Monday, July 18, 2005

Buying Real Estate in China

Hi again all - it's been a while since my last post because I've been busy moving. Authense has sent me to the U.S. for an extended stay, and I'm living in Virginia now. It is beautiful!

I have been hearing a lot of questions in my speaking engagements related to real estate in China. People have heard how much prices have run up in the primary markets there (like Shanghai, Beijing, etc.) and many westerners are getting interested in real estate in China as an investment.

First, I'd like to clarify the way land use works on a country-wide level. When you buy property in China, you are actually leasing it from the government - not buying it. The amount of time left on the lease can range from decades to almost 100 years, depending on how (and how long ago) the deed it was written. You own the building(s) on the property - it is the land itself that is leased.

This doesn't always have a huge effect on the price. The value of a property for the next 50 years overshadows its value from the 51st year on because of discounting due to inflation. In fact, there is almost no difference in the discounted current value of a property over a 50 year period and an infinite period. This is true because 50 years of inflation discounts the "future" income stream from the property so much that it converges to near-zero.

The long and short of this is that you shouldn't worry much about the "leasing factor" when looking at property in China. However, you should strongly consider the underlying value of a property - how much income does it generate? When adjusted for inflation, does this suggest a value commensurate with the asking price? If not, are you sure enough that the property will go up in value to compensate you for the gap? No area is immune to bubbles. If you think there is something magical about China's growth, keep in mind that between 1900 and 1990 in the U.S. - a period of great economic growth - increases in real estate values were flat in real terms - only keeping up with inflation.

There are title search firms and mortgage brokers in the China market, just like in the U.S. The process of valuing and researching a property is similar. Don't be afraid - just keep your head and look for value.

Signing off - Ruobing

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