China, China, China, oh crystal china ball please give us a sign; will the Chinese government's measures stifle foreign investment in Chinese real estate?
The answer in my crystal China ball is exactly as you'd expect from a clairvoyant; an answer which spreads its bets to ensure the highest chance of being correct. In this case the answer is: yes the Chinese government's current measures could affect foreign real estate investment, but at the same time they might not.
However, it is not just rolling out taxes that foreigners have to worry about, because according to a recent report the Chinese Ministry of Commerce (MOC) has asked local authorities to keep a closer eye on foreign purchases and strengthen risk controls on the real estate sector. The statement also advised that foreign funded developers must not be allowed to profit from buying and reselling Chinese real estate.
That said: China has never been the easiest country for foreigners to invest in anyway; the legal system is very strict. However, property investment is about a calculation of investment safety and worthiness and nothing else. So, all that happens when a government considers rolling out new tax system and possibly other measures, is that these things are added to the calculation to assess the viability of the investment. Let's look at the viability of property investment in China factoring in these new, well, factors.
China is one of the top 3 fastest growing economies in the world and also has the world's largest and fastest growing population. This dynamite combination points to massive demand growth in the residential and commercial property sectors without fail.
At the same time it also has one of the biggest wealth gaps in the world combined with a communist government. This combination is why the government is coming down so hard on the housing market, because it does not want its people to be priced out of the housing market.
However, that is also why all of the measures have been focussed solely on the residential sector. The commercial sector is still abundant with opportunities, especially in the retail and office sectors.
And residential isn't exactly a no-fly zone either. Yes, the government has put the brakes on any chance of capital appreciation for the time being, but there is still plenty to be made in rental income. My mother used to say as one door closes another one opens, and that is certainly true of the Chinese residential sector at the moment. Developers of the growing high end sector have been hit hard by the restrictions, but at the same time the government is also looking at having more social housing built with renewed vigour. Thus, there are opportunities for both developers and investors to construct social housing in China.
Finally, while Shanghai and Beijing have both voiced their steadfastness in bringing down property prices, the authorities in many third-tier cities are actively looking for ways to let some air back into the windpipes of their property markets. Wuhu has just been forced to abandon plans to remove restrictions, but others continue to try so watch that space.
- Monday 27 February 2012