ABSOLUTE gUIDE sERIES to Investment Property
China
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Date of Publication: November 2008 © Obelisk 2
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Contents 5. Welcome to China
Dedicated to providing impartial information.
6. Economic Growth & Stability
China’s GDP growth was 9.7% in 2008, with 9.3% predicted for 2009.
7. Currency & Banking
China is holding its currency stable, shifting focus from countering inflation to sustaining growth.
8. Foreign Investment
China was the highest recipient of FDI among developing countries in 2007.
9. Political Situation & Stability
The Chinese Communist Party is the only party in government.
10. Tourism
By 2020, China is likely to be the world’s largest tourist
14 - 15. Secondary Market
Salaries in China are expected to rise 8% in 2008.
16. Mortgage Market
China has a very restricted mortgage market.
17. Market Risks
China presents several market risks.
18. Purchase Process
Foreign ownership of property is restricted.
19. Investment Costs
Buying costs are generally low in China.
20. Summary
China has seen impressive growth in its economy,
destination.
tourism and infrastructure investment.
11. Infrastructure
21. Verdict
China made a vast range of infrastructure improvements
China is an investment option to be approached with
in preparation for the 2008 Olympic Games.
caution.
12 - 13. Property Market
22. Obelisk Advantage
Beijing property increased by 11% in 2007.
Obelisk approaches its projects purely from an investment perspective.
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Harbin
Urumqi
Shenyang Lanzhou
Qinhunangdao
Beijing
Tianjin Zhengzhou Nanjing Chengdu Wuhan Chongqing Xian
Lhasa
Shanghai Ningbo
Guangzhou
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China forms part of the Obelisk Absolute Guide Series, dedicated to providing impartial information to numerous property investment destinations worldwide.
Welcome
to China
As the market leader for overseas investment property,
with in-depth, clear-cut knowledge on the most important
we are committed to providing cutting edge information
factors influencing your property investment decision in
for property investors, one aspect that has earned us the
China.
award of International Property Specialist 2008 by Business Britain magazine.
In this guide you will find recent economic performance and predicted growth, a profile of the current property
We are therefore pleased to present our latest Property
market and its future potential, along with tourism trends
Investment Guide to China, an essential tool for the
and infrastructure improvements. The guide also includes
investor planning to buy property in this country. This
information about China’s mortgage market, the buying
guide forms part of the Obelisk Absolute Guide Series,
process and buying costs.
dedicated to providing impartial information about numerous investment destinations worldwide.
Obelisk’s Absolute Guide to China offers investors objective and authoritative information to facilitate an
At Obelisk, we are only too aware of the importance of
informed decision about investing in China. We trust that
extensive research into an investment destination and, as
you, as an investor, will find this guide indispensable.
part of our policy to offer investors the definitive service, this guide has been rigorously researched to provide you
Here’s to Successful Investing!
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GDP Growth (2008): 9.7% GDP Per Capita (2007): US$5,483 Inflation (predicted 2008): 4.2% Unemployment (predicted 2008): 4%
Economic Growth
& Stability Following major economic reforms in the late 1970s,
expects domestic demand to remain strong in 2009-
China’s economy has become increasingly more
2013 as consumption is boosted by strong wage
market-orientated, with a rapidly growing private sector.
growth.
The government is firmly committed to reform
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of state industries, which it has achieved by large-scale
Inflation is forecast to decrease from an estimated 4.2%
privatisation of unprofitable enterprises and a
in 2008 to an annual average of 3.8% from 2009 to
reduction in government bureaucracy. The resulting
2010. Rising utility costs will be offset by low food and
efficiency gains have contributed to a more than
consumer goods inflation. Unemployment figures are
tenfold increase in GDP since 1978.
also down from 4.2% in 2007 to 4% in 2008.
China’s GDP growth was 9.7% in 2008, with 9.3%
Standard & Poor’s raised China’s credit rating to A+
predicted for 2009, slipping for the first time in 4 years
from A with a stable outlook, commenting that the
due to the international slowdown. However, it is
government’s improving balance sheet will offer
expected to remain impressive, slowing from 11.9% in
greater resilience to a potential sharp economic
2007 to 8.2% in 2012. The Economist Intelligence Unit
slowdown.
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Currency
& Banking The Chinese currency is the renminbi (RMB), also referred to as the yuan (CNY). After many years of being pegged to the US dollar, China revalued its currency in 2005, moving to an exchange rate that references a basket of currencies, primarily those of China’s main trading partners. China maintains its currency stability in order to support its export-led economy, a policy that has received international criticism. Interest rates were cut to less than 7% in October 2008, in an attempt to revive slowing economic growth. The limited exposure of the economies of East Asia-Pacific Central Banks to foreign troubled assets has helped to reduce the negative impact of the financial crisis on Chinese institutions and markets.
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Foreign Companies Investing in China Carrefour, General Electric, General Motors, Intel, McDonald’s, Tesco, Wal-Mart
Foreign Investment China was the largest recipient of foreign direct investment
Economists believe that the growing strength of the
(FDI) among developing countries in 2007 and 6 in the
Chinese market will make it more resilient to the recession
world with inflows of US$83.5 billion, ahead of Hong
in the West.
th
Kong, Singapore and India. International companies and foreign investors whose trade Foreign investment in China continued to grow in 2008,
from their traditional consumers has decreased have shown
reaching $27.4 billion in Q1, a 61.26% year-on-year
strong interest in selling to China. Banks, unwilling to lend in
increase according to government sources. These figures
Europe and the US, are increasingly investing in China and
show that China remains an attractive market for multinationals
the country’s debt allocation expanded 15% during 2008.
because of its large market, vast manufacturing capacity and relatively low costs. Inflows of foreign research and
21st century China is showing a changed image with the
development investment have also increased strongly in the
government prioritising private consumption and
past years, and funding from foreign firms based in China
encouraging consumer spending and loans. Modern
and abroad is estimated to account for 25% of business
China has its fair share of billionaires, 5-star hotels, futuristic
enterprise.
skyscrapers, designer shops, Michelin-starred restaurants and luxury cars.
The government closely monitors international financial institutions to minimise the effects of the global credit crisis on China, currently insulated from the economic downturn.
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WTO Member: Since 2001 Political System: Single party system Ruling Party: Communist CCP Next Presidential Nomination: March 2013
Political Situation
& Stability The People’s Republic of China was founded in 1949 under one-party rule by the Chinese Communist Party (CCP). Today, the CCP continues to be the only party in government. It is the world’s biggest political party and retains its monopoly on power. The Chinese president and a vice-president are approved by the National People’s Congress (NPC). The current President is Hu Jintao, re-elected in 2008 and the general secretary of the CCP. The prime minister is Wen Jiabao and the CCP’s policy making body, the politburo, sets policy and controls all party appointments. China welcomes foreign investment, although this is carefully monitored and the impressive rate of economic change has not been matched by political reform.
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Visitor Numbers (2007): 131 million Tourism Contribution to GDP (2008): 12.2%
Tourism In 2007, China welcomed 131 million visitors, of which 26.11 million were foreigners with 6.2 million from Europe. According to the World Travel and Tourism Council (WTTC), real GDP growth for China’s Travel & Tourism (T&T) economy is expected to be 11.3% in 2008 and to average 8.8% a year over the next 10 years. The contribution of tourism to employment is expected to rise from 9.6% to 12% by 2018. The 2008 Olympic Games in Beijing changed the face of tourism in China. In the lead up to the Olympics, Chinese tourist industry officials focused on opening hotels and building infrastructure in preparation for the Games. In 2010, China will host the World Expo in Shanghai and the government believes this will provide a further major boost to Chinese tourism. By 2020, China is likely to be the world’s largest tourist destination. The WTTC currently ranks China in 2nd position out of 176 countries in terms of tourism size, with tourism growth forcast to remain in 2nd position for the next decade.
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Tourism Contribution to Employment (2008): 9.6% World Ranking: 2/176 countries (tourism size)
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Infrastructure Beijing’s Capital International Airport, costing around US$3.75 billion Between 2006 and 2010, US$200 billion will be spent on railways World’s largest shopping mall opened in 2005 China’s rapid economic growth has put a considerable
impressive being Beijing’s Capital International Airport,
strain on its infrastructure and it has recently invested
which, with the addition of the new Terminal 3, is the
large sums on transport. Between 2001 and 2005 more
world’s largest building and the 9th busiest airport in
was spent on roads and railways than in the previous 50
the world. Taking 4 years to build and costing around
years and it is expected that investment will see annual
US$3.75 billion, the airport covers an area of 14 million
double-digit growth until 2010. Between 2006 and 2010,
square feet and is expected to cater for 50 million
US$200 billion will be spent on railways alone. Work
passengers annually by 2020.
began in 2008 on a high speed train which will link Beijing with China’s financial capital, Shanghai.
China has numerous shopping malls, including the world’s largest, the South China Mall, costing US$312 million.
China made a vast range of infrastructure improvements in preparation for the 2008 Olympic Games, the most
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China’s capital, Beijing, has undergone a rebirth with major investment happening in transport and infrastructure, retail, residential and commercial property. Capital Growth (2008): 9.2% Average Annual Rental Yield (2007): 7.78%
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Property
Market
Knight Frank, in their 2008 International Residential Review,
Foreigners or foreign institutions are permitted to share
report that the Chinese property market is experiencing huge
ownership with a Chinese partner.
change as a consequence of its economic transformation and claim that “the potential impact of this emerging global
A Jones Lang LaSalle report says that China’s capital,
wealth has barely begun to be felt in the residential market.”
Beijing, has undergone a rebirth with major investment in
Returns on investment have been high in recent years, with
infrastructure, retail, residential and commercial property.
foreign investment flooding into the Chinese property market
The outlook for Chinese real estate and property appears
and according to Knight Frank, year-on-year growth in
positive with over 70 Chinese cities showing year-on-year
September 2008 was 9.2%.
increases. Beijing’s property price history looks impressive, with an 11% increase in 2007 alone,
Growth has slowed slightly, which experts attribute to
although this high rise may have been influenced by the
government restrictions on mortgage lending and foreign
Olympic Games.
investment introduced in 2006 to prevent over-investment and excessive construction. There are restrictions on foreign
China had the world’s 8th highest rental yields in 2007
ownership to prevent investor speculation – foreigners
at 7.78%, with yields on apartments in the 5 main cities -
may buy only one apartment and must prove they have
Beijing, Shanghai, Guangzhou, Shenzhen, and Chengdu
worked or studied in China for a minimum of 1 year.
– slightly lower at around 5%.
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Secondary
Market
It should be noted that foreign investors, both individuals
Although a large proportion of China’s population
and companies face certain restrictions when buying
(over 1 billion) lives in poverty, the stronger and
Chinese property for letting or investment purposes.
more market-orientated Chinese economy has led
These restrictions are detailed in the purchase process.
to the emergence of a growing middle class, whose increased affluence will eventually lead to further
Rental yields are generally good and averaged 7.7%
demand for property.
in 2007. China has a pro-landlord rental market, although foreigners are not permitted to be landlords.
Construction of private properties expanded in 2007 and increased by 47% in October, although this rate
Salaries in China are expected to rise 8% in 2008,
slowed by 21% in June 2008 indicating a slowdown
more than the 7.3% average forecast for the Asian
in supply. However, this may lead to increased
region and well above the global average of 5.9%.
demand for housing due to rental demand and rises in household income.
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Average rental yields in the 5 main Chinese cities are around 5%.
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Mortgage
Market Mortgage lending is restricted in China as part of the government’s anti-speculative measures intended to cool down the housing market. In addition, several interest rate rises had a major impact on the mortgage market. A mere 2% of homes are bought with mortgages in China and there are currently no equity release products on the market. It is generally difficult for foreigners to secure a loan from a local bank, although it may be possible through a local branch of an overseas bank. Access to mortgages for foreigners varies depending on the city. For example, in Shanghai, foreigners can buy off-plan or resale property with a 40% down payment and a 60% mortgage, and in mid-2008, some Shanghai banks offered a 70% loan. Payments for property must be made from a local bank account and transferring funds from an overseas bank account is subject to taxation. There are also formalities regulating foreign exchange and individuals who send capital to China from abroad.
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For the foreign property investor, China has a young property history and assessing the property market is not easy due to the lack of reliable official information.
Market
Risks
Property investment into emerging markets may carry
China faces several economic development challenges
some degree of risk. However, the degree that market
such as sustaining employment growth for millions of
risk in a particular country affects a property investment
job seekers, reducing social inequalities, containing
depends largely on thorough due diligence conducted
environmental damage and reducing corruption. GDP
prior and during the purchase process.
growth has also slowed after 5 years of double-digit increases, although financial experts believe that the
Although China is the world’s most populated country
9% growth in Q3 2008 is still extremely high by
and a fast-emerging economic power, the fact that it is
historical standards.
not a democracy means that China’s integration into the world political system is likely to cause tensions with
For the foreign property investor, China has a young
other world powers such as the US. Relations with Japan
property history and assessing the property market is not
have also been traditionally difficult, although these have
easy due to the lack of reliable official information. There
recently improved. China’s occupation of Tibet is a further
are also issues concerning foreign ownership, currently
international issue.
restricted. According to CB Richard Ellis, “the ‘wait-andsee’ attitude is becoming increasingly popular in the residential market.”
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Purchase Process Chinese laws and legal processes may be very different from what you are used to and Obelisk strongly recommends that independent legal advice be taken during a property purchase. This is particularly important since laws regarding property ownership in China are subject to frequent change. Below is the standard purchase process in China and issues that may affect a property purchase: Foreign ownership of property is restricted in China. Foreigners are not permitted to own land and may only buy 1 apartment, which must be for personal use. In addition, they must hold a residence permit and prove that they have worked or studied for a minimum of 1 year in China. Property ownership is also possible through a Chinese company. Non-Chinese citizens are not allowed to let property. A Property Purchasing Registration Form and Property Selling Registration Form must be completed and filed along with a Property Ownership Certificate at the Real Estate Transaction Department. Once this is done, the Department fixes a date for transfer of ownership. The transfer of ownership is finalised at the Real Estate Transaction Department.
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Investment Costs Chinese taxation is complex and subject to change. You are therefore recommended to take expert and up-to-date advice on taxation issues affecting the purchase and ownership of property in China.
The costs of a standard property purchase in China may include the following: 3% deed tax (paid by the buyer). 2% maintenance taxation. 0.1% stamp duty (buyer and seller both pay 0.05%). Capital gains tax (CGT) is levied at the rate of 20% on individuals and at 25% for companies. However, these rates are higher when the profit from a sale of real estate exceeds certain thresholds – for example, when the capital gain is over 200%, CGT is levied at 60%. Annual property tax is levied by the municipality and is calculated according to the rateable value of the property.
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Summary The following summary provides key highlights to consider when investing in China’s property market: China’s economy has seen a more than tenfold
The Chinese property market is experiencing
increase in GDP since 1978.
huge change as a consequence of its economic transformation.
China cut its interest rates to 7% in October 2008 in order to revive economic growth.
The year-on-year property increase in September 2008 was 9.2%.
China was the largest recipient of FDI among developing countries in 2007 and 6th in the
Rental yields are generally good, although
world.
foreigners are not permitted to be landlords.
FDI in Q1 2008 saw a year-on-year increase of
The mortgage market is limited and only 2% of
almost 62%.
property purchases are made with mortgage.
The People’s Republic of China is ruled by a
The Chinese government currently faces several
one-party communist regime.
important economic challenges.
The Beijing 2008 Olympic Games provided a
Foreign ownership of land is not permitted and
major boost to Chinese tourism and China is
ownership of property is very restricted.
expected to be the world’s largest tourist destination by 2020.
Purchase costs are low, but capital gains tax is high.
Investment in infrastructure will see double-digit growth until 2010.
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The Absolute Guide Series Rating
Based on our extensive research, Obelisk has introduced a 5 star rating system to summarise the investment potential of a country. The availability of finance, economic stability, political stability, the strength of the local market to provide an exit strategy and the potential to earn from investment are the key criteria that determine the investment grade of each country.
Verdict Although the Chinese property market has enormous potential and returns on investment have been high in recent years thanks to the country’s economic transformation, significant barriers remain for the overseas property investor. These barriers include high rates of CGT for both individuals (20%) and companies (25%). There is also a range of restrictions for foreign investors including restricted ownership, although this is possible through a Chinese company. Due to these investment barriers, Obelisk recommends that investors take expert legal advice before considering any purchase. Although Chinese property investment may have considerable future potential, Obelisk currently advises extreme caution. Based on thorough research we have carried out on China, we at Obelisk believe that China does not present a viable investment opportunity at present, although this may well change in the future. Capital growth is good but the investment barriers outweigh the advantages for the foreign investor.
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Obelisk
Awards Obelisk ‘International Property Specialist 2008’
Advantage
Voted International Property Specialist of the Year 2008 by Business Britain magazine, Obelisk has been recognised as the authoritative voice within the industry and its clients benefit from the company’s uncompromising high standards and professionalism. Obelisk has identified a simple and transparant purchase process for its clients as a simple, four step process: 1.
The client chooses and reserves the unit that best suits their investment requirements, and Obelisk takes the client through a compliance procedure.
2.
An independent lawyer, sourced and appointed for the client by Obelisk, will have already carried out full due diligence on the project. They will issue all purchase contracts and paperwork to the client.
3.
On receipt of this contract, the client will sign and make the first payment. The lawyer will notify the client of all further payments when required.
4.
The appointed lawyer will also represent the client in all aspects legally required within the country of purchase, ensuring that clients of Obelisk enjoy the benefits of simple and hassle-free real estate investment.
For more information about Obelisk’s investment opportunities in China, contact us now on info@obeliskinternational.com, visit our website at www.obeliskinternational.com or call us FREE on 0808 160 0670 (UK) or 1800 932 514 (IRE).
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Disclaimer The material contained within this document has been prepared for information purposes only. Information contained herein is not to be relied upon as a basis of any contract or commitment. The information is not to be construed as an offer, invitation or solicitation to invest and opinions expressed are based on market conditions at the time of print and may be subject to change without prior notice. Information contained herein is believed to be correct, but cannot be guaranteed. In case of queries or doubt you should consult an independent investment adviser. No personal recommendation is being made to you and the past is not necessarily a guide to the future. The brochure in its entirety – text, images, marks, graphics, logos, buttons, combinations of colours, and the structure, selection, ordering and presentation of its content – is protected by the legislation on intellectual and industrial property, it being forbidden to reproduce, distribute, publicly disseminate or transform it, except for personal private use. It is also forbidden to reproduce, relay, copy, assign or broadcast, in whole or in part, the information contained in this brochure, for whatever purpose and by whatever means, without written consent.
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Call us free from UK: Tel. 0808 160 0670 Call us free from Eire: Tel. 1800 932 514 For general and international enquiries contact us at: Tel: (0034) 952 820 319 Fax: (0034) 952 825 790 Alternatively you can email: info@obeliskinternational.com or visit: www.obeliskinternational.com