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Does the Bubble Mean Trouble?

Re-emerging from her spotless kitchen with a steaming cafetiere and plate of home-made cookies, Victoria Lenton seems content with her life in the spacious, tastefully decorated and beautifully furnished apartment she and her husband Cliff rent in the Chaoyang Park area, one of Beijing’s hottest areas for leasing.

But with the couple’s monthly rent set at 27,000 yuan (nearly US$3,400), a question arises: Why not buy?

The Lentons are typical of many foreigners who are wary of committing themselves to making a Beijing property purchase. “We finally decided against buying here; there are too many disreputable developers, and too many of our friends have had problems after they have bought homes,” Victoria Lenton said. “Renting is far more convenient and has actually turned out to be easier than living in France!”

Choosing between renting and buying a home in Beijing can be a tough decision. For many foreigners (and Chinese), it is purely a case of economics: mortgage repayments are usually lower than rental costs, and investing money in the capital’s rapidly appreciating property “bubble” is more productive than throwing it away on rent. Others buy properties as investments, gambling that homes in desirable locations will always attract tenants and that their values will inevitably rise. Still, considerable risks remain: there is always a fear the bubble may suddenly burst. Construction quality is highly variable, regulations aren’t always clear or enforced, and buying a home is expensive, time-consuming and potentially nerve-wracking.

Notwithstanding the numerous challenges that face homebuyers, there is little doubt that Beijing’s residential sales market is booming. The city experienced the fastest growth in housing prices in all of China last year at 10.4 percent. According to a report recently released by Sina.com and New Real Estate Magazine,residential real estate prices in Beijing have increased by 42 percent during the past three years, despite attempts by the Chinese Government to cool the market.

Despite continuous interest rate increases and incessant warnings about the possibility of more government belt-tightening measures, Beijing’s property market looks set to receive further huge cash injections from foreign investors in 2007, who will go on buying buildings en bloc and teaming up with local or foreign partners to develop new projects, in anticipation of handsome returns and the appreciation of the yuan.

In 2004, new homes sold at an average price of 6,178 yuan (US$803) per square metre (sq.m). By late 2006, this figure had soared to 8,792 yuan (just under US$980) per square metre. Market analyses by Jones Lang LaSalle, an international property consultant and investor, indicates that strong demand for new housing and office space in Beijing will push real estate prices up by 11 percent in 2007.

Clouding the water recently has been a new raft of property regulations introduced by the Chinese Government. These are aimed at restricting foreigners who want to buy homes in the capital and who have purportedly “driven property prices to exorbitant levels ordinary Chinese people cannot afford.” An announcement jointly issued by six government ministries in July 2006 stated that foreigners must have studied or worked in China for a year before they are allowed to buy a home, and that newly bought homes cannot be used for letting or commercial purposes.

The hazy nature of these regulations meant that new property sales for foreigners and foreign organizations came to a temporary halt at the end of 2006, boosting second-hand sales considerably. Recent clarification of the new laws has led to a revival of the first hand market, although now it appears as though foreigners will be further limited to buying a single Beijing home.

Jolyon Darker, a senior manager at Savills Beijing, said, “Buyers need to be well aware of the nebulous legal framework in China where laws continue to change for foreign investors. Buyers should also question the length of time they intend to invest for, their exit strategies and whether they will require financing. Mortgage rates have been increasing quarter on quarter as the government attempts to slow the market.” 

Elly Zhen, a Chinese journalist, is unaffected by the recent restrictions on foreign home ownership, and recently took the plunge to become a first-time Beijing homeowner. She purchased a 100-sq.m apartment in Zhujiang Luoma Jiayuan, an “international-style” complex between the Fourth and Fifth Ring roads in Beijing’s Chaoyang District. By dealing directly with the complex’s sales centre, Zhen was delighted to negotiate a price of 7,000 yuan (US$910) per square metre.

Although she describes her purchase as an “impulse buy,” Zhen did her homework before putting pen to paper. “Of course I spoke to other tenants in this building in this complex before I made a decision. I wanted to know how much they had paid and what the building management was like. One reason I chose this place was that I could move straight in. Buying property that hasn’t been constructed might be cheaper, but it’s certainly a lot more risky.”

Zhen’s investment seems to have brought an immediate return, with her new apartment already valued at over 9,000 yuan (US$1,170) per square metre. However, there were a few nasty surprises in store when she moved in. “I pulled back the curtain in the master bedroom to find a massive concrete beam blocking my view beyond the window. It’s quite common in Chinese apartments to find such examples of poor design. I’m in discussion with the sales centre about it at the moment.”

It’s not only apartments in modern apartment blocks that are being snapped up by Beijing’s resident laowai. As the Chinese Government presses on with pre-Olympic beautification and zealous developers get busy with their bulldozers, Beijing courtyards (siheyuan) have become increasingly rare and desirable residences. Available at prices similar to those for high-end apartments, after renovation, these traditional-style dwellings can make comfortable, stylish and essentially unique homes.

However, buying a courtyard is an even more complex process than buying a regular second-hand apartment or villa. Some courtyard areas are protected, while others await a fate far less certain.

Darker said, “In addition to the worry of possible demolition, it is also quite common for a courtyard to have seven or ten owners. This often makes the negotiation process a bit of a nightmare.”

The old adage “location, location, location” is more relevant than ever in Beijing. With an additional 200 kilometres of subway line under construction and expected to be in operation by 2010, some areas of the city will become more popular as they become more accessible. Projects such as the Silver Maple Garden, close to Dashanzi, are already increasing in value because of a nearby light-rail line. The construction of shops, restaurants and other amenities can also affect property values. So it certainly pays to consider the long-term development plans for a given area when selecting possible investment options.   

In sharp contrast to the sales market, Beijing’s leasing market was steady in 2006, with a healthy supply of new properties keeping rental prices competitive. The Chaoyang Park–Lufthansa Center–Kempinski Hotel triangle continued to be an expat favourite, with its easy access to embassies, businesses, shops, restaurants and nightlife. Suburban villa projects, especially those in the Shunyi area, were also popular with expatriate families, whose children often attend nearby international schools.

Lenton was pleasantly surprised after she moved into her Chaoyang Park apartment. She explained: “We haven’t had many problems. My husband loves the fact our utilities are all pre-paid and we don’t get any nasty bills at the end of the month. The concierge services here are also great: we’re pampered far more than we are back home. The only thing I regret is bringing so much furniture from the United States. If I’d known how much I could have got here I wouldn’t have brought half as much!”

The Lentons are so happy with their current apartment that they’ve just signed another yearly contract.

Darker said, “If you’re a tenant, renewing your lease for a further term is a good option for reducing the rental price and/or getting additional items from the landlord.”

Whether renting or buying in Beijing, it is a common misconception that “new” equates to “hassle-free.” Foreigners should be aware that new properties are far more likely to suffer teething troubles than older, more established properties. Zhen said, “It really is worth checking into the developer’s background. You wouldn’t dream of buying a car without all the necessary paperwork and guarantees. A lot of construction in China is more about speed than quality, and this is reflected in problems buyers have after they move in.”