The Real Estate Deals
As mentioned in the previous article, the sheer size and diversity of China’s different regions and the all-but-endless expansion and growth inherent in its economy (pictured on right – yet another Beijing mega-plex construction site), mean that deal mining is quite possible and can be quite attractive, at least on initial “paper” terms.
Because Chinese rural or semi-rural areas are often the equivalent of large cities in non-Asian terms, housing millions, attractive deals at very low prices and very high rental yields can be found, by utilizing competent and reliable teams (the sourcing of which, of course, requires thorough research and DD).
Yields as high as 20-25% on some of the older properties, with purchase prices as low as $40-50K in some cases – are quite achievable, and while residential rentals have had a tendency to drop a bit in recent years, retail and commercial rentals have been going up in almost all cities across China, while property prices, at least temporarily, are slightly on the down – resulting in even more attractive deals becoming more readily available in recent months.
This is obviously a very attractive proposition for overseas investors, particularly ones from more affluent countries such as Germany or Australia, where even extensive deal mining will very rarely yield anything beyond 6-7% rent return (barring new developments, fix n’flips etc), and investors are left to rely on the hope for capital gain alone – the reality of the matter, however, requires a bit more forewarning, thanks to –
Government Policies (and greed, and corruption)
If it was only official government policies that were causing severe uncertainty in China, one could conceivably deal with it – after all, China’s government has been handling its economy remarkably well on a global scale for the past few decades, as we well know – in fact, China is generally viewed as one of the main reasons global economy hasn’t quite reached the final meltdown status many prophets of doom have been advocating – as its energy and resources requirements are one of the main driving forces behind a large portion of the world’s global trade. And while the Chinese economy has slowed down its growth remarkably, current containment policies meant to boost internal resiliency for the next few years seem to be working well.
The main problem, unfortunately, is corruption, which China is rife with, particularly as far as local governments are concerned. Rural land grabs are one of the main issues – where farmers’ houses (or even some urban neighbourhoods) and accompanying lands are seized by local authorities, often by force and for paltry compensations, then sold to developers at an average of 40 times the compensation paid. This is done by greedy government officials for institutional and/or personal profiteering purposes, and the vile practice is so rife, that a recent survey found that 47% (!) of farmers surveyed nationwide have reported falling prey to such land grabs.
What further complicates the issue is the fact that local governments have the right to change the definition of any land from urban to rural almost overnight, thereby enabling any property to be thus seized, almost regardless of its location. And while this hasn’t been practiced in the heart of the cities as yet, border-line suburbs can and have been “compensated” from owners, causing a rising wave of individual owners-occupiers to blow themselves and others up, and entire families to light themselves up in mass suicide attempts, violent demonstrations and other extreme examples of civil unrest – providing stark proof that no land or property owner is really safe from individual, corporate and governmental greed and corruption in China.
Government authorities also can and do raise and lower income tax, property tax and impose or increase other investment-related taxes at will, sometimes in an attempt to curb rising property prices, and sometimes out of other, less clear or legitimate motives.
If this all sounds like a warning against purchasing property in China, it’s probably because it is exactly that – but more on that in our summary.
Sheer size dictates extensive deal mining at very attractive returns, at least in theory. Practice, however, requires hands-on research and due diligence, local familiarity or reliable teams. Well-connected English-speaking developers, agents and lawyers are crucial to profitable success, but this high profit, especially in the short, safer term, is quite possible (at the right prices and budgets, of course). Property prices, while currently on the halt as a response to previous extreme inflation, seem to be heading upwards in a stable pace on average.
Above all, one should have a clear and identifiable entry and exit strategy prior to entering the Chinese market, stick to it, and associate one’s self accordingly. Don’t be blinded with greed at every glittering opportunity (and many will present themselves as such), research diligently, and you may well strike gold.
Corruption, particularly in local government, is rife, and a major issue. While China’s central government recognizes this fact and claims to be acting to subdue it, this is not yet evident in practice, as land grabs are common and getting commoner. Property is leased for 70 years maximum, price rises that may signify the forming of a property price bubble have been halted, at least temporarily, due to substantial central government forced economy manipulation that has been working efficiently for the country as a whole, but spells uncertainty for the individual investor. While profits can be extremely high, this uncertainty necessitates extreme caution, and only short-term strategies can be recommended for the non-resident investor, in order to mitigate risk from future potential government intervention.
The biggest problem, perhaps, is the fact that, while the majority of the world may object to China’s central, non-liberal, unpredictable and often corrupt regime (pictured on the right, protesters in NYC), these foreign forces have no say (or possible influence) in the matter – and the majority of Chinese citizens, if surveys are to be believed, are supporting their country’s policies and philosophies – so this situation is unlikely to change in the foreseeable future.
How about Hong-Kong, though?
While the “unofficially-all-but-separate-city-state” differs greatly from mainland China, and is considered to be an international economic haven, in very similar fashion to Singapore – is that really the case, or is HK subject to the same uncertainty and corruption as its official “Ruler”? More on that as we begin to explore Hong-Kong in more detail, next week.
Looking forward to your thoughts on this, or any of the previous posts,
1 (The majority of data presented above compiled from the “Financial Times”, “Wall Street Journal”, “China Digital Times (CDT)”, and “The Financial Post”, as well as from conversations, interviews and opinions expressed by Chinese professionals, officials, ex-pats and citizens, in various media channels and private interviews worldwide)