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Residential Lease Report - Beijing - January 2011

February 10th, 2011

Rents continue to climb. With Beijing expat numbers rising and with limited new supply on the horizon, this trend will probably continue.

In 2010, China attracted $106bn of foreign direct investment (excluding investments in financial instruments such as shares). An increase of 17.4% from 2009, according to the Ministry of Commerce. Enough to more than reverse the 2.3% fall seen during 2008. (source: BBC 18 Jan 2011).

Beijing has seen sharp increases in office space occupancy. Foreign companies, especially in the mining, infrastructure and technology have grown their operations and increased foreign staff. There’s also been a rise in medium sized foreign companies setting up offices in the city. German companies in particular have been prominent in this surge.

International school’s are always a good indicator of expatriate relocation trends. Waiting lists at Beijing’s two main international schools, WAB and ISB, are now at peak 2007 levels. In 2009 there were were no waiting lists at these two schools. At Beijing’s German School, there are now waiting lists for several age groups. This has not occurred before.

Supply of quality expat-friendly properties has not kept pace with demand. One reason is that the government is encouraging developers to build low-cost housing and discouraging lower density luxury developments, both in the city and in suburban Shunyi. Lofty property prices also mean that for landlords who purchase properties now, rental returns have dropped from lofty 15% to close to zero. For new investors, rents today fall far short of monthly mortgage payments.

In the city, Gemini Grove and Sanlitun SOHO were the only expat-friendly city apartment complexes to open in 2010. Park Avenue and Central Park remain the most popular mid-tier city expat residential communities. Both have seen rent increases of up to 11-37% (see below). Unusually, it is the 3 to 4 bedroom apartments that have undergone the highest increases. With the completion of high-end office towers at China World Tower 3 and WFC, both within walking distance, demand at Central Park will remain strong.

Embassy House is still Beijing’s most exclusive luxury apartment development. Despite high occupancy and premium rents, Embassy House has not had a viable competitor since opening in 2002. A competitor, The Ascott, has closed. As have East Gate Plaza and Yong He Villas, either because the buildings have been sold, or because apartments are being upgraded.

In suburban Shunyi, Rose & Gingko is the only viable new villa residential community. Occupancy climbed steadily in 2010. Interestingly, the Rose & Gingko developers sold their houses fully fitted-out making them ready to lease for landlords. This contrasts with the earlier trend of selling villas as bare-concrete shells, leaving the individual landlord to carry out all fit-outs. Yosemite houses were sold bare-shell. There are several downsides. Quality and decor varies, often not meeting expat standards. Also, the property management has difficulty doing repairs as the materials and appliances at each house differ.

River Garden, Yosemite and Beijing Riviera and the more exclusive Grand Hills remain solid expat favourites. Expat occupancy is heavily clustered at these four developments. Increased relocations have meant year-on rent hikes of 10-18% (see below). The other ten Shunyi villa communities have not managed to attract the all-important expat numbers either because of deterioration, or because of poor quality fit-outs.

Last June, Mercer’s Expatriate Cost of Living index, ranked Beijing 16th in the world behind Milan, and 6th in Asia, behind Seoul. The city’s continuing rent increases suggest the capital will at the very least retain its place on the ladder. Supply will remain limited for the foreseeable future. We don’t see viable expat-friendly properties (in terms of rent, location, quality and  interior decor) being launched in 2011.

Median Residential Rents *

Embassy House (City High-End)

- Apartment 2bed 213sqm RMB38,000/mth [Year on Increase 26.7% - RMB30,000/mth]
- Apartment 3bed 314sqm RMB55,000/mth [Year on Increase 22.2% - RMB45,000/mth]

Park Avenue (City Mid-Tier)

- Apartment 1bed 97sqm RMB9,500/mth [Year on Increase 18.8% - RMB8,000/mth]
- Apartment 2bed 150sqm RMB16,000/mth [Year on Increase 33.3% - RMB12,000/mth]
- Apartment 3bed 178sqm RMB22,000/mth [Year on Increase 37.5% - RMB16,000/mth]

Central Park 3-4 Phase (City Mid-Tier)

- Apartment 1bed 88sqm RMB10,000/mth [Year on Increase 11.1% - RMB9,000/mth]
- Apartment 2bed 139sqm RMB18,000/mth [Year on Increase 33.3% - RMB13,500/mth]
- Apartment 3bed 188sqm RMB24,000/mth [Year on Increase 33.3% - RMB18,000/mth]

Yosemite C-type (Suburban House)

- House 3bed 356sqm RMB36,000/mth (Townhouse 4bed) [Year on Increase 12.5% - RMB32,000/mth]
- House 4bed 425sqm RMB46,000/mth (Semi-D 4+1bed) [Year on Increase 15% - RMB40,000/mth]

Beijing Riviera - Upgraded (Suburban House)

- House 3+1bed 250sqm RMB35,000/mth (Type C 4bed) [Year on Increase 16.7% - RMB30,000/mth]
- House 4+1bed 406sqm RMB45,000/mth (Type B 4bed) [Year on Increase 12.5% - RMB40,000/mth]

* Note that these are median rents of a representative sample at each development. Actual rents vary up or down depending on specific unit and specific rent terms.

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Released: 9 February 2011
Contact: research@lihong.biz

Running Mountains in May

April 26th, 2010

north-face-2010.JPG

The flag-bearing students may have been loud (a fierce Peking & Tsinghua Uni rivalry) at the 2009 Beijing marathon, but few students outran the 50-something couple who cruised past me at 32km on the lonely stretch before turning into the Olympic Park. As I hit my wall-shuffle, she in her hand-patched lycra shorts, was casually discussing pace-time with her husband. Not surprising. Beijing’s youth may be strutting their stuff at the city’s fitness clubs each evening, but it’s the elderly who sweat it out in city parks early each morning, irrespective of weather.

Beijing has a fantastic mountain range 80mins drive to the North, but a dearth of recreational running events. May brings running to the masses.

The North Face 100 is being held on Satuday 8th May up in Changping around the Ming tombs. There will be 10k, 50k and 100k races. Most of the route is on hilly trails. The 50k has 1,700m in ascents. Ascents on the 100k are mind-boggling.

The following Saturday, 15th May, the Great Wall Marathon returns with it’s 5,164 steps.  I’ll be making the most of May by representing Lihong on the shorter North Face 50k followed by 42k on the Great Wall.

Wonder if that couple will be there?

Eco Courtyard at Hou Hai

March 22nd, 2010

Drove out to Hou Hai on Sunday to see a friend’s energy efficient Courtyard. An impressive home in a historical and alternative neighbourhood. It’s now for lease.

eco-court-ext1

eco-court-kitchen

eco-cour-stairs eco-court-liv-vert

Size: 300sqm including yard with two date trees, 230sqm living space, large living & dining room, 4 bathrooms, 5 bedrooms, cellar with 4 additional rooms, pantry, washing, fitness room, ayi room and walk in wardrobe.
Description: Courtyard built to energy efficient German standards and design. Old style romantic exterior with modern conveniences and sustainable living concepts. The low energy eco courtyard is powered by a solar system and is fully insulated to keep the place warm & dry in winter, and cool in summer. In addition the courtyard is fitted out with floor heating and a Swiss air filter and circulation system. No nasty oil or coal heating needed and no expensive electricity bills either! Very close to the Hou Hai District, with coffee shops, boutiques, restaurants and bars. But far enough to be quiet and serene.
Asking Rent: RMB45,000/month

Beijing Utility Costs

March 12th, 2010

Just got an email asking about utility costs at suburban homes in Beijing. Here my reply.
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Dear ________,

Thanks for your email. At villas in Shunyi, it’s the heating (mostly gas) and air-conditioning (electricity) fees that are the highest with cost highest in the winter and summer months.

For a smaller 200sqm, I’d budget for an average utility cost of about RMB3,000/month. Costs could vary depending on your usage level. For example, if your family is at home during most days, or if you’re away for a month hot August, your costs will drop.

Note that some houses are more energy efficient than others. Also, some houses have thermostats on each floor or in each room. This allows better temperature control and less wastage. For example, older unrenovated houses at River Garden have one thermostat for the whole houses so you can end up having a 2nd floor room that’s too hot and a 1st floor room that’s too cold.

Utilities are typically paid by the tenant. Some tenants (who have room in their housing allowance) include a utility subsidy into the rent. However, note that the landlord would typically keep any unused subsidy.

Water costs are very low here. Satellite TV fees and family club memberships are typically included in the rent.

There’s more useful information in our FAQ here:  http://www.lihong.biz/beijing-property-lease-faq

Feel free to ask if you have any questions about housing, or living in Beijing.Best regards,

Happy Tiger Year!

February 25th, 2010

2010 New Year lunch

Buying into Beijing Real Estate - Private Investors

February 23rd, 2010

An investment firm (whom we’d recently found office space for) asked us about the feasibility of foreign individuals buying into Beijing’s residential real estate market. Although the outlook is good, for foreign individuals, it’s not as attractive an investment as before. Rents here have dropped while prices have risen. Read below:Individual Purchases vs. Investment Fund
Two possible ways for investors to invest in Beijing real estate:

Individual Purchase
- Each, investor buys his own properties. Individual investor holding the individual title deeds in his name.
- More transparent for investor.
- Possible issues with repatriation of rental income.

Investment Fund
Form Investment Fund and register Chinese company that purchases real estate assets. Investors buy a share in the fund.
- Possible greater tax exposure
- Dividend payment rather repatriation of monthly rents
- Establishment more approval more complex, but economy of scale allows for more efficient operations.
- Potential for institutional sale and more lucrative exit
- Potential higher returns if upgrading old properties

Type of Homes
Beijing has a wide range of properties. The market is highly segmented in terms of quality and also resident/investor profile. In the mid to high end segment most investors are Chinese or foreign nationals with links to China (incl. Taiwan, Hong Kong and Singapore). Tenants are mostly expatriates.

Despite the wide range of options in Chaoyang and Shunyi, the majority of expatriates with mid-tier rental budgets live at one of 6 compounds owned by individual landlords:
- City Apartment (RMB15,000-30,000/mth): Central Park, Park Avenue & Park Apartments
- Shunyi Villa (RMB30,000-50,000/mth): Yosemite, River Garden, Beijing Riviera

Expatriates prefer to live amongst other expatriates, especially families in suburban Shunyi. This clustering means it can be difficult to attract expatriates to live at a development without an existing community of expatriates. If it’s a new development, it takes some time to create a community. Many developers delay the opening of the club house which slows down the move by expatriates into a development. In Shunyi, Palm Beach is a prime example of a new development with a slow expatriate uptake. Potential tenants feel there’s no “expat community”.
Recomendation on Type
- If investments are made as individual purchases, buy apartments between 75-180sqm at the above mentioned properties, or new properties of this type.
- If investments are made as an investment fund, buy multiple homes (houses and/or apartments) in an older development with promise, and then upgrade.
New Homes vs. Secondary Market
Investors could buy new homes from a developer or purchase existing homes on the secondary market.

New Homes:
Pros: Simple purchase process; Option for discounts if multiple units bought by group of investors.
Cons: Future rent level unknown; Revenue time-lag as properties sold months before completion; Takes time to establish community, especially in suburban Shunyi villa developments.
Secondary Market:
Pros: Investor knows what he’s getting (incl. build quality and management), Quick rental income
Cons: Arguably less potential for price gains.
Deteriorization
In Beijing, mid to low end properties deteriorate rapidly due to poor building materials and management. An example is Boya Garden at Chaoyang Park West Gate. In 2003, a 135sqm apartment rented for RMB12,000-15,000/mth. Today, it rents for RMB8,500-9,500/mth.

Rental Income and Capital Gains
Over the last 5 years, residential real estate purchase prices have grown much faster than rents. With current government concerns about a real estate bubble, it’s unlikely investors will see the rapid returns received by early investors in the last decade. They could use rental revenue to fully cover their mortgage payments and management fees. Here’s an example of price and rental gains.

Example: Park Avenue 3bed 196sqm
2006
Purchase Price: RMB12,000-18,000
Rent: RMB30,000-35,000/mth

2010
Purchase Price: RMB30,000-38,000
Rent: RMB22,000-25,000/mth

Rent & Repatriation of Funds
- Most tenants at mid to high end properties will pay their rents in RMB. Rents are paid by their companies who require this.
- These companies require Fapiao (VAT/GST receipts) for their rental payments. Fapiao 5% of the rent and can easily be applied for at the tax authorities.
- Investors may want to repatriate their rental income off-shore. This may pose difficulties, especially if the foreign investor is not based in China.
- Repatriation of proceeds from an investor’s property sale can be repatriated if the investor has proof of transfering funds into China, and has paid the relevant taxes.

Restriction Risks
- In 2007, the government introduced a regulation whereby foreign buyers were required to have had 1 year’s residence in China before being allowed to buy property.
- In the downturn, the regulation was relaxed. But, similar restrictions may be introduced again.
- Likewise, the government could choose to tighten currency restrictions, although this is less likely.

Decor
Homes with better decor rent out quickly and command a higher rent.
White walls, clean lines, light wooden floor, open kitchens and Scandinavian style furniture (but not cluttered). See photos on www.lihong.biz for the type of decor that rents quickly and for a higher rent.
Homes with kitsch or “bling” decor are difficult to lease out. Also, kitsch is more difficult to maintain.

Beijing 9th Most Expensive City

July 8th, 2009

For RMB2.00 (USD0.30) you can travel to any location on its extensive (and growing) subway network. Lasagna at a good Italian eatery in Beijing’s CBD costs only RMB 70 (USD10). How can Beijing  be more expensive than London? That’s what Mercer LLC’s 2009 Expatriate Cost of Living Survey says.

Beijing rentals droped 15-20% over the last year, but this year’s summer surge in relocations has caused minor rent increases at the more popular housing developments. Waiting lists at WAB & ISB, the city’s two main international schools, have all but disappeared. Yet fees remain static. The survey uses a standard expatriate basket of goods to measure price levels across the globe.

Mercer says the strengthened US dollar (to which the RMB is closely linked) has had a significant effect on rankings. The survey is intended as a guide for assessing expatriate remuneration levels.

Beijing expatriates who buy local products (groceries & petrol) and services (restaurants, drivers & maids) must be smiling.

Read more about Beijing’s expatriate cost of living here: http://www.lihong.biz/beijing-cost-of-living

A Softer Market

February 19th, 2009

Cakes and fruit baskets are always welcome at our office, but less so when it’s an enticement. Since December last year sales teams from Beijing’s top-tier serviced apartments have been bearing gifts when dropping by to say “Hello”. Always the first to react,  rents at  Embassy House and Ascott have been slashed by 15-20%. They’re also offering more flexible lease terms to maintain occupancy levels. A lower floor 2 bedroom apartment at Embassy House now rents for RMB28,000/month. Compare that to last years’ rent of RMB35,000/month.Individual landlords are following suit with similar drops at apartments such as  Park Avenue and  Central Park. In suburban Shunyi we’re seeing a similar drops in rent levels at  YosemiteRiver Gardenand  Beijing Riviera.With no viable new supply coming online, we expect occupancy to remain high at the main expat residential communities. Landlords at less popular communities, and also at older or poorly renovated properties may face tougher times if they don’t renovate or make large rent adjustments.There’s no doubt that our clients are tightening their belts and on the look out for cost savings. Still, January was an unusually busy month for us. But with the month’s  33% drop in foreign direct investment, we’re cautious about this summer’s expat relocation season.On a side-note, in an effort to stimulate lacklustre sales, the government has lifted the 12-month prior residency requirement for foreigners wanting to buy property in China.

Taxi take on Olympic traffic

September 15th, 2008

Five days from now Beijing’s drivers will be able to hit the roads each day without having to consider whether it’s an even or odd calendar day. Since the 20th of July traffic load restrictions have been in force. Besides keeping half the city’s private cars off the road, heavy trucks have been banned from coming within the 5th Ring. Curious, I struck up a conversation with one of the city’s many friendly cabbies kicking off with, “Did the restrictions increase your daily fares?”. Surprisingly, he claimed only a 10% rise in takings.

The designated Olympic lanes on major arteries meant that traffic levels were close to normal. Also, he noted a sharp drop in domestic tourism during the games. “Provincial visitors flock to shopping centres at weekends and take taxis as they don’t know how to use public transport. But they’ve stayed away during the Olympics.” he said. It wasn’t so bad during the first 3 weeks as he’d get 7-8 foreign tourist fares a day, but since then it’s been relatively slow, especially at the end of the week. Of course, one taxi driver does not a survey make, but an interesting insight nevertheless.