Lihong’s Blog

The games are two months away and developers are rushing to complete their edifices. The exteriors of China World Tower 3 & CCTV Tower will be ready but tenants will have to wait till the end of the year before fit-outs are completed. The Olympic venues are of course ready. Here’s the answers to questions I’ve been asked recently:

Q. Have apartment rents increased due to the Olympics?
A. Rents have increased about 10-15% (varying by complex) in the last 12 months but not for reasons directly related to the Olympics. For August 08, many landlords owning properties in the sub-RMB20,000 range are hoping to rent out their properties for 3-5 times the normal rent rent. This has caused some distortion on rents affecting long-term tenants moving in this summer. If Beijing follows the trend in Sydney and Athens, landlords with high expectations will be disappointed. Nevertheless, they are still high. For apartments with rents above RMB20,000/month, there’s less of an Olympic effect.

Q. How about rent at serviced apartments?
A. There are still plenty of availabilities, but many serviced apartments are still asking for astronomical rents for August. Will they hold out, or drop their rents in June or July?

Q. Do you expect rents to come down in September?
A. Yes, but by not more than 5%. This will mainly be due to the slack from landlords who (successfully or unsuccessfully) kept their apartments for Olympic guests in August 08.

Q. How about rents at houses in Shunyi?
A. Again, we’ve seen 10-15% rent increases there in the last year but there’s little Olympic effect. Few tenants in Shunyi are associated with the Olympics and the more seasoned landlords in Shunyi are pragmatic. They prefer tenants who provide stable long-term term rental revenue from their tenants.

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At about 14:40, we felt a gentle swaying in our 21st floor office. Within minutes, we’d walked down the stairs and joined the thousands in the street below. The mobile networks were overloaded.

The epicentre of the 7.8 quake was in a mountainous region of Sichuan.  As I write, Rueters is reporting casualties in the southern region. The tremors in Beijing registered 3.9.

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This week’s Economist devotes a page to gloomy news on China’s property market. It mentions developers in Shanghai retaining list prices but offering rebates taking up to 10% off. While Shenzhen has seen prices drop by 28%, prices in Beijing remain more robust, but sales have definitely slowed.

An article in property-report.com mentions a Central Bank survey in 50 Chinese cities showing that only 14.6% plan to buy homes in the next quarter, down 1.3% from the last quarter. The article also notes growing trend of investors choosing to hold and rent out their properties rather than sell. Rents at popular properties have increased by upto 15% over the last year. With the heady days coming to a close, it will be interesting to see how things pan out. Will increased supply slow the rent increases? With slowing capital gains, will landlords prefer steady rental income over flipping?

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In the last week we’ve been reading news articles on real estate chains closing retail outlets in major cities such as Shenzhen, Guangzhou, Beijing and Shanghai. In China, agents with a street-side presence deal in mid to low-end housing.

It’s not uncommon to see a row of 5-6 real estate agents on one street, and then another row of them round the corner or across the street. You’ll see both home-grown and foreign brands. Business owners wanting to buy into perceived respectability can join foreign franchises such as Century 21 and Baker Caldwell. Properties are not listed exclusively, so with few exceptions, all real estate agents have access to the same properties.

The two pre-requisites for entering the business are (1) a retail space in an area with a high density of privately owned mid to low-end housing (2) A team of resourceful salesmen

Streets with a row of real estate agents are market places in the truest sense. Some start the day with the rather foreign practice of lining up outside the front door reciting self-encouragement slogans. Signages may be large, but retail spaces barely seat the employees who spend much of the day on the pavement, ready to deal with potential clients. In Shanghai, where business is always at a faster pace, a squad of electric bikes is always on hand to zip out to a property with a potential client. The incentives are strong. Salesmen are typically from the provinces where there’s an abundance of young people willing to give it a go. Basic salary is low or non-existent. In good times, the talented have made fortunes in a market where negligible capital gains taxes encourages flipping. But for every success story, there are many who barely scrape by. Reports mention that some have not been paid commissions due.

The Chairman of Changhui, one of the afflicted chains was quoted by sohu.com as saying they’d “grown too fast and too big” (source: AP). With such low barriers to entry, it’s not surprising. The signs of over capacity were there. In the last six months, we noticed retail agencies setting up makeshift stands outside subway stations at peak hours in an attempt to reach out to clients.

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Thursday’s announcement that ultra-thin plastic bags will be banned by 1 June 2008 has received massive media coverage in recent days. Supermarkets and shops will have to charge for thicker plastic bags, currently provided free. Jenny Lous (RMB0.20) and IKEA (RMB1.00) took the win-win plunge months ago.

Do your bit and stuff your washable Lihong tote in your regular work-bag.

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As the CNY climbs to 7.27 against the USD, was interesting to read this week’s Economist citing two reasons, neither of which involve Washington:

- Reducing imported inflation, especially for food and raw materials. A question mark is placed on the efficacy of interest rate hikes in stemming inflation that is attributed to “supply-side shocks”.
- Snow-balling costs of holding down the CNY with falling interest rates in the US vs. rising rates in China.

The article notes: “Some economists argue that a big one-off revaluation would help to stem inflows by reducing the expected future appreciation of the yuan. But Chinese policymakers have stressed the need for gradual adjustment. To show that the currency is not just a one-way bet, the PBOC may try to nudge the yuan a bit lower in coming days.”

With rising rents in a lofty ‘08 (am refraining from using the “O” word) coupled with housing budgets set in USD, the data gatherers at firms like ECA will be under pressure not to under quote.

Source: Economist

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China has reiterated that it has no plans to tax capital gains, contrary to market speculation. Forbes reported via Shanghai Securities News reported, citing the State Administration of Taxation (SAT).

Individuals with annual personal income of over 120,000 yuan are required to submit a tax disclosure form. Forbes writes that speculation of a gains tax arose when the 2007 tax form required detailed disclosures of individual gains from property and stock transactions. The article quotes media reports that a new property tax is expected to be introduced this year as part of a unified property tax bringing together housing property tax, city real estate tax, land value-added tax and land leasing fees.

Source: Forbes

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A survey initiated by the State Administration for Industry and Commerce (SAIC) has sparked concerns that new moves may be on the way to curb foreign investment in the real estate sector. The survey was announced via an “urgent notice” on the official Web site of the SAIC’s Registration of Foreign Invested Enterprises unit. In its article, Money Morning quotes Asian investment expert Jim Rogers as saying that even if China’s stock market were to plummet, that country’s economy would remain healthy, and would continue to advance unchecked.

Currently, only foreign institutions establishing branches or representative offices in China and individuals working or studying in China for more than one year can purchase apartments for their own use.

On another note, the government’s focus on affordable housing for low-income households may be having an effect. Last November, local authorities were urged to reserve at least 70% of residential land to low-rent or low-cost homes. CRI quotes analysts as saying the drop in floor space of marketable, unsold buildings from 4.5% to 117.97 million square meters in November may be a result of this move. Little or no foreign investment is in the low-end segment.

Source:
China Radio International
Money Morning

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  Flying out of Copenhagen airport after the holidays, we spotted the above ad from a Danish real estate & relocation firm surprisingly targeted, not at clients, but at potential house owners about to be posted abroad, it reads:

“Would you like to lease out your home when you move abroad? Let us find a tenant who will appreciate your home as much as you do.”

In Beijing, a majority of high-end landed properties are investment properties (as are high-end apartments). In Denmark, most houses are owner occupied. Investment properties are commonly urban apartments. Denmark has traditionally had a very Danish work-force. The first batch of Indian doctors arrived last year.

On another note, my chemist cousin PA was also on the flight to Beijing. His company had put up a similar sized billboard very near the gate SAS uses for its Beijing flights. Thought it might be to impress Chinese clients coming on visits. Yes, but not quite. The firm needs people and the billboard targets potential recruits.

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With the main structure complete, the media has given a lot of attenti   on to Rem Koolhaas’ CCTV tower . We’re more interested in China World Tower 3, the newest addition to Beijing’s first high-end office complex scheduled for completion this year. The first buildings were completed way back in 1990.

It’s meant to overtake faded Jinguang as Beijing’s tallest building at 380m high with an auspicious 68 floors. Typical of Robert Kuok’s people to keep it all low-key despite its prominence on the skyline. Hadeed & Koolhaas’ Beijing edifices may get pride of place in the glossy books but China World will be the premier office address. Why? Functional design, quality materials & maintenance.

- Excuse the dreary camera-phone pic.

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