Shanghai Real Estate: Finding a Home with a History

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Shanghai Real Estate: Finding a Home with a History
by Sam Crispin, Crispin Property Consultants

Due to regulatory changes made by the Shanghai municipal government around the middle of 2001 which effectively saw the levelling of the real estate playing, foreigners have for over 2 years now been able to buy properties previously only available to local Chinese residents in addition to the conventional expatriate properties that are on offer. This has made buying old garden villas and lane houses much easier than ever before.

The French Concession area is home to some of the most desirable residential properties in the city. A growing number of owners and investors are realizing that the barriers to entry in this market sector have been lowered. Before the overseas sale and local sale markets were merged 2 years ago it was a market fraught with difficulties. The mortgage business was still in its infancy and have tended to be handled through developers who arrange mortgages en masse directly with banks. Dealing with individual buyers for individual mortgages was, until recently, not a business line the banks were much interested in. This has changed and a number of different financing options are now available.

Availability of properties for sale had always been something of a barrier to entry. Many of these houses have been under multiple occupancy for many years and finding an opportunity where all residents are moving out at the same time has been the trick for successful buyers. What properties that were on the market were snapped up quickly by cash buyers without time for other prospective buyers to undertake even the most rudimentary checks of construction quality, mortgage availability or town planning. 2003 saw the market for such properties open up. More properties available, indeed properties sold one weekend promptly went back on the market the following weekend at a 20% mark up. Such activity sends shivers down the spines of both the government and long-term investors but is an inevitable consequence of a market that lacks both transparency, educated participants and, dare I say it, agents with scruples.

The government is more accessible than it used to be and planning departments can be helpful in regards to information useful to home buyers. We have been able to save several buyers from making expensive mistakes in buying condemned houses. Indeed we make a point of keeping on friendly terms with the planning bureau so we can give effective advice to our clients.

Reassuringly, plans for conservation areas have been drawn up in 12 different locations with land area totalling 27 square kilometres. Details are still being filled in, but the general idea is to refurbish property of historic value, demolish any modern interlopers in the shape of ugly public housing blocks, reduce building density and give the properties a new lease of economic life. The conservation areas will be protected by law and prospective buyers could not hope for more protection for their homes than that afforded by being within the boundaries of a conservation area.
on the market is increasing. The most expensive I have come across was on Yongjia Road at about Rmb45 million, but apartments from around Rmb2 million can also be found.

Sample properties offered for sale*

Location / Size (sq.m.) / Garden (sq.m.) Modern d�cor /Asking price
Jiangsu Rd & Yuyuan Rd / 225 / 170 / Y / Rmb10 mil
Jiangsu Rd & Yuyuan Rd / 225 / 100 / Y / TBC
Wanhangdu Rd / 162 / 10 / Y / Rmb3.9 mil
Xinzha Rd / 244 / 15 / Y / Rmb4.3 mil
Wukang Rd / 750 / 400 / N / Rmb30 mil
Nanhui Rd / 290 / 50 / N / Rmb10 mil

*All details subject to contract

Unit sales prices for old houses vary according to type, decoration, location and size of garden. A �garden villa  goes for around Rmb50,000 per sq.m. (depending on size of garden); lane houses: Rmb20,000 to 30,000 per sq.m.; old apartments: Rmb15,000 to 20,000 per sq.m.

Purchase for renovation is one way that investors can improve the value of their properties and increase returns on investment. Purchase of a property for say Rmb10 million and expenditure of say Rmb300,000 on renovation could potentially increase the value to say Rmb12 million. But this needs to be done carefully and with due consideration to what a buyer may be looking for. Anything of historic value usually adds value and should be retained where practical. �Retrofitting  a property that has been unsympathetically modernized is a particularly satisfying process and with the amount of demolition that has taken place there are materials available. The renovation process is not one to be undertaken lightly. Once renovated, properties can be leased and retained for long term income or resold based on capitalizing the rental income. Various investors specialize in different stages of the process enabling new entrants to join at a stage they feel most comfortable with.

For those not ready to make the leap as a buyer, the leasing market is also active. For various sensible reasons many foreigners choose to lease rather than buy and old houses and apartments are available at a range of rents from around US$2,000 per month up. So active is the sales market that tenants may find their home changing hands during the term of there lease. This is usually not something to be unduly concerned about but there should be adequate protection for the tenant in the lease contract.

Overall, as a long-term investment, Shanghai�s stock of old houses and apartments make an attractive choice. Despite recent increases, prices in Shanghai are still a long way below those of comparable properties in other major cities and yields for investors are attractive. The issue of repatriating capital, rental income and profits remains but the number of ways of tackling this are increasing. Much talk is of prices having moved ahead of rational pricing but for the most sought after properties such as these, there seems little prospect of prices falling. Furthermore, with the risk profile of the market decreasing, yields will fall as prices increase further.

Facts you should know:

The Shanghai Housing Index – the benchmark of new housing prices – grew just 0.45 percent in January. The index rose 33 percent for the whole 2003.

Purchase taxes vary for different types of property with garden villas being the most expensive.

Crispin Property Consultants was established in Shanghai in 2002 with a staff of 2. The company now employs 25 staff in 3 offices covering all types of real estate purchases and rentals. Please contact info@ChinaBusinessServices.com for more information.

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