It’s a common view that Japan is considered to be Asia’s most “alien” environment, as far as cultural norms, cuisine and business/work etiquette goes – (don’t worry, we’ll get there soon ;)) – while China, at least on the surface, seems far more familiar to the foreign investor. US nationals, in particular, feel comfortable around the Chinese, if only due to the vast amount of Chinese migrants present in the USA (as well as in almost any other country in the world) – some of them dating their original pilgrimage two, three or even five hundred years back, making them, alongside the Indians possibly, the most common and well-assimilated Asian ex-pats in almost every “western” society.
As a result, many foreigners also believe that doing business in China is a viable, profitable, easily exploitable option – after all, so many of the world’s movers and shakers have told them “That’s Where It’s All Happening Now” (whatever “it” may be, depending on the conversation and participants)– and after a lifetime of haggling over the price of vegetables with their local Chinese grocer, buying home-decor Chinese lucky charms and sampling all of the popular, familiar dishes in Chinese restaurants world-wide – venturing further and doing business with the Chinese, in China, seems like a natural choice.
The government, while (cough, cough) communist, seems to be very international business-oriented, much like the “average Chinese” one meets in the course of doing business or on the street, and the vast size of the land, its population and economy all but dictates endless opportunity for those willing to venture that far.
And, theoretically, this is all very true. There are several huge “howevers”, (however), which we’ll delve into more deeply into in the second part of this article. For now, though, let’s consider -
One should bear in mind that private real-estate ownership has only been allowed in China in the last dozen years or so, is government lease-based(as opposed to freeheld) for 70 years at a time, and any information regarding market performance in previous years is non-existent. Naturally, as a result, our ability to look back at historical trends and analysis is severely limited – it also means that, from a foreign investor’s perspective, China’s property market is virginal and highly volatile, for better and worse. Governmental “iron-fist” regulation has maintained a VERY steady rise in property value since late 2001 – average value up 75% in the last decade, exactly the same as in Singapore, but without the pesky and opportunistic roller-coaster dips and curves evident there – Singapore being a tiny market, any change in policy has immediate and sharp effect, whereas the sheer size and magnitude of China’s property market tends to act as a regulator for any such fluctuations, making the big picture seem far more stable when viewed from afar – this is highly misleading, however, as China’s real-estate market is beset with surprises, policy about-turns and, increasingly in the last two years, even violence and civil unrest – but more about that later.
The last two years have seen a relative plateau with a slight downwards curve, as a result of (you guessed it!) yet more government intervention, enforcing stronger financing laws regarding additional home purchases – as a result, the minimum down payment now required is 30%, banks (wholly owned by the state) do not approve mortgages for more than the first two properties purchased, and other such control measures – measures that have achieved the desired effect and slowed down price rises to a (purely temporary, in most analysts’ minds) reverse trend. These measures have, in fact, been so effective, that in the last two months sales have begun to pick up, likely due to tax reliefs and easing of limitations for home buyers. A recent rise in borrowing interest rates (also manipulated by the government, and in sharp contrast to China’s GDP expansion slowdown) has also done its share in this artificial forced slow-down.
Rent return in the bigger cities (Shanghai, Beijing) is paltry, even compared to other metropolis’ around the world, and is now at an average of just under 3%, which many consider to be the early warning signs to the forming of a Chinese property price bubble. The only internationally recognizable spot exhibiting healthy rent returns (an average of 8-9% p/a) at this point in time seems to be the fast-developing metropolitan hub of Chengdu, in the heart of the country, and the last major city as one heads west, towards trouble-stricken Tibet.
While this doesn’t sound too good in theory, one must bear in mind that these numbers are relevant to central metropolitan centres, and all-but-new developments or close to it. Due to the size of the land and a huge variety in prices (from $50K in the more rural areas to the mid millions in the heart of the city), extensive deal-mining is possible – but watch out for local municipality taxation by-laws, and China’s infamous “land grabs” (more on that next week).
(Figures mainly taken from globalpropertyguide.com and “The Economist”, re-checked & confirmed with local industry professionals, as always)
The Foreign Investor
The first procedural challenge all foreigners must deal with when considering the purchase of Chinese commercial property (residential investment property, as well, is considered commercial by Chinese law, unless owner-occupied by a legal resident) is the fact that it’s illegal for non-residents to own Chinese property. This can be circumvented by the setting up of a Chinese company (JV – Joint Venture, or WFOE – Wholly Foreign Owned Enterprise), but this requires legal and financial representation, and incurs expenses that should be taken into account beforehand.
Taxes vary across China, with different local municipalities taxing at varying rates, but general rules of thumb are –
* Income tax on rental income is normally a flat 20%
* Property tax is a whooping 12%(!) for out-right commercial property, 4% for rented-out residentials
* App. 25% in CG-related taxes (20% plus an additional 5% business tax, on all sale-related profits)
* Shanghai (pictured in it’s full smoggy glory, above and to the right) is far more investor-oriented, with app. 5% for both income and CG-related taxes
* Taxes can be further reduced for smaller residential apartments/landless properties, and with creative accounting and familarity with local taxation laws, in similar fashion to most other countries.
Again, as this is largely region-specific, local advice is highly recommended. The big cities have a multitude of English speaking financial and legal reps, but these aren’t cheap, so as with the costs related to a forming of a company, above, should be estimated and WILL affect profitable investing budget minimums.
If all of the above isn’t formidable and complex enough, it gets much more so– next week we’ll do a quick review of recent history and unique environmental issues (mostly related, as you may have already guessed, to Chinese government policies and control), speculate on what this means for future investments (aka “Crystal-balling”), and try to summarize the general pros and cons.
Looking forward to your comments!
ZivAn Overview of Real Estate in China - Scratching the Surface by Ziv Magen