Related stories

Stock Market Review Keys to Real Estate Success Stock Market Review Looking Back, Looking Ahead Beijing Real Estate 2005-2006 Beijing Land Market Review in the Second Quarter of 2006

2006 Real Estate Market Review

New governmental regulations designed to limit real estate speculation in China seems to have resulted in some price declines in Shanghai, but Beijing real estate prices remained strong in 2006.

In the first ten months of 2006, more than 103 billion yuan (US$12.3 billion) flowed into residential projects in China, a 28.4 percent increase over 2005, with Beijing one of the hottest residential markets in China. Beijing’s residential market was marked by rapid growth, though the government has issued a series of policies to control the overheating property market and to drive down residential transaction volumes and the average sales prices.

In October 2006, the prices of newly built homes in 70 major Chinese cities rose by an average of 6.6 percent year-on-year, with Beijing chalking up a 10.7 percent hike, the highest of any Chinese city. At an average price 500,000 yuan (US$64,562) for a home in Beijing, 22.87 million square metres of commercial housing were sold in 2006, a 3.2 percent increased over 2005. A report released by a real estate information Web site (www.e-fdc.com) showed that the sales value of commercial housing—residential and office buildings and shops—was 200 billion yuan (US$25 billion) in 2006, an increase of 16.7 percent over 2005.

According to Sina.com and New Real Estate Magazine, real estate prices in Beijing have increased by 42 percent over the past three years. In 2004 new homes sold for an average of 6,178 yuan (US$798) per square metre. By 2006 that figure had soared to 8,792 yuan (US$977).

For developers, 2006 was a good year despite the government’s efforts to cool their red-hot property market. However, soaring prices have by far exceeded the purchasing power of most middle-class and other residents.

Strong demand for new housing and office space in Beijing is expected to strengthen real estate prices by 11 percent in 2007, according to a market report released by Jones Lang LaSalle, an international property consultant and investor. The report said that prices of newly built houses will increase by 11 percent–14 percent in 2007, while the cost of renting property will remain stable or perhaps decline slightly. According to the report, real estate prices will maintain their years-long upward momentum in the first half of 2007 then become more stable in the latter half of the year. There will be sufficient office space in 2007; Beijing had 300,000 square metres of office space available during the fourth quarter of 2006, and the figure will more than triple to 1 million square metres in 2007.

According to figures available from the National Development and Reform Commission (NDRC) and National Bureau of Statistics, the price of newly built commercial residential houses in Beijing grew by 9.9 percent year-on-year in January 2007, ranking second only to Shenzhen's 10.2 percent among 70 major cities on the Chinese mainland.

The price hike came despite the government’s market cooling measures. Beginning in February, Beijing began collecting taxes from people who provide rental property. The Beijing Local Taxation Bureau announced a regulation requiring landlords to pay 5 percent of their rental fees as rental taxes. But some real estate insiders say the new regulation will not have a significant effect on the housing market.

Jin Yusong, manager of the Homelink Housing Real Estate Agency, said, “Take a house with a monthly rent of 2,000 yuan (US$250) for example. The landlord should pay 100 yuan (US$12) for the tax. Compared with the seasonal fluctuations in rent, which usually run from 100 to 200 yuan, the tax is not a big deal.”

In 2006, commodity housing prices in Beijing continued to climb. In the housing rental market, however, rental fees have not increased much. As a result, the ratio of the sales price of second-hand housing to their rental fees is getting larger. Statistics show that in 2006, the average rental fee for an ordinary one-bedroom apartment was 1,526 yuan (US$198) per month, while the average selling price of an ordinary one-bedroom apartment was 370,000 yuan (US$48,100), the ratio between the two being 242:1. For a two-bedroom apartment, the rental fee was 1,751 yuan (US$197) per month and its sale price was 490,000 yuan (US$ 63,271); the ratio between the two was 280:1. In addition, the rental fee of a three-bedroom apartment was about 2,343 yuan (US$302.56) per month and its sale price was 670,000 yuan (US$86,514), with a ratio of 286:1.

The average ratio between housing prices and incomes, an index indicating the degree to which housing is affordable by the local population, is now as high as 9.4:1 in Beijing, much higher than the average for many metropolises in the world. The present housing prices in Beijing, which have exceeded local residents' purchasing power, will not drop in the short term, said a report released by the Home Link Group (HLG), a real estate company in Beijing. In 2005, the disposable income of each household in Beijing averaged at about 51,194 yuan (US$6,480) and the median price of a second-hand dwelling unit was 480,000 yuan (US$60,760). This means the housing price to income ratio in Beijing reached 9.4:1, HLG reported. The World Bank considers a ratio of 5:1 affordable for local residents, while the United Nations set its standard at an even lower 3:1. The ratio is 3:1 in the United States and 4:1 in Japan. HLG said this ratio has been as high as 11:1 in Hong Kong before its real estate bubble burst in 1997. In some other Chinese cities, the ratio may be even higher.

Price increases stem from economic progress, rising individual incomes and effects of the Beijing Olympic Games. Investment in real estate projects amounted to 136.2 billion yuan (US$17.5 billion) in Beijing over the first 11 months of 2006, a growth of 15.1 percent from the same period of 2005, according to the Beijing Municipal Bureau of Statistics, but this investment is also propping up high prices. According to a report by the Beijing Real Estate Association, rich people sitting on stocks of unused homes are keeping real estate prices up. Unused houses outnumber unsold houses in Beijing. An earlier report by the Beijing Municipal Bureau of Statistics said that one-tenth of Beijing’s population has more than one apartment. While some rich people may have many apartments, many low-income people have none. The report said that while around 10,000 low-cost apartments were provided to low-income earners in 2006, Beijing has more than 130,000 families that qualify for this kind of housing; only one out of 13 families actually has a low-cost apartment. Beijing has 14,000 inexpensive rental houses, but they can accommodate less than 1 percent of the city’s population of more than 15 million, which is totally inadequate, said the report. More than 70,000 families living on the lowest allowance of 310 yuan (US$40) are queuing for an apartment, according to the report. Residential real estate costs around 9,000 yuan–10,000 yuan (US$1,170–$1,300) per square metre on average in Beijing whereas low-cost housing cost about 4,000 yuan (US$520).

A low-rent housing system tailored to low-income earners will cover all Chinese cities and towns in 2007 to solve the problem, according to the Ministry of Construction. As 2006 came to an end, 512 Chinese cities had established a low-rent housing system, accounting for 77.9 percent of the nation's total of 657. About 7.08 billion yuan (US$919.5 million) was available to build low-cost housing nationwide in 2006, 50 percent more than at the end of 2005. By the end of 2006, 547,000 low-income families had benefited from the reduced-rent housing system. Of these, 219,000 households came into the system in 2006, a growth of 66.6 percent from 2005.

In addition, the government launched new regulations governing the purchases of homes in Beijing by foreigners in February 2007. Foreigners must prove they have worked or studied in China for more than a year before they are allowed to buy homes for their own use in the city, according to new regulations. The rules forbid foreigners buying houses not for their own use unless they establish a business in China. Many foreigners have bought property in China hoping to profit from escalating housing prices and the appreciation of China's currency, the yuan. However, they have driven property prices to exorbitant levels, making housing unaffordable for many Chinese people.

Influenced by a government rule restricting foreign investment in the real estate sector, the number of transactions involving foreign institutional investors declined recently, according to a report by US-based consulting firm CB Richard Ellis (CBRE). Some overseas investors are expected to remain on the sidelines and wait for a clear direction to emerge against the backdrop of present policy uncertainties. The new policy has slowed the entry of speculative capital to China's real estate market, but has benefited overseas investors adopting a long-term approach towards investment.

However, Beijing’s luxury home rental market continued to improve 2006 and will likely keep climbing in 2007, because of more expatriates moving to the city and because of the 2008 Olympic Games. This rental market covers hotel-serviced apartments, as well as high-end apartments and villas, mainly targeting foreigners and Chinese people working for large multinational companies. In 2006, there were more than 7,500 luxury units delivered to the luxury residential market, while the figure is expected to be 4,000-plus in 2007 and 3,200 in 2008.

“More multinationals are seeking set-ups and expansions in Beijing, the capital of the world's fastest-growing economy, and the 2008 Olympic Games offers more opportunities,” a Jones Lang LaSalle's researcher said in Beijing.

Beijing’s infrastructure and environment improved markedly during 2006 under the influence of the city’s modernization and its hosting of the 2008 Olympic Games. With these massive infrastructural projects coming to the city, notably the series of new metro lines, airport light-rail and expressways, the long term outlook for the city is positive.

Chaoyang Park, located on the East Third Ring Road near Beijing's Central Business District (CBD), and eastern Chaoyang District will get more luxury housing units. Among these projects are the Park Avenue Phase III with 446 units, Central Park Phase III with 400 units and Yintai International Apartment with 240 units. Sanlitun, a hub of foreign embassies, and Chaoyang Park will be hot areas for apartments, while the Shunyi area near Capital International Airport will be popular for villas. The average rental fee in the sector fell by 1.6 per cent compared with 2005, with the vacancy rate up by 2 percent. Rents were typically about US$10 to US$14 per square metre per month. So far, investors are estimated to make up about 20 percent to 35 percent of luxury projects in Beijing. Meanwhile, rents of luxury residential housing will remain more or less stagnant, with a marginal increase of about 1 percent per year expected between now and 2008.