What Goes Up…Must Keep going Up..

Friday, November 3, 2006 3:47
Comments Off on What Goes Up…Must Keep going Up..

Despite a series of regulations to stop rising real estate prices, prices are still going up in the major markets Shanghai, Beijing, and Guangzhou as well as in second tier markets Chengdu, Chongqing, Wuhan, and Nanjing.

It is a trend that those on the ground are seeing, and the folks over at Forbes, People’s Daily, and are all reporting. In the Chinese press, the problem is one linked to political corruption and foreign investment, while in the Western press it is presented as curbs in the wrong places, inefficiencies in the market, and lack of investment options in China for locals.

There is no doubt a fear that the average local (making less that 1000USD a year) is having a tough time affording many of the options that have recently come online, but that is not a foreign investment problem nor a general problem that needs to be corrected through curbing foreign investment.

For foreign investors, the model has changed in a couple ways:
(1) Theoretically, foreigners are not allowed to own (as foreign persons or entities) more than one unit. However, this rule can be circumvented by those who have raised funds offshore and are willing to invest in a local entity that will then purchase the properties on their behalf. This strategy will in crease tax exposure and also make it more difficult to repatriate funds, but shares of the offshore entity can be transferred easily enough as part of any purchase (assuming the buyer is not a Chinese company).

(2) The holding term will have to be increased to avoid payment of taxes that were implemented in June and July of this year, as we analyzed in our previous posts a A Rough 6 Weeks for Real Estate Investors and New Regulations: Real Estate Investment. For long term investors those (say those that take on development risk 2-3 years before a building is open), this may not even factor in.

(3) Second hand real estate transactions have become popular as there is no tracking of these investments. For properties with strong rental contracts, or by working with a provider, one can invest knowing what their yields will be in the first 1-2 years. Not a bad thing in a market that changes as fast as China’s

(4) A move from the top tier cities to the second tier has begun as these cities are not as likely to enforce the various regulations as strictly as Shanghai, Beijing, or Guangzhou might. For those that are forward leaning, gaining the same returns as Shanghai investments did 3 years ago is still possible. Developers are eager to offer attractive terms, and the fundamentals of the cities (depending on which city of course) often present higher potentials for growth than their East Coast counterparts.

My finance professor once said that there is only one asset that does not lose value over time, and that was real estate. It always goes up. In China, this has been the case for the last 3-5 years in the major markets, and depending on the market and the level of risk one is willing to take, high returns can still be achieved.

To learn more, see our report Real Estate Trends in 2nd Tier Cities

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