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About the Beijing Residential Market

As the capital of China and the host for the 2008 Olympic Games, Beijing is once again a focus of the international spotlight.

With China's rapid economic growth and the Capital's rapid pace of development, real estate has quickly became one of the fastest growing industries in Beijing, attracting billions in investment from home and aboard.

Many people question whether property prices in Beijing are too high and whether the market is overheated. To better understand the current situation, we should further investigate the recent market movement and various governmental policies.

According to DTZ's research, the yield for high-end residential projects dropped from approximately 12 percent last year to 10 percent this year. In fact, the yield is still be considerably high if compared with many overseas markets. There may still room for the yield to drop further - either by lowering rents or raising prices.

Despite concerns about China's overheating economy, the residential market was on the rise in 2004. This trend is expected to continue into 2005. In 2004, price increases of certain high-end projects were more than 20 percent. Prime projects with successful marketing campaigns reported the highest capital gains last year.

Based on a survey conducted by DTZ of these high-end residential developments, DTZ has found that a significant amount of buyers purchased apartments for investment purposes. Rental demand for high-end residential apartments comes mainly from high income individuals or expatriates. Although the rental market is benefiting from a booming economy and new foreign investment, a continuous supply of high-end residential products will continue to exert pressure on the rental market. With rising prices and lower rents, there is still room for yields in the residential market to drop further.

In terms of policies, government has taken various actions to prevent the market from overheating. On March 17, the People's Bank of China circulated a document allowing an increase in the minimum down payment ratio for urban mortgages from 20 percent to 30 percent. The minimum mortgage loan rate has been raised 20 basis points to 5.51 percent, or 90 percent of the benchmark rate of 6.12 percent.

Even though these measures are not mandatory, major banks in Beijing have already taken action. The Bank of China will charge the prime interest rate for a buyer's second mortgage. The down payment at the Industrial Commercial Bank of China has increased by 30 percent-40 percent for a grade-A office purchase, a buyer's second property or for a high-end residential property.

The document represents another governmental action taken to cool overheated property prices in the wake of the October 2005 interest-rate hike. It is also clear that the government is targeting speculators, mainly, in the market. Steps taken by commercial banks following the document will increase investors' borrowing costs and lower their free cash flows. Since the policy mainly applies to buyers with more than one mortgage, normal home buyers are mostly unaffected.

It is believed that such measures will not cause a sudden drop in property prices. Demand for Beijing residential market remains strong - from economical, affordable housing to high-end residential apartments or villas. Demand from home buyers remains strong. Affordability for local Beijingers has gone up because of increased wages and rapid economy growth. Further, with the commodity housing market maturing, many would like to own their own home in Beijing. In the view of investors, being the capital of China, Beijing will continue to attract investment from other parts of the country. Overall demand in the residential market remains strong.

It is obvious that government is concerned about any rampant speculation on the market. The recent document can be considered another warning directly issued to speculators. The government hope to cool investment demand gradually.

The future of the Beijing residential market still depends on various factors such as second hand market, land supply, introduction of property tax, etc. China has already made significant progress in regulating the market and establishing a clear legal framework in 2004: public offering of commercial land after August 2004, added transparency for real estate transaction. Property market in Beijing has stepped into a new era. Like China's rapid economic development, Beijing property market is growing and stepping toward maturity.