Home » Opinion » Foreign Views
Property market wears the emperor's new clothes
By Sean Maguire |
July 27, 2010, Tuesday
|
Print Edition
Print Edition
MANY readers will be familiar with the deceptively simple Hans Christian Andersen tale "The Emperor's New Clothes."
A vainglorious emperor hires two tailors who promise to make for him a robe so splendid and made of such fine and rare fabric as to be invisible to anyone who has not the sophistication of taste to appreciate the elegance of its design.
Upon first inspection of his new garment, he sees nothing at all - the tailors are swindlers and there is no robe to be seen.
Afraid of being judged vulgar or philistine, the emperor pretends to be delighted with the new clothes and "wears" them in a grand parade through the town.
Everyone else, wishing to appear as citizens of taste and refinement, also pretend to see the robe until a child lets the cat out of the proverbial bag and punctures the self-reinforcing group delusion.
It is a cautionary tale best noted, particularly if you have an appetite for domestic real estate investment in Shanghai.
The city's housing market has been effervescent - to put it mildly - for the past year or so, and it would appear that Beijing's recent efforts to damp down speculation may have borne some fruit.
According to figures released by the National Bureau of Statistics, June witnessed a month-by-month slowdown in house prices for the first time in 16 months. The city's house prices grew by 8.2 per cent in June compared to May, 1.4 points less that the figures issued for April-May. Nonetheless, across the board in China house prices grew by 11.4 percent year-on-year in June.
One of the measures introduced by Beijing to cool down the market has been the restriction on bank lending for those who already own one property, in attempt to curtail speculative purchasing, a principal market dynamic.
There is some concern, however, that these speculators are rushing to market without paying sufficient attention to the possible returns on their investment.
With regards to investment real estate, purchase decisions are made upon the basis of the expected return from the investment. If the desired return on your investment is 7.5 percent and the net rent someone is willing to pay is 10,000 yuan (US$1,474) per month, you should be paying 1.8 million yuan for the property. (1.8 million x 7.5 percent = 120,000 yuan per annum / 12 months = 10,000 yuan per month).
One of the first things real estate investors look at when considering the possible return on their investment is, among other things, multiples of rent.
The norm in a developed economy is around 10-15 times annual rent; in a developing economy (like China), this figure climbs up to around 15-20 times annual rent. Rarely do multiples make it to 25 times annual rent, which would constitute only a 4 per cent return on the investment - there are much safer bets out there.
The expected return on the investment is known as the capitalization rate and is typically compared to other available investment vehicles (equities, bonds, etc). The distinguishing feature of real estate investment, however, is of course potential capital gain, or the hoped-for increase in the resale price of the property.
So how does investment real estate increase in value? If the rental value of the property increases from 10,000 yuan per month to 11,000 yuan per month and at the same 7.5 per cent capitalization rate, the value of the investment property similarly increases to 1.98 million yuan for a capital gain of 180,000 yuan.
It is well known that a building depreciates over time and land appreciates. In China one does not own the land on which a property is built and a lease on a domestic property runs for 70 years.
Assuming that such leases will revert to government after the expiration of 70 years, the owner of my place will have revenue from 70 years of rental income from the apartment to recoup the initial purchase price of the property and any return on his investment.
The closer the lease gets to the reversion date, the less it will be worth. Of course, rents will increase, but also properties of this kind require increased maintenance as they get older.
To paraphrase Oscar Wilde, uninformed speculators know the price of everything, but the value of nothing, so as prices continue to increase in a self-reinforcing speculative loop, some investors have failed to recognize that price has long since left value behind.
This market is attired in the Emperor's robe and it is only a matter of time before a voice from the crowd puts things to rights.
(The author is a lawyer at Allbright Law Firm. His e-mail: sbjmaguire39@yahoo.co.uk)
A vainglorious emperor hires two tailors who promise to make for him a robe so splendid and made of such fine and rare fabric as to be invisible to anyone who has not the sophistication of taste to appreciate the elegance of its design.
Upon first inspection of his new garment, he sees nothing at all - the tailors are swindlers and there is no robe to be seen.
Afraid of being judged vulgar or philistine, the emperor pretends to be delighted with the new clothes and "wears" them in a grand parade through the town.
Everyone else, wishing to appear as citizens of taste and refinement, also pretend to see the robe until a child lets the cat out of the proverbial bag and punctures the self-reinforcing group delusion.
It is a cautionary tale best noted, particularly if you have an appetite for domestic real estate investment in Shanghai.
The city's housing market has been effervescent - to put it mildly - for the past year or so, and it would appear that Beijing's recent efforts to damp down speculation may have borne some fruit.
According to figures released by the National Bureau of Statistics, June witnessed a month-by-month slowdown in house prices for the first time in 16 months. The city's house prices grew by 8.2 per cent in June compared to May, 1.4 points less that the figures issued for April-May. Nonetheless, across the board in China house prices grew by 11.4 percent year-on-year in June.
One of the measures introduced by Beijing to cool down the market has been the restriction on bank lending for those who already own one property, in attempt to curtail speculative purchasing, a principal market dynamic.
There is some concern, however, that these speculators are rushing to market without paying sufficient attention to the possible returns on their investment.
With regards to investment real estate, purchase decisions are made upon the basis of the expected return from the investment. If the desired return on your investment is 7.5 percent and the net rent someone is willing to pay is 10,000 yuan (US$1,474) per month, you should be paying 1.8 million yuan for the property. (1.8 million x 7.5 percent = 120,000 yuan per annum / 12 months = 10,000 yuan per month).
One of the first things real estate investors look at when considering the possible return on their investment is, among other things, multiples of rent.
The norm in a developed economy is around 10-15 times annual rent; in a developing economy (like China), this figure climbs up to around 15-20 times annual rent. Rarely do multiples make it to 25 times annual rent, which would constitute only a 4 per cent return on the investment - there are much safer bets out there.
The expected return on the investment is known as the capitalization rate and is typically compared to other available investment vehicles (equities, bonds, etc). The distinguishing feature of real estate investment, however, is of course potential capital gain, or the hoped-for increase in the resale price of the property.
So how does investment real estate increase in value? If the rental value of the property increases from 10,000 yuan per month to 11,000 yuan per month and at the same 7.5 per cent capitalization rate, the value of the investment property similarly increases to 1.98 million yuan for a capital gain of 180,000 yuan.
It is well known that a building depreciates over time and land appreciates. In China one does not own the land on which a property is built and a lease on a domestic property runs for 70 years.
Assuming that such leases will revert to government after the expiration of 70 years, the owner of my place will have revenue from 70 years of rental income from the apartment to recoup the initial purchase price of the property and any return on his investment.
The closer the lease gets to the reversion date, the less it will be worth. Of course, rents will increase, but also properties of this kind require increased maintenance as they get older.
To paraphrase Oscar Wilde, uninformed speculators know the price of everything, but the value of nothing, so as prices continue to increase in a self-reinforcing speculative loop, some investors have failed to recognize that price has long since left value behind.
This market is attired in the Emperor's robe and it is only a matter of time before a voice from the crowd puts things to rights.
(The author is a lawyer at Allbright Law Firm. His e-mail: sbjmaguire39@yahoo.co.uk)
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
