Market-oriented reforms that “opened-up” China to foreign investment beginning in 1978 continued to propel the country to unprecedented economic growth and transformation during the past three decades. China’s unique market size, abundant skilled labor force, political stability, tax incentive system, and rapidly developing transport infrastructure attracted foreign direct investment (FDI) to flow into the country at exponentially increasing rates, with a record of USD $92 billion in 2009, according to Ministry of Commerce of the People’s Republic of China.
This staggering influx of FDI has created a booming market for businesses from all sectors, from manufacturing behemoths to luxury hotels to software start-ups. This rapid growth has produced a high demand for experienced professionals. Multinational corporations (MNCs) increasingly are recruiting foreign experts to supplement the local talent. This has opened the door for growing numbers of expatriate workers who possess strong managerial and leadership backgrounds and previous international exposure. According to Foreign Enterprise Service Company Limited (FESCO), Shanghai, China, the number of foreign nationals relocating to major cities in China, such as Shanghai and Beijing, has grown from 5,000 in 2000 to 160,000 in 2009.
Relocating to China always has been an adventure and navigating the mind-boggling array of housing choices is fundamental in assuring that the foreign employees feel comfortable and “at home” in their new workplace. Expatriates a decade ago often were assigned to one apartment building that housed every foreign resident in town, but today foreigners are welcome to live anywhere, from Soviet-era concrete apartments to shared-stairway lane houses to suburban-style villas.
Evolution of the Housing Market in China
There are two distinct phases of real estate development in China: pre-housing reforms and post-housing reforms. Prior to the housing reforms in 1998, the housing market in China mirrored Soviet-era public housing, and no private property market in China existed. Only the specially approved organizations and state-owned enterprises (SOEs) were allowed to purchase property under the “welfare housing” system, where most local housing was assigned to employees at very low or zero cost. Foreign nationals were prohibited to live outside the specifically designated foreign housing, known as expatriate housing. These properties were sold or leased at comparable international Tier-1 city rates, but only possessed the local housing quality levels.
In March 1998, Premier Zhu Rongji announced an end to China’s half-century old welfare housing system and encouraged the commercialization of real estate development and purchasing. The real estate industry then evolved into a core pillar of the new economy, and has created a significant multiplier effect on China’s expanding economy.
Policies to Promote Demand
To speed up the commercialization of the housing market, the government created policies to boost the demand of commercialized housing. Cities such as Shanghai, for example, introduced a series of policies to promote homebuyer demand. The most significant of these incentives included zero capital gains, tax rebates on mortgage payments, simplified mortgage application processes, flat rental taxes at 5 percent, and offering the coveted “Shanghai Residency Card” for out-of-town homebuyers. In addition, foreign nationals were invited to purchase local housing for a lease of 70 years, and were now free to move out of the designated “foreign housing compounds” and live anywhere in the city.
The opening up of the housing sector was welcomed by the eager homebuyers and investors. Real estate in China became a “hot” commodity thanks to its exceptional rental yield, capital appreciation, potential RMB appreciation, and increasing transparency. By the end of 2004, housing prices had nearly doubled across all the Tier-1 cities in China.
The rampant interest in the housing market has led to a flurry of asset price appreciation that is currently a topic of great concern to both the Chinese government and homebuyers. The anxiety stems mainly from concern that prices are skyrocketing above the affordable price for an average white-collar professional, the threat of a potential mortgage crisis, and speculation over RMB currency appreciation.
Since 2004, the Chinese government has been forced to initiate a series of policies to slow down the pace of soaring real estate prices (see chart at right). The government designed a variety of policies to address issues across different sectors of the housing industry, applied at different periods according to the global and domestic economic situation.
Roller-coaster Ride
A series of austerity measures in 2004 to 2008 designed to control the overheated market nearly crippled the housing sector. During the 2008-2009 global financial crisis, the government implemented a USD $586 billion China economy stimulus plan, rescinded the austerity
measures, and adopted a more supportive stance of commercial developers. This lead to a huge boom in the market and prices soared again in 2009. By 2010, property prices in major cities such as Beijing and Shanghai quadrupled their 1998 market prices.
Prevailing market wisdom suggests that without careful government manipulation of policies, the China real estate market is at risk of a price bubble nationwide. One key concern that has gone by the wayside with the focus on inflationary policies is improving the quality of construction.
Fast Fact:
In June 2009, a 13-floor building in the Lotus Riverside residential complex in Shanghai toppled, killing one worker. An investigation revealed the building’s foundations had been undermined by soil piled 10 meters high on one side of the structure and the digging of a 4.6-meter underground car garage on the other.
From Bubble Trouble to Rubble Trouble
During a recent international forum on green and energy-efficient building, China Daily reported that Qiu Baoxing, vice minister of housing and urban-rural development, revealed that the average lifespan of a building in China is 25 to 30 years, compared to 132 years in Britain and 74 years in the United States.
One of the most common complaints among foreign homebuyers is that buildings in China appear to have been built with the cheapest construction materials available, which tend to degrade quickly. Clients often are shocked to learn that a building they believe to be 10 or 15 years old was only built five years earlier. The situation is further exacerbated in Tier- 2 and Tier-3 cities in China.
The quality of the developments might not merely be a factor of subpar construction materials, but rather more importantly be influenced by the level of attention and standards enforced by construction supervisors. According to authors Ping Yung and Brenda Yip in their article, “Construction Quality in China During Transition” in the January 2010 issue of International Journal of Project Management, management issues, including the attitudes or commitments of management, the cooperation of parties, and the abilities and experience levels of project managers are the most important factors affecting construction quality.
Prior to 2004, the real estate industry had low-entry barriers; consequently, the backgrounds of the developers were diverse—from consumer electronics organizations and banks to agriculture firms and pharmaceutical companies. Despite lack of experience and inferior quality, the buildings quickly sold in the booming bull market.
Real estate developers have been heavily reliant on strong cash inflows from pre-sales to support and recoup the initial heavily invested capital. This pre-sale “cash-in-hand” has led to even further disregard for quality.
Implications of Housing Reforms, and Construction Quality Issues on Expatriate Housing
A number of the real estate developers, especially those from Hong Kong with international housing development exposure, foresaw the needs of MNC’s relocating expatriates as an opportunity to introduce westernized, urban upscale apartments and grand villa suburban gated compounds.
In addition to offering higher quality housing choices, many of these housing developments are equipped with English-speaking property management offices and expatriate amenities such as international schools, sports and recreation centers, restaurants, supermarkets, beauty parlors, and country clubs. The popularity of these upscale developments, such as Seasons Villa and Green Villa in the Shanghai Biyun Green City International Community, has risen so much that there now is a tenant waiting list.
The rising property prices of this new generation of “expatriate housing” is driven by the strong demand and lack of supply of suitable expatriate-friendly housings choices in China. Foreigner relocation companies report that their foreign clients rank location, amenities, and construction quality standards among their top concerns when searching for a new home in China.
Predictably, these specialty-housing options have been offered with a huge premium. The property and rental price differences between a typical local housing option and a new generation expatriate housing in the same neighborhood can be as much as 150 percent.
Landlords of Expatriate Housing
There are no specific Chinese regulations dealing with landlord and tenant relations. This type of legislation is administered by local government bodies, and circumstances can vary widely across different cities. Generally, the system works in favor of the landlords, as there are no restrictions regarding discrimination of tenants, rental price control, or significant penalties for delay in repair and maintenance. Finding the right landlord is crucial for guaranteeing a hassle-free living situation for the tenants.
In general, there are two types of landlords in China who own expatriate housing: corporate landlords who can be the developer or hospitality management company engaged by the developer, or individual landlords who purchased the properties from the real estate developer.
The business nature of corporate landlords is to acquire or build, lease, and collect rental fees. Service quality is key for corporate landlords because they are incentivized to keep the tenant long-term and generate positive buzz for their development. While the leased properties offered by corporate landlords are generally more expensive, tenants report that the response or turnaround time for maintenance issues is satisfactorily quick.
As there are a limited number of developer-managed properties available in China, modern stylish housings owned by individual landlords provide expatriates another choice of living with more variety, e.g., historical she he yuan (courtyard with houses on all sides) colonial-style apartments in Shanghai. While these properties are deemed to have “more character,” leasing properties from individual landlords always has been a controversial topic.
If the tenants are lucky, an individual landlord will allow more room for rental negotiations and a great opportunity for cultural exchange, as we have witnessed a case where a landlord is hosting monthly Chinese seasonal cuisine dinners with tenants at the landlord’s own home. However, a number of individual landlords are investors or speculators who seek to realize their investment gain via capital appreciation instead of cash flow from rental income.
The past appreciation of property prices implies a low rental yield (1 to 2 percent rental yield versus a mortgage rate of 5.94 percent), which has further de-incentivized catering to the tenant’s housing needs. In this case, tenants also are harassed by different housing inspectors and drop-by visits from potential buyers. One final problem is that many of these landlords are not based in the same city as their investment properties, and they rely on their “friends” or hired help to manage properties, which leads to slow turnaround times in responding to tenants maintenance needs.
Post-reform Era Housing
Housing in China still is largely influenced today as in the past by government regulation. In the post-housing reform era, there is no doubt that expatriate housing in China has gone through a dramatic change. Expatriates now enjoy a large variety of choice concerning neighborhoods, style, and design of homes. However, some critical pitfalls, such as building and construction quality, interior design styles, and relationships with landlords remain unresolved. It is important for MNCs and expatriates to allow adequate time and concentration when choosing a new home during their relocation period. MNCs are advised to investigate both quantitative and qualitative research on the local housing market during the assignment planning stage. The expatriate on relocation assignment should take care to personally visit the properties and carry out a detailed due diligence to avoid rental regret later. There are wonderful gems out there and many foreigners choose to stay in the same home throughout the duration of their assignment in China, but the opposite also is true as many expatriates find themselves packing up and moving multiple times before they find a suitable home.
Experiences of Expatriates with Private Landlords
...restricted in interior design choices... poor quality in interior construction... too few awesome choices... furniture issues... home comesfurnished with no option to remove or replace furniture... negotiations with landlords are tedious and can turn to shouting match... landlords withhold the security deposit for no reason… harassed by landlord to open home to visiting potential buyers… landlord difficult to track down… landlordunwilling to make home improvements… communication barrier… cultural differences… $250 TV in a $2.5 million apartment…
Alex Chua, GMS, is vice president of Asian Tigers Mobility (China) Limited, Shanghai, China, and a member of the MOBILITY Editorial Advisory Committee. He can be reached at +86 10 6415 1188 or e-mail achua@at-mobility.com.