Buying into Beijing Real Estate - Private Investors

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.

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