Expatriates are arriving in China in large numbers. The latest figures from the Ministry of Labor and Social Security estimates that more than 150,000 foreigners were registered to work in China at the end of 2005, almost double the number three years ago. Forty thousand of those foreigners live and work in Shanghai.
Indeed, some estimates place the true number of foreigners living in China at around 300,000, and this figure is expected to grow significantly in coming years. Shanghai’s large pool of expatriates means that its local luxury housing sector will come under pressure.
This pressure is most keenly in the very villa developments in Jinqiao, Hongqiao, Xujing and Kangqiao. With occupancy rates high, it is fortunate that a number of these developments are already adding new phases.
However, current government restrictions, which limit villa land sales and construction licenses, will only decrease supply while stimulating buyer demand.
The regulatory cosh
The effects of these restrictions will be most strongly felt – barring central government policy U-turns – once the current round of construction is complete and there is a lag in new property coming to market in the prime expatriate-preferred areas.
Villa owners and tenants face further problems. Additional taxation (rental income subject to personal income tax at a 20% minimum in addition to the current 5% sales tax) and higher purchase prices due to higher land and construction costs means either lower yields or higher rents – we’ll let you guess which it will be.
Other factors worsen things. Chief among these is the huge increase in affluent middle-class Chinese. What this translates into are more owner-occupiers and therefore less properties for rent.
Another factor pushing up rents is increased leasing demand from foreigners. As new government restrictions come into play, fewer foreigners are buying. Many choose to rent instead. This increases demand and raises rents.
Additionally, there is an extreme demand for villas that are not only next to international schools but also have access to main arteries.
Finally, the increasing number of multi-national corporations moving their regional headquarters to Shanghai means more expats are looking for housing here, which increases demand again.
Luckily, it is not all bad news for tenants. To make you feel better (we would not want to dampen your Chinese New Year celebrations), potential villa dwellers today can look forward to a number of positive points.
Among other things, this includes higher quality fit-outs, improved property management, positive supply in the sub-US$4,000 downtown leasing market, and more experienced landlords who are more accustomed to tenants’ furnishing and fit-out demands.
These circumstances are especially valid for the new villa developments in the suburban areas of Shanghai. Nevertheless, the wind of change has also been blowing through the tree-lined streets of the former French and International Concessions.
Shanghai’s colonial real estate has always been an interesting option for the city’s expat community. Because the stock of colonial property is limited, it has continuously been in high demand among expats. In recent years, colonial real estate has become even more sought after than the traditional expatriate enclaves of Gubei and Hongqiao. The good news is that although the supply-side of old housing remains limited, the quality of the interior and overall renovation has improved noticeably in recent years.
Experienced local landlords and the availability of foreign-led renovation teams has resulted in such ‘novelties’ as radiators, floor-heating and reliable wiring in these often almost century-old structures.
Setting new standards
This new standard of renovation has created a split in the pricing structure of Shanghai’s colonial properties. Lane houses with new luxury fittings can now be leased at premium prices, while those with older, more basic renovation can be found at prices even lower than two years ago – great for anyone wanting to experience Shanghai’s charm on a more limited budget.
With Shanghai becoming a major international destination and the continuous efforts of the government to cool the buyer’s market, the demand for high-end housing of any type, new or colonial, is not likely to subside.
Since landlords are unlikely to accept a lower rental yield, foreigners in particular can continue to expect an increase in rent over the coming years for high-end properties.
The good news is that nowadays you can at least hope for a little more value for money.
Kevin Harding is Managing Partner at Elite 8 Consulting. Kate Whitton is Managing Director at Ark International.
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