One year after Shanghai merged its overseas and domestic-sale housing markets, Beijing has followed suit. The municipality lifted the distinction on September 1, after announcing the move in mid-August.
The unification of the sales and leasing market gives equal treatment to foreign and local buyers or tenants. This means that there will be no limitations on foreigners or overseas Chinese buying or leasing domestic-sale housing properties. The municipality will unify all home purchase documentation and procedures for both local and foreign buyers. However, there will still be rules regulating properties for lease to foreigners.
The move is likely to have a direct effect on the sales market. China's accession to the World Trade Organisation and Beijing's successful bid for the 2008 Olympic Games have stimulated demand for real estate. This has been particularly strong for centrally located housing projects that are well designed, reasonably priced and built to a high standard. Domestic housing projects with foreign lease rights have attracted large numbers of foreign tenants as they are competitively priced.
Now, foreign homebuyers have a greater number of choices at cheaper prices.
Landlords of former 'foreign-sale' properties are likely to see values drop for secondhand sales and they will also find it harder to resell their properties. For example, the average sales price for apartments in Parkview Towers in Chaoyang district was more than US$2,400 per sq metre in 1995- 96. At the time it was the only foreign project on the market. However, small landlords in the project will now accept US$1,200 per sq metre when negotiating with potential buyers. The resale market for properties like
Parkview Towers is likely to encounter increasing competition not only from similar properties, but also from high-end domestic housing projects.
Most owners of foreign-sale projects are individual investors who target the expatriate leasing market. After the merger of the markets, these investors may switch to high-end domestic housing projects located in central areas, where they pay lower prices for units of similar quality that can still be leased to expatriates.
Developers of foreign-sale projects will lose some demand for high-end domestic housing properties. According to the Beijing Housing and Land Administration
Bureau, a total of 108 pre-sale permits were issued in the first half of this year. These new projects will provide the market with 9.1m sq metres of housing space, of which 600,000 sq metres is for overseas sale. After the merger, overseas-sale properties will largely compete with high-end domestic-sale projects that are of similar quality and provide facilities that expatriates prefer.
Many high-end domestic housing projects have obtained foreign leasing permits, which allow them to lease to expatriates. Most of these projects are located in Chaoyang district, within the third ring road, and they include New Town, Global Trade Centre, Sunshine 100, Boya Garden and Sunny City. All of them have experienced strong sales rates over the last couple of years. It is expected that demand for similar projects will increase, especially projects that have gained foreign leasing permits.
Projects that have been priced high because they have an overseas sales permit will obviously suffer most from the merger. However, those 'overseas sale' projects that are located in central areas, and designed and built to high standards, will remain in demand despite the higher price.
Quality properties at the top end of the market will not encounter much competition after the merger. Having an established foreign community, international standard property management and effective security systems are still the fundamentals for success.
Foreign buyers can now apply for mortgages in yuan, US dollars and Hong Kong dollars from local or foreign banks. Banks providing mortgage loans to foreigners include the Bank of China, China Construction Bank, Bank of East Asia and Wing Hang Bank. Banks have also simplified procedures for mortgage applications and are now offering foreign buyers loans up to 80 percent of the appraised value, 10 percent higher than the amount they used to be able to get.
Different mortgage terms
FPD Savills Research conducted a survey in July 2002 of 20 domestic housing projects in Beijing. The results showed that the most common mortgage loan term is 20 years, loan ratio (loan to value) 80 percent and payment ratio (monthly payment to monthly income) 40 percent. However, for foreign homebuyers purchasing overseas-sale projects, the figures were 10 years, 60 percent and 50 percent.
Suppose that a foreign buyer purchases a two-bedroom unit in a high-end domestic housing project, at a price of Yn1,000,000. Before the merging of the market, the buyer could apply for a mortgage of up to only 60 percent, giving a repayment total of Yn6,535 a month (see table above). After the merger, foreign homebuyers will be able to apply for mortgages that give them a 15 percent reduction in monthly payments, due to the longer term of the loan.
Beijing recorded a 30 percent year-onyear increase in contracted foreign investment in the first half of 2002 and a 180 percent increase in utilised foreign investment, following China's entry to the WTO. FPDSavills expects that the number of expatriates brought in by new start-ups will soften any impact managerial localisation policies may have on demand in the luxury residential sector.
According to official statistics, about 50,000 foreigners in Beijing currently have a work permit. However, the total number of foreign expatriates in the city is estimated to be as high as 150,000, taking into account family members, officials and embassy staff and foreign employees who have not applied for work permits. This creates a high demand for rented residential property.
In the second quarter of 2002, the average monthly rent for Grade A residential property was US$20 per sq metre. Rents have fallen by 57 percent since 1995, and it is expected that they will remain on a downward trend following the merger of the markets.
Corporates plan to reduce spending on housing allowances as the market allows. Three of FPDSavills' corporate clients have reduced housing allowances for their expatriates by more than 20 percent over the last 12 months. Perceptions about the merger of overseas- and domestic-sale housing and increasing competition from high-end local housing projects with foreign lease permits are two reasons for the adjustment. The merger of the markets provides a wider availability of housing, especially at the lower-cost end.
Some companies have taken measures to save housing costs, including hiring staff from Hong Kong, reducing the number of expatriates with children and making housing allowances part of salaries. IT and internet companies in particular are hiring 'local' expatriates and staff from Hong Kong; these staff normally have housing budgets that are 25 percent lower than those for expatriates brought to Beijing from abroad.
Reducing the number of China postings for staff with children can mean big savings in schooling costs and additional housing allowances. Some foreign firms now include the housing allowance in their employees' salary rather than paying it separately. Expatriates are allowed to keep some or all of the savings, which gives them a strong incentive to move to cheaper properties.
In June 2001, the People's Bank of China released a new notice designed to limit bank loans on real estate development. According to the regulations, developers must obtain land certificates, construction permits, land-use right permits and layout permits and inject 30 percent of the total investment before they can apply for development loans.
Additionally, in April 2002, the Ministry of Land Resources released new rules on the acquisition of land-use rights. From July 1, land used for commercial developments – including office, residential, hotel and recreational facilities – must be acquired by land auction, open bidding and public listing.
The combined effects of these new restrictions are likely to result in the merger or closure of small developers without sound financial backing. Only those developers with a strong background who can secure prime sites will survive. According to the Beijing Statistics Bureau, 22 real estate development companies, or 2.5 percent of the total, closed during 2001. The consolidation trend is already under way.
Prices will remain stable
The merger of the markets did not come as a surprise to developers in Beijing. They were prepared for the move and put more effort into site selection, target market identification and positioning of their developments. Projects located in areas that are popular with expatriates will go for foreign lease permits when they get approval for construction, instead of applying for foreign sales licenses.
Sales prices will remain stable, despite the increase in demand brought about by the merger, because of the huge number of new developments in planning and under construction. These new projects will provide the market with 9.1m sq metres of housing, an increase of 4.6 percent year-on-year.
Although competition is intense, quality is always the key to success, for developers and investors alike. Market segmentation and market positioning are other key factors to which developers and investors will have to give greater consideration.
This article is based on a report by FPDSavills, international property consultants. Contact: Michael Purefoy, general manager, Telephone: +86 (10) 6505 2348, Email: firstname.lastname@example.org Website: www.fpdsavills.com