For the average investor looking for a place to park some spare cash in China, the Shanghai residential market remains a relatively safe and straightforward place to start. Other cities, Beijing included, offer the occasional glint of something enticing but cannot match Shanghai in terms of ease of entry or the liquidity for a quick exit.
Indeed, with spring upon us, buyers are showing signs of returning, having waited on the sidelines as the market found equilibrium following the new taxes brought in nearly a year ago. It is not easy to make sense of the mass of options available but the "evergreen" choices are to be found around the international schools. It is the fact these properties are not obvious to most speculative investors that makes them attractive to those in for the long-term gain. And these days it is the longer-term investor that holds sway.
The rationale is this: expat families have the biggest rental budgets; most parents will choose to live nearer the schools than the workplace; the schools are not downtown thus properties around the schools offer a steady flow of well-financed new tenants, which means lower vacancy periods. Not being the obvious choice – the locations are not prime by any means – many investors will stay away, so prices are high for the location but haven't seen the ramp-up experienced by downtown apartments over the last few years.
Irrational behavior remains a feature of this market. Here I am thinking of the landlord I came across one Sunday morning who put the price of his luxury apartment up from RMB9.5 million (US$1.18 million) to RMB10.5 million (US$1.3 million) "because RMB9.5 million was last month's price." I am happy to say this sort of thing is less widespread than it used to be, although irrational pricing can at times work in the buyers' favor. Two side-by-side developments of similar quality can have price differences of 20-30%. The discrepancies tend to be purely cosmetic – things that a quick refurb job will soon put right.
Many investors seek old houses but these can be remarkably difficult to rent out if they are large and, unlike the international school halo effect, the reverse is true when it comes to local schools. If you are a "fixer upper" there is certainly value to be added, but consider subdividing into apartments rather than keeping as a single unit. Even simpler, just buy an old apartment to do up. For offshore investors the management of an extensive renovation from afar is not something to be considered lightly.
Investment pools may yet see the light of day and these would feature bundles of properties intended to reflect both the risks and opportunities offered by different niches within the same market. Expect to hear more on this topic soon.
The foregoing opinions are those of Sam Crispin
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