In comparison to the sagging US real estate market struck by the sub-prime mortgage crisis, the Chinese real estate market has become more appealing to investors. The source of capital has become much more diversified internationally: some U.S. financial institutions have started navigating the Chinese real estate market.
However, US real estate investors, who are motivated to plunge into the Chinese real estate market, should watch for the issues that will affect their investment: the Chinese understanding of “land ownership,” which sharply differs from the US legal system; new legislation that will potentially impact foreign real estate investment; and the intervention by the Chinese government.
How can we invest in real estate in the world’s most populous and fastest-growing economy country: China?
1. Basically no one owns land, just the government. Nobody can own land but can get the right to use the land for a specific and limited time (usually 40 years to 70 years). The right to use the land is transfer-able, lease-able and mortgage-able. One interesting thing is that the length of the remaining term does not affect the value of the land-use rights and the value of buildings on land.
2. Foreigner investors can get a mortgage (usually with 30% down). It is recommended for foreigners to obtain a U.S. currency loan in China because the China foreign exchange rate is expected to increase (now is about 7.5 RMB to 1 US$ compared to 8.1 RMB to 1 US$ a year ago). In this way, foreign investors can benefit from two kinds of appreciation: foreign exchange and real estate value.
3. Although China has strict controls on bank wiring money out of the country, if the foreign buyer keeps the original document for his wiring money into China to purchase the property, the investor can wire out the sale proceeds including the profit after the investor sells the property in the future.
4. The sale is subject to a capital gain tax if the Buyer sells the property within 5 years.
There are two kinds of sales tax for real estate transactions, paid by the buyer and the seller respectively.
So far, there is no real estate tax but the proposal is under processing and expected to be executed in 2008.
5. Officially, real estate agent service fees are 3% in Beijing and 2% in Shanghai of the sale price, paid half by the buyer and half by the seller, respectively. For rentals, the service fee is one month rent for one year lease or half month rent for half year lease paid by the landlord.
6. The MLS system has not been established in China. Almost all the real estate agents in China make money from the mark up on the listings, and no disclosure is required. However, my company’s China offices deal mainly with foreigners so we charge only service fees to our clients with a guarantee of no mark up and full disclosure to them.
In just Shanghai there are special new controls because of the overheated market there:
1. Foreigners are officially only allowed to buy one residential property per person and only after when they have been working in Shanghai for more than a year. I have heard though that depending on the district having an employment contract for a year may be sufficient. No commercial properties are allowed for foreign individuals.
2. Overseas Chinese can purchase residential properties in Shanghai without the requirement of working in Shanghai more than one year. However, overseas Chinese are limited to one property per person, too. If not purchased jointly, then a husband and wife can each buy one. No commercial properties are allowed for overseas Chinese, too.
Again these last two new restrictions only apply to Shanghai, not other cities in China. Foreigners can purchase commercial properties in other cities. Unpredictable lawmaking, and uneven implementation and enforcement are some of the major disadvantages for investment in foreign countries. But from a positive point of view, shouldn’t investors take actions faster before more restrictions are made?
My company’s China offices have in place many of the same programs as my Las Vegas offices have including an Online Property Management system. Our Global Online Property Management System allows landlords to access to view their real estate investment portfolio via the Internet from anywhere. In addition, my China offices have unique virtual tour pictures of overseas properties to allow you to preview online for sale or for rent based on your criteria. My China offices also offer a series of services for newcomers to Shanghai and Beijing.
As I have discussed, it is difficult but still possible to invest with the help of a real estate professional located in the United States who has offices there.
