May 2011

Property hunt

By Dave Green

Foreigners looking to purchase homes in China should watch out for tougher checks on real estate investment

The State Council in early April dispatched inspection teams to 16 provincial regions, including Beijing and Shanghai, to check up on the implementation of central government policies to curb rising home prices.

Those teams will primarily be focusing on the draconian measures introduced since early 2010 to rein in speculative purchases by Chinese citizens. But their attention may also turn to the haphazard enforcement of regulations specifically targeting residential home purchases by foreigners.

Despite the central government's determination to clamp down on the real estate market, local authorities have so far enforced regulations with varying degrees of strictness.

Helen Chang, director of residential sales at Savills Beijing, said that despite rules that restrict foreigners from buying homes as an investment vehicle, the agency still sees foreign owners renting out their property. She also noted that there is a discrepancy in law enforcement in the capital, depending on whether buyers are Westerners or hail from Hong Kong, Taiwan or Singapore – traditionally the primary source of foreign interest in mainland real estate.

This has been seen, for example, with measures that only allow foreigners who have lived in China for more than one year to buy property.

"It's easier and more flexible for overseas Chinese, as the authorities don't take the one-year residency requirement as seriously," Chang said. "For Westerners, it's not that easy."

Circumnavigating rules

Kung Si Wei, who operates a property agency under her own name that targets foreign buyers in Shanghai, also said that contrary to regulations, some foreign buyers still rent out the homes they purchase in the city. 

"While foreigners should live in the homes they buy, quite a high proportion of buyers still lease their properties," she said. Kung added that it is also possible to circumnavigate the rule that limits buyers to one property by placing deeds in the name of children or relatives.

However, in Chengdu, which has experienced some of the most explosive house price growth of any Chinese city, real estate agents say the regulations are enforced to the letter. "There are plenty of foreigners who want to buy here, but they can't, even if they do intend to use the property for personal use," said Jacky Tsai, head of Colliers International's sales office in the city. "You can't even sell pre-sale to foreigners, so if you want to invest, you have to come in as part of a wider investment project."

Those who do manage to secure a home for investment should be aware of the troubles they may encounter when it comes to getting money out of China.

Savills' Chang described the case of one client who sold her property to an individual from Taiwan,  before realizing she could not remit the funds gleaned from the sale. "We applied to the State Administration of Foreign Exchange, but the currency control bureau wouldn't handle it, as there were no locals involved in the transaction," Chang said.

That chimes with views offered by one leading wealth management consultant in Suzhou, who declined to be named, as he is the de facto owner of two properties in the city.

He said that while banks will help move renminbi out of the country, such aid is subject to exorbitant charges of about 7% of the transaction cost since it involves skipping the US$10,000 annual limit on foreign remittance.

Irrespective of whether it is possible to side-step the one-year residency requirement, the consultant also said he would not recommend Western clients enter the market without a Chinese partner and the ability to monitor homes on a regular basis. This is because property rights can be removed very easily without the help of sound legal backing.

"Unless you have family or strong ties to the community, don't do it," he said.