Why gambling on Chinese property could pay off

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Foreign investors may be a rarity in China’s residential property market, but the potential rewards can be astronomical. With prices going through the roof in major cities, however, fears that the bubble will burst remain relevant

With luxury condos in Shanghai selling at rates comparable to London or Manhattan, it is small wonder that the Chinese residential market is a source of endless speculation. As enticing as some of the lofty sums being exchanged at the highest end might appear, the proportion of foreign investors in the market remains minuscule, with many leery of peeling away the necessary layers of bureaucracy.

Among the chief concerns are the rumours of a housing bubble and impending crash that have plagued the market for years. The Chinese government’s enduring confidence in the nation’s future economic primacy has led to missteps in the commercial sector in the past.

More than a few of the nation’s tier-3 cities, once thought to be on the cusp of a boom, are now burdened with vacant shopping centres hawking premium products beyond the financial grasp of the vast majority of the population. Similarly, these amply proportioned, but relatively obscure cities are prone to oversupply of expensive new housing.

Fears that the real estate markets in more major centres might be reflective of a similarly outlandish level of optimism have often given investors pause.

Most analysts agree that these fears are overblown, if not unfounded. “People have been talking about a bubble for at least the last decade,” says David Ji, director and head of research and consultancy for China at Knight Frank. “I think that indicates a lack of solid understanding of how the Chinese real estate market works.”

More: It’s the smaller cities that keep the Chinese property market warm and bubbly

To understand the Chinese property market, experts say it is vital to understand China – and its tightly controlled economy. It is essentially a policy-driven market, not an interest-rate driven one. When it’s overheating, the government can introduce measures such as purchase restrictions or loan requirements. They can even stop an auction when the price reaches a certain level. While not entirely fool proof, government intervention does provide a considerable safety net.

In Shanghai, where price growth in real estate has been sharp, cooling measures were implemented since the end of March 2016. So far these measures have kept the situation under control.

“The government has a pretty good handle on it,” concurs James Macdonald, head of research for China at Savills. “If it does cool too quickly, they will do as they have before and release some restrictions. We’ve seen this in the past, with price growth of 40 or 50 percent in a year, but then restrictions are able to cool that off.”

These astronomic levels of growth are primarily confined to China’s tier-1 cities: Beijing, Shanghai, Shenzhen and Guangzhou. With populations dwarfing small nations and their own distinct industries, dialects and internal cultures, these cities have grown so massive that Chinese analysts have started to treat them as very separate entities from other megacities in the country. Indeed, Beijing and Shanghai are now classed as “Alpha Cities”.

Due in part to their increasingly cosmopolitan populations and rising status, Shanghai and Beijing have made significant strides in transparency, according to the 2016 JLL Global Real Estate Transparency Index (GRETI), with Shanghai standing out for improving investor conditions the most.

More: Don’t propose homes on commercial sites, Shanghai developers told

“Shanghai in particular is becoming a global financial centre,” says Joe Zhou, head of research for China at Jones Lang LaSalle. “As the rest of the world begins to deal more and more directly with the mainland rather than negotiate through Hong Kong, Shanghai has grown ever stronger.”

Other industries aside from finance such as shipping and IT have helped cement the city’s dominant position and ensure that it is likely to remain at the top of the market for some years to come.

The vast majority of investors are domestic and intend to inhabit the homes that they have purchased. Most estimates place foreign ownership at significantly below 10 percent, with the majority of investors coming from Hong Kong, Taiwan or Macau. Much of this has to do with byzantine regulations designed to limit foreign ownership.

Domestic investors, meanwhile, have few stable long-term alternatives that offer the same security as a physical piece of property. Malfunctions in the stock market have put off investors. Therefore, the housing market is one of the only ways for Chinese to invest large amounts of capital in a short period.

In addition, the concept of property ownership has a deep-rooted social value that transcends fleeting market trends.

“In China, if you get married, you want to buy a house. You don’t rent. It’s a part of the culture that you need to have a roof over your head,” says Ji. “There’s a real demand, albeit heavily skewed towards first- and second-tier cities. People still want to buy houses in those cities. And the supply is limited.”

More: China was the largest outbound property investor of 2016

Additionally, China’s uneven economic landscape compels citizens of all social strata to jostle over limited spots in tier-1 metropolises. Much of the country’s growth has centred upon distinct city clusters, bringing prosperity and the promise of a higher quality of life to inhabitants.

“The more GDP generated, the more jobs there are. Therefore more people are going there,” Ji adds. “The reason some cities are not able to clear their inventory is that there are not enough jobs to attract the skilled workers needed to fill these places.”

Shanghai is one of many overheating residential housing markets where the Chinese government has announced a string of property curbs at short notice

Just how prices have climbed in tier-1 cities is startling. In Shanghai, projects along the Huangpu River are selling at around CNY250,000 (USD36,000) per square metre.

The most famous of these high-end projects is the Tomson Riviera, where the smaller units are around 480 square metres. Opened in 2006, the building is still slowly filling vacancies. “They only sell several units per year, but the developer isn’t trying to sell them quickly,” adds Zhou.

Meanwhile, Beijing was the most expensive city in April with a median price of CNY63,647 (USD9,400) per square metre, a state thinktank reported last month.

More: China still has more billionaires than the US

Buoyed by its fast-growing electronics manufacturing and tech sectors Shenzhen has been on a steady upward swing and arguably represents one of the best value-for-money buys for investors.

A number of upscale projects debuted at the tail-end of 2015, most notably Park View Manor, priced at CNY150,000 (USD22,138) per square metre. Half of the spacious three-to four bedrooms have already been snapped up.

In the end, residential property investment in China remains a risky game, one that foreign investors are reluctant to play. Yet while the Chinese government’s tight grip on the market, lack of transparency, and draconian ownership restrictions are obvious turn-offs, those willing to gamble on in-demand property in top cities can reap substantial financial rewards.

“It’s a high-growth market. You can see prices grow by 30 or 40 percent in a year,” says Macdonald. “That is the primary appeal: to be able to make quite a lot of money in a short amount of time.”

Only time will tell if the government can keep its reins on overheated markets and prevent the bubble that is undoubtedly growing from bursting. In the meantime, risk in the luxury sector is comparatively low for investors willing to stick to the rules.

Built for speed

China’s high-speed rail network has become a major factor in the joining together of the country’s urban hubs. A new fast connection can dramatically boost a city’s employment market, while long-distance journeys, such as the record-smashing link between Beijing and Guangzhou, are national game changers. Currently under construction is Badaling station, the world’s largest and deepest rail station. Situated 102 metres below the Great Wall of China, the proposed train line would send passengers rocketing to Zhangjiakou, site of the 2022 Winter Olympics.

Sino solutions

Shanghai Post-Expo Area

As prime real estate in Shanghai becomes ever more scarce and commuter traffic from the outer rings more congested, city officials have been looking for subterranean solutions. May 2015 saw the arrival of a sprawling 44,5934 sqm complex under the former site of the World Expo that includes a pedestrian passageway, shopping malls and entertainment venues.

Beijing’s New Airport

Though it will still be years before the vision is fully realized, officials hope that Beijing’s new international airport in Daxing District will finally be able to handle the ever increasing volume of air traffic to the capital. Once completed, the airport will become the largest in the world.

Guangzhou-Shenzhen-Hong Kong Express Rail Link

This ultra-high-tech rail line would shorten the commute between each of these powerhouses in southern China. It would dramatically boost commerce and enable employees to live in any of the three cities, regardless of where their office might be located. According to a recent CBRE report on southern China, it could be one of the most significant developments in the region.

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After a stint in Bangkok she is now based in Germany where she combines writing with consultancy for an emerging fashion brand. She has contributed to a variety of publications, including Travel + Leisure, The Guardian, Conde Nast Traveller India, Cathay Pacific’s Discovery, Slow Travel Berlin, Travel + Leisure Southeast Asia, among others.