion Yuan Renminbi (RMB)
(£466bn), a growth driven by exports and
largely private sector investment. This
is one of the largest growth rates in the
World. To complement this, the Chinese currency
is currently undervalued - the World Bank
estimated the currency to be 75% undervalued
in 2000. Until July 2005 the Yuan was pegged
at 8.28 RMB to the US dollar, a fact which
enabled China to build up a huge trade surplus.
On July 21 in 2005 the People's Bank of China announced
the adoption of a more flexible exchange
rate system and a 2.2% appreciation of the
RMB against the dollar. The likelihood of
further appreciation, along with the aforementioned
economic growth, has helped to drive investment
interest in recent years. Straightforward
currency purchase would appear to be the
best tactic to take advantage of these factors,
but the Central Bank of China maintains
strict controls over the RMB, an untradable
currency. The Bank has imposed a limit of
$50 thousand a month on the buying of the
RMB, and once bought, it is extremely difficult
to repatriate funds or to convert the currency
back into foreign denominations. Funds can,
however, be taken out of China through investment
in a business or in property, and the commitment
required to run a business in a foreign
country means that property investment is
the simplest and most advantageous way to
benefit from the opportunity that China
offers.
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| China's property sector began
to take off in 1998 (when the Chinese began to be allowed
to buy their own homes), and has been growing at an
average rate of 22% a year ever since. The investment
boom in 2003 raised growth to 32.5%, an unprecedented
level. In Beijing, statistics from the Beijing Land
Bureau show that the revenue to investment ratio of
high and medium-grade housing has reached as high as
30% to 40%, compared with around 5% in Europe and the
USA. The consistently high returns on property investment
have meant that money is pouring into the property market,
and according to research by Morgan Stanley, up to $2
billion in foreign capital will flow into Shanghai's
property market in the next few years.
The massive appreciation has caused fears that this
amount of investment is unsustainable, and that a property
bubble is being created in China. In response to this
the Chinese government took action in 2005 to raise
taxes, interest rates and deposit requirements, also
imposing restrictions on certain types of sales. The
residential property market has slowed as a result,
whilst the commercial sector has gained ground, continuing
to return impressive rental yields and capital appreciation
figures. The government is continuing to keep an eye
on the situation, and is ready to provide stricter controls
if necessary, a fact which means that a bubble is unlikely.
Over the longer term the government's action should
inspire careful and sustainable investment, rather than
short term speculative investing by investors looking
to make a fast profit. The real estate market therefore
looks set to remain in a sustainable price increase
curve for a number of years to come.
Where taxation is concerned, this is currently under
the control of the regional governments and is periodically
adjusted in moves designed to stabilise the economy.
Capital gains tax is floating and varies between 0%
and 30%, although as the government is currently looking
at stabilising their taxation systems, this should only
be of concern to short-term investors.
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All property in China is under a 'land use right'
system, similar to the western leasehold concept.
There are three types of lease on land: residential,
which is run on a 70-year lease; commercial, which
is on a 50-year lease; and industrial, on a 40-year
lease. At present, due to the relatively recent
nature of this system's creation, what happens
at the end of this period is uncertain, although
the government is likely to create possibilities
for renewals of leases similar to European models.
The recent drop in prices in the residential sector,
combined with the sustained strength of returns
in commercial properties, means that institutional
investors are now more certain than ever that
the Chinese commercial property sector is the
one to become involved in. Investors are aware
that prime office space in China's main cities
is in relatively short supply, allowing owners
of such properties to charge ever |
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increasing rents as demand increases, and domestic
purchasing power in many Chinese cities is also
increasing, meaning that businesses are able to
pay higher rates for retail space. The residential
market is also by no means finished; in fact we
believe that Chinese residential property offers
one of the best long term investment opportunities
around.
The securest investments
currently on offer, however, are most likely those
available in the serviced apartment sector. The
demand for apartments and hotel accommodation
is rising rapidly in major cities such as Shanghai,
Beijing and Guangzhou, especially in areas close
to the financial and business centres of these
cities. The great advantage of these properties
lies in both guaranteed rental schemes (an example
of a property currently available has a guaranteed
rental averaging 8.9% of the purchase price over
an 18-year agreement) and in a capital appreciation
rate of, in many cases, around 20.1% per year. A
number of new developments are also available
with their full lease period intact.
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Buyers in China will come from various fields and backgrounds.
As stated above, many institutional investors are buying,
including big names such as Morgan Stanley, Citigroup
and Goldman Sachs. These investors prefer to invest
in office complexes and brand new retail units and spaces,
as these are likely to be in short supply in future
and they are able to purchase substantial amounts. However,
there is space for the private investor as well, and
many of those who are hoping to break into the investment
market will be able to purchase property in the major
cities. This is due to the fact that there are an extremely
wide range of properties available in the commercial
sector, and options include low-cost cash purchases,
financed properties and properties with guaranteed rentals.
There are also opportunities for those wanting a long-term
investment as well as those wanting a shorter-term project,
although it is advisable to keep ownership of a property
for three years or more to avoid paying a resale tax.
China therefore offers something for everybody wishing
to make an investment.
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are a number of different regions attracting investment
in China, and each region has slightly different
legal requirements and benefits with regard to
property investment. The major cities on the scene
are currently Shanghai and Beijing, although it
is also worth considering Guangzhou. Due to rapidly
rising local wealth, domestic tourism is also
taking off in China. As a result it may be worth
considering investing in either ski or beach resorts
here. For the purposes of this book and due to
shortage of space, Shanghai and Beijing will be
considered here. |
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As home to the powerful Shanghai Stock Exchange,
Shanghai is one of the world's most significant
centres of trade and finance and is the
world's second-biggest container port. The
city is becoming more important all the
time, being ranked alongside New York, Tokyo
and London. The city showed a GDP increase
of 10.2% in 2004, bringing it up to $60
billion, and the Shanghai government contributed
approximately 25% of the tax payment for
the whole country. Thousands of international
companies have relocated to Shanghai, including
the regional headquarters of the World Trade
Organisation, due to the growth in worldwide
significance of the city's financial district.
The resulting influx of people has driven
demand for property to far outstrip supply.
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Considering the city's current status, the
price of property here is extremely attractive
- you can purchase here at a fraction of
the cost of other world financial centres,
and at half or even a third of the prices
in Hong Kong or Taipei. This means that
the potential for capital growth is incredible,
and prices are likely to rise very quickly
over coming years. It is estimated that
commercial property prices in the Pudong
financial area will increase by 50% until
the year 2007, which will probably affect
the demand for private property and leasing
as well.
The local government has recently relaxed
both the housing loan market and foreign
home ownership policy (there are now no
restrictions on foreigners owning property
in Shanghai). Currently mortgages are available
for up to 70% of the purchase price and
70 year leases are now available to foreign
property purchasers, with experts predicting
this will soon change to freehold property
ownership being a right for all. It is still
extremely difficult to find property with
guaranteed rental in Shanghai, though when
these are found, rental returns currently
stand between 6 and 10%. As rental costs
are comparatively high, they may not rise
in line with property prices, meaning that
there may be a drop in yields to 5-7% against
future prices, which is nonetheless a healthy
return.
Shanghai is growing at an unprecedented
rate, and is therefore likely to be considered
an investment hotspot for some time to come.
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The Beijing market is proving increasingly
attractive to foreign investors. Colliers
International noted in a report released
in March 2005 that several international
real estate funds are looking to gain a
presence in the market, attributing the
demand to the booming economy, the expansions
of multinational companies in China, the
improvement of Chinese investment regulations
and the 2008 Beijing Olympics.
Since 1990 Beijing has built 5.1m square
metres of premium office space. At the end
of 2004, Morgan Stanley purchased the north
tower of R&F TwinTower in Beijing, and in
March 2005, CapitaLand agreed to purchase
two office buildings in the Central International
Trade Center complex in Beijing Central
Business District (CBD) for RMB 1.84 billion.
The Colliers International report revealed
that rental demand for Grade |
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office space in Beijing remained quite firm
during 2004, despite the overall slight
downward trend since Year 2001. The data
showed that the average rental in Beijing
CBD outperformed the overall market with
an increase of 5.7% during 2004 due to a
shortage of high quality Grade A office
space.
Beijing is also an attractive investment
market for other reasons. The city is a
centre for tourism in China, a fact which
means that the serviced apartment and hotel
industry is always a good buy. This sector
is also likely to benefit greatly from the
2008 Olympics, when thousands of visitors
are expected to flood into the city. The
Olympics have also led to a massive programme
of infrastructure development, a fact which
should keep the value of property rising
even after the Olympics have ended.
Overall, Beijing offers good prospects for
potential investors, although it is a good
idea to consider your overall aims before
buying. If your aims are principally short-term,
the Olympic Park area would seem to offer
the best potential. For the medium- to long-term
investor, however, it would be wise to remember
that once the event is over, although theoretically
transport links to the centre from the Olympic
Park will have been improved, interest is
likely to shift away from this area and
property prices will stabilize. It is probably
more advisable, therefore, to invest closer
to the Beijing CBD, as this sector is more
likely to continue to develop after the
Olympics have finished. |
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Anne Kalifa, Head of Research for Beijing at Jones
Lang LaSalle, noted that there is a high probability
that in the future, investors will begin to show
an interest in 2nd tier cities such as Tianjin,
Qingdao, Shenyang, Nanjing, Xi'an and Chongqing.
Many Singapore and Hong Kong developers are already
active in these cities, and large amounts of foreign
capital are expected to flow into the market in
coming years. Wherever you decide to invest in
China, it is worth conducting some independent
research, as specific rules regarding property
ownership and purchase are likely to vary depending
on the region you are interested in.
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| Donald Greenlees, of the
International Herald Tribune (IHT), has stated
that there is a frontiers feeling to the Chinese
property market, and, as on all frontiers, there
are numerous risks and unimagined traps, as well
as a worrying lack of information and legal security.
Concerns include security of title, financial
disclosure, governance of listed real estate companies
and zoning and building codes. In its 2004 Global
Real Estate Transparency Index, Jones Lang LaSalle
ranked China 39th out of 51 countries for transparency.
However, there has been a fundamental shift over
the last couple of years, and China has taken
steps to improve the transparency of its property
market. More reliable information and professional
advice have become available to support investors'
decisions, especially in the major cities such
as Shanghai and Beijing.
Another risk lies in the fact that no land in
China is freehold, and the government is legally
allowed to expropriate land if needed for commercial
purposes. According to the constitution, they
are required to pay compensation which is likely
to be market value, especially where foreign funds
are concerned.
As always, it is wise to procure reliable legal
and tax advice when investing.
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