China’s large scaled growth, power and influence looks set to be one of the major transformations witnessed in the 21st century global economy.
Already the powerhouse in the Asia Pacific region, by 2050 PricewaterhouseCoopers has predicted that it will top the list of GDP earning nations, overtaking the USA by over US$ 20 billion annually. The country’s presence internationally has also been very well felt – particularly in regions like Africa and Latin America who have been keen to develop key long-term relationships.
As a result of legislation in the early 90s, which freed up much of the ability to buy and sell, the property market is very much young and has a huge potential to align itself with the country’s economic success. One of the most prominent reasons is the booming middle class which, according to Euromonitor International, will grow by a further 25 percent by the year 2020.
The majority the China’s main cities – such as Shanghai, Beijing and Hong Kong – have seen rapid rural to urban population shifts and the government has invested some US$ 300 billion annually in infrastructure – particularly focusing on energy supply and transport. Furthermore, the Chinese are generally known as a nation of savers with citizens storing an average of 36 percent of their income and very few having credit card or other unsecured debt. The banks adopt a strict approach to home lending and most mortgages require a minimum 30 percent down payment – meaning very little chance of a ‘sub-prime’ type crisis emerging.
Nevertheless, as with many of the ‘emerging’ nations, inflationary pressures on property prices have fuelled the bubble debate in recent years. Chinese residential house purchasing as a proportion of GDP has risen by 2 to 6 percent and from 2000 to 2011 prices have increased on average by 140 percent nationally and an estimated 800 percent in Beijing (general price patterns can be seen via China Real Estate Index System).
Whilst often questioned in terms of accuracy and under-stated salary levels, property price to income statistics cite between 8 to 9 for most Chinese cities and over 20 in regions such as Shanghai and Beijing (compared to averages of 3-5 in the USA, Australia and Canada and 5-10 in Europe – statistics according to the Chinese Crash website).
In April, Moody’s Investor Service downgraded the property sector from ‘stable’ to ‘negative’ and, as a result of the wide scale construction boom, the Chinese Crash website also believes that a disequilibrium in prices has meant that there are 64 million vacant properties and the emergence of what have been referred to as ‘ghost towns’ within several metropolitan regions. It is popularly stated that this is due to the fact there are no property taxes (or other holding costs) meaning that stock-piling has become a more common investment phenomenon.
Subsequently, the Chinese government has initiated a number of regulations aimed at cooling down the market – examples of which include fundraising restrictions for real estate developers; increasing the down payment for second home buyers from 50 to 60 percent; the imposition of home-purchase restrictions in several cities and a property tax on high end properties in Shanghai and Chongqing. Whether such measures can prevent an all out crash will undoubtedly be debated and remain to be seen. Indeed, investors may well be able to use such speculation in their favour.
From a practical point of view, property investing in China is advisable to only be undertaken with a reputable broker or trusted contact with proven experience. Indeed, the ruling Communist party retains a monopoly power over politics, the law and the economy which needs to be well understood. Rules and regulations surrounding the purchase and ownership of property are complicated and investors should also be aware of the erratic nature of the government’s attitude towards overseas funding – which seemingly prioritises the domestic market. Foreign investors often also find it hard to enter the Chinese business culture, known as ‘guanxi’ – a complex network of corporate relationships built on years of experience and past favours.
Whilst Chinese property owners can also benefit from various tax exemptions, investors are advised to work with a good accountant due to the fact that the rules are often changing and can vary from region to region. Accounting practices remain behind international standards and foreign buyers often point to transparency issues when undertaking due diligence. According to the China Market Research Group, many companies keep three sets of books: one for the tax bureau, one for investors and one for senior executives.
Ruban Selvanayagam, Property Investor / Developer
Linked In Profile: http://br.linkedin.com/in/rubanselva