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Jun 12
2005
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"James Hughes, managing director of Black Swan Capital, financial advisers in international property, is nevertheless encouraged that the Chinese Authorities are trying to prevent things getting out of hand."
China has the fastest growing economy in the world, and Shanghai is sprouting new flats at an amazing rate. But is property a good investment in a still-communist state?
Pick up almost anything these days, from a children’s toy to a laptop, and the chances are it was made in China. Pick up any newspaper, and it will be full of articles about how, in a couple of decades from now, China will have overtaken American to become the biggest economy in the world.
Growing numbers of adventurous British fly-to-let investors are bypassing central Europe and Dubai and continuing east to China, unfazed by the distance from home and the fact that, for all its newfound capitalist ways, the government is still nominally communist.
So where do you start in a country 40 times the size of Britain with a population of 1.3 billion? Go to a far-flung grim industrial town, and you could pick up a flat for little more than the cost of a pair of Peking ducks and a portion of fried rice.
But let’s be realistic. How are you going to find a property in the first place, let alone somebody to let it out to? All things considered, the least-hassle choice for a UK-based investor must be Beijing or Shanghai - and the winner is Shanghai.
China’s commercial and financial capital, Shanghai is already home to 21 m people, and keeps on growing, as multinationals relocate their regional headquarters from Hong Kong or Singapore, and locals move in from the surrounding countryside.
With a new Formula One track and the 170mph magnetic-levitation train to the airport, the prospect of new Disney and Universal Studios theme parks opening soon and the 2010 World Expo, this is city that is going places. The Puxi district, the traditional heart of Shanghai, has a pleasing mixture of British and French colonial architecture with modern skyscrapers.
David Cunningham, managing director of agent Shanghai Vision, advises buying centrally, ideally near the rapidly expanding metro system. “Lots of people who go out there are shown high-end flats for £750,000 because they assume this is what foreigners want, but there is a very limited rental market,” he says. “We suggest spending £112,000-£130,000 on something you can rent out not just to foreigners, but also to the emerging Chinese middle class”.
The oddly named Dynamic Crystal development is in the Pudong Lujiazui financial district, east of the Huangpu River that divides the city. For £116,000-£134,000, you can get a 69sq m - 73sq m studio flat, decorated and furnished “to international hotel standard in classic French or Japanese style”. There is also a guaranteed 7% gross income per year from scheduled completion in February 2007. Many of Cunningham’s buyers are bankers, airline pilots or others who already know the region.
Surprisingly, though, of the 670 or so people who have bought from the company since he set it up three years ago, only three have been to see their property before signing up.
Take Alan Jones, 49, a technician from Norwich. An F1 fan, he was so impressed by what he read about Shanghai, he bought a flat last June for just under £100,000 in the Chang Ning district. He has since travelled to the city and bought a second flat and an option on a third.
“Shanghai is an amazing place,” he says. “I spoke to other investors while I was there and realized it was too good an opportunity to miss”.
If Jones is dipping his toes into the Shanghai market, Nicola Ogilvie, 30, from Bristol has plunged straight in. Based in China since 1997, she acquired her first property in the city with her boyfriend in 2001 and has since bought over 30 more, which she has renovated and sold on.
“There are some lovely art-deco apartment buildings and beautiful old villas with gardens in the former French colonial area, but the prices are phenomenal now,“ Ogilvie says. She is now looking towards cheaper areas within walking distance of the central business district.
It is this expectation that prices will keep on rising, rather than the rental yields themselves, that keeps drawing in buyers. Sooner or later, China will also have to bow to pressure from America and revalue its currency, the renminbi, providing an instant windfall gain for investors.
Anybody hoping for a continuation of the 20%+ annual price rises seen over the past few years will probably be disappointed, though. Worried about a speculative bubble, Chinese authorities are trying to cool things down: the maximum mortgage permitted has been cut from 70% to 60% of value, and a 5% sales tax levied on properties bought and sold within two years.
James Hughes, managing director of Black Swan Capital, financial advisers in international property, is nevertheless encouraged that the Chinese authorities are trying to prevent things getting out of hand.
“It’s a good idea they are letting some steam out of the pressure cooker,” he said. Although concerned about possible oversupply in some sectors, he is confident overall annual price rises will remain in double digits for several years to come.
Jones, for one, is not too worried about the risk - or the fact his investment is more than 6,000 miles from Britain. “Unless you have got a property across the road from where you live, it doesn’t matter how far away it is,” he says. “There are risks, but you’d have said the same about Spain under Franco in the 1970s. And I bet we all wish we had bought a villa in Spain in the 1970s.”
THE FACTS
Buying procedure: Selling off-plan is illegal: developments must be 70% completed before they can be sold. The Chinese bureaucracy can be daunting, but a reputable agent should sort it out for you
Purchase costs: As much as 10% for taxes and agents’ fees
Mortgages: The only real possibility at present is through a Chinese bank in renminbi, the local currency. Rates are currently about 5.5%, but are likely to rise as Chinese authorities try to cool the market. Maximum permitted loan-to-value 60%; repayment only. The bank will ask for a number of documents and want to scrutinise them very carefully
Taxes: A 5% tax is levied on gross rental income and a 5% capital gains tax is imposed on anybody buying and selling within two years. You should be able to offset payments against any UK tax liability
Legal title: There should be no problem for new developments. Properties are typically sold on 70 year leases that convert to freehold
Please note, Black Swan Capital used to be called City Trading Post. Where appropriate, references to City Trading Post in the original article have been replaced in this transcript.