The Wall Street Journal-20080118-WEEKEND JOURNAL- The Home Front- Buying Into China-s Land Rush- Americans- Others Acquire Luxury Homes Despite Restrictions
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WEEKEND JOURNAL; The Home Front: Buying Into China's Land Rush; Americans, Others Acquire Luxury Homes Despite Restrictions
Beijing -- Once known for drab, government-controlled housing and ancient courtyard homes, China has become a land of multimillion- dollar apartments and soaring property values. And foreigners are trying to get in on the action.
Real-estate prices in major Chinese cities have been shooting up at double-digit rates year over year, boosted by an economy that has been growing at more than 10% annually. The jump in prices has been so sharp that the government in mid-2006 implemented stricter controls on foreign investment in hopes of reining in housing costs. Still, foreigners keep buying.
Bill Bishop, a 39-year-old American living in China, bought a four- bedroom penthouse in Beijing in 2005, choosing a luxury complex built by a big-name developer and run by a well-known property manager. The apartment was an unfinished shell -- a common way of buying a unit in China -- and fitting it out took more time and attention than Mr. Bishop, a private investor, imagined it would. But he estimates that the home, for which he paid "a fraction of the cost of an apartment in Manhattan or San Francisco," now is worth at least 50% more than he paid for it.
Behind the run-up in property values is the scarcity of housing for sale. Analysts predict the growth will continue even after the building boom sparked by the Beijing Olympics this year tapers off, despite post-Games housing downturns that occurred in other Olympics cities such as Barcelona, Spain, and Sydney, Australia.
In the last few years, the average growth rate of residential prices in major Chinese cities has been 15% to 30%. Those prices will continue to rise at a rapid clip this year, though the rate of growth should slow, predicts Anna Kalifa, head of research for U.S. real- estate services firm Jones Lang LaSalle in Beijing.
Already there have been signs of a slackening in several southern cities. Prices for new homes in Shenzhen, a boomtown of nine million that borders Hong Kong, dropped 8% from September to the end of the year, according to global real estate advisers DTZ. In nearby Guangzhou -- China's third-largest city behind Beijing and Shanghai -- new-home prices fell 9.9% in November from October, according to city government statistics. Yet many brokers and analysts are reluctant to draw too many conclusions from the downturn in the south. They point to the tides of middle-class Chinese who continue to pour into big cities looking to buy a first home. "Fundamental demand in China across the board is very strong and will remain that way for the next 10 years," says Alan Chiang, the Shenzhen-based head of mainland China residential property at DTZ.
The real-estate boom has extended beyond Beijing and Shanghai, China's main population centers, to second-tier cities like Chengdu in the west, Hangzhou and coastal Qingdao and Dalian, experts say. As multinational companies push into less built-up parts of China they are bringing along expat employees who have helped feed property growth there, too.
Many investors say they have done well. Patty Chen, 53, an American living in Shanghai, says she sold one of her first apartments in the city -- a 1,829-square-foot luxury unit downtown -- for $600,000 in 2005, almost three times what she paid for it for in 2000.
Chinese real estate wasn't always a hot prospect. Foreigners in Beijing once were forced to live in government-approved housing -- chiefly diplomatic compounds and hotels -- often at astronomical rents. Buying was difficult. But laws began to change in the late 1990s and with China's entry into the World Trade Organization in 2001.
Today, upscale developments are popping up all over China's major cities -- in Shanghai, luxury apartments can go for as much as $20 million. The Beijing Yintai Center, a high-rise development that opened in 2007 with apartments ranging from 1,076-square-foot one- bedrooms to 9,253-square-foot penthouses, is almost sold out, a spokesman says. A salesperson for the property, a joint venture between Hyatt International, Merrill Lynch and China Yintai Holdings Ltd., quoted the equivalent of $1.35 million for a 2,582-square-foot apartment in the project's 63-floor tower.
On average, however, a 1,640-square-foot apartment with Western amenities in Beijing costs about $400,000, says Jones Lang Lasalle, while the same quality and size apartment would go for $520,000 in Shanghai and $190,000 in Chengdu.
Worried that real-estate speculation was leading to higher prices, China's government rolled out regulations in July 2006 that greatly restrict foreigners' ability to purchase homes. Under the rules, foreigners can't buy a home until they have lived in the country for at least a year. And they are restricted to owning just one home at a time. The full-year requirement applies to all foreigners except Taiwan and Hong Kong residents who have a Chinese work visa.
But as with most laws in China, gray areas exist. Some foreigners have been approved to buy homes despite having traveled in and out of China during their first year. "The rules aren't clear on how that one year is calculated," says Kevin Tu, a Beijing-based agent who works with foreign buyers. Agents also say that foreigners who owned multiple homes before the new rules not only can keep them but may buy an additional property. Ms. Chen, the American in Shanghai, says she owned seven residential properties before the regulations changed and had no problem buying another one afterward.
Other methods to invest in China real estate include starting a China-based company or putting money into a property-development company. Yellowstar Capital LLC, a real-estate services firm in Beijing, raises money from investors in the U.S. and oversees more than $30 million in real estate in China. "New York [real estate] had gone up so high, I missed it," says Brett Aaron, the company's co- founder, a native of New York's Long Island who has lived in Asia for many years. "I went to Beijing and I saw all these foreigners . . . and I thought if we can design and develop some good housing that would be a great idea."
There are other potential downsides to China property purchases. Foreigners must borrow locally, and down payments typically are at least 30%. Lenders sometimes will loan only 50% to 60% of a property's value if the buyer already has another mortgage. Property sold within five years of purchase is subject to a 5% tax, a levy designed to discourage flipping.
Ms. Kalifa of Jones Lang LaSalle says researching the background of developers is especially important because buyers generally must hand over the purchase price to a developer before construction is finished -- the country lacks escrow services to provide a safeguard. Some buyers, in fact, have been unable to move in until a year or more after the agreed date. And since the government owns all the land in China, real-estate purchases are technically very long-term leases, usually up to 70 years.
Still, Ms. Kalifa says an investment could be well worth it for anyone looking to live in China for at least three to five years. "There's a major need for housing," she says. "People are looking for investment options, and housing is a no-brainer."
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Kersten Zhang and Jonathan Cheng contributed to this article.
