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Property Investment for Expats in China

Submitted: August 2013

There are restrictions on foreign nationals wishing to buy property in China, but this is not a total prohibition either.

Property rights are poorly protected in China, but round-trip property transaction costs are fairly low (5 to 6%). It is fairly hard to find reliable housing market statistics in China.

Don’t underestimate the geological side of it, and check the possible risks in your local area. Even a large city like Shanghai is not a safe place from this point of view, as the entire city is reportedly slowly sinking under its ever higher weight.

Acquisition of land by foreigners

It is possible for foreigners to buy property in China. To be eligible, you must:

  • Have a valid student visa for a period exceeding one year (Hong Kong, Macau and Taiwanese citizens only), or have a valid work permit whose duration is at least one year (all foreign nationals)
  • Buy no more than one unit, and
  • Use the property for residential purposes

If you are in any doubt, seek professional advice. Be wary of illegal or fraudulent schemes to circumvent these rules.

General investment restrictions

Additional restrictions may apply, regardless of your nationality. These are designed to curb speculation in some areas in high demand, and they have been tightened in March 2013. 40 major cities are within the scope of such restrictions. This can be, for example, a total prohibition from acquiring real estate in Beijing unless you have lived there for at least five years.

Many prospective buyers reportedly falsify documents in order to circumvent these restrictions, thereby adding further demand on the Chinese housing market.

Chinese housing market generally

China has experienced tremendous house price rises over the past decade. The real estate sector is a large contributor of today’s Chinese GDP growth, and any downturn would hurt it hard.

Despite the fresh recent round of tightening this year, house price rises seem unstoppable. This is largely due to high demand rather than low supply. Many fear a housing bubble, but we can’t be 100% sure that recent price rises are unsustainable.

An assessment of the Chinese housing market must include many additional macroeconomic factors, including:

  • Mortgage availability
  • Interest rate variations
  • Developments in connection with the chronic housing shortage
  • Social and cultural trends in China (see below)
  • Political factors, including corruption issues
  • Demographic trends
  • Tax policy, and
  • Psychological factors

Cultural factors

Don’t forget that you are in a 1.4-billion-strong market that is shifting from an agricultural society to a consumption society. Therefore, cultural perceptions are constantly evolving.

Cultural factors can be a large contributor to demand for homes, as they may push up homeownership rates. For instance, we can cite the widespread belief that you must absolutely own your home to succeed in life, no matter if this is leasehold property (see below).

Culturally-justified high homeownership rates may force gross rental yields to ultra-low levels (below 3%). Expats might wish to take advantage of this little game, and decide to rent their home. Huge savings may be made as financing costs (e.g. mortgage costs) may far exceed rental costs. But going contrarian on cultural factors should not make you an anti-social person either.

From a financial point of view, the downside of renting is that you cannot make capital gains. In a Chinese context, capital gains on home disposal are not unlikely. However, the potential for capital gains may be largely eroded by the tenure system.

Leaseholds in China – tenure system

An expat should understand the concept of “leasehold” prior to going ahead with a property purchase. In some countries, the residential real estate market consists almost exclusively of freeholds. Conversely, all properties in China are leaseholds. This is because the Chinese Government remains the owner of all land in China. Leaseholds are common practice in Asian markets.

When you own leasehold property, you are only the lessee of the ultimate owner, i.e. the Government.

Leaseholds are like tenancies, but they spread over a very long period (70 years for residential property, and no more than 50 years for commercial real estate), and ground rent is very low, if not nil. Therefore, leaseholders may have the illusion that they are the ultimate owner of their property, even though it will eventually return to the Government unless they have a right to renew their lease.

You should always check your property tenure. Don’t forget that the value of a leasehold property erodes over time. Typically, you enter red territory when your lease matures within less than 70 years.

Be wary of the apparent low prices in China. Without the leasing system (see below), Chinese property prices would be probably much higher. Therefore, international comparisons may be a risky business.

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.

It might be tricky for expatriates to take out a mortgage in China, as lenders require documentation which isn’t necessarily available for non-permanent resident individuals. Language can be a serious issue as well. However, some lenders may appreciate that there is high demand from individuals who have an overseas element in their application. Therefore, the first thing to do is to look for a lender who is willing to offer its services to you.

Like many things in China, mortgage terms are regulated. Deposits towards a first-time buyer mortgage must be at least 30% of the property’s value. This is increased to 60% for second homes. Mortgages towards a third home in China are not permitted.

Remember that:

  • your net borrowing costs include not only interest but also many additional fees and taxes
  • interest rates may go up in the future, but they have some room to shrink further as well.

Property taxes

Property taxes are payable each year in some urban areas. They may be assessed on the original value or the rental value of a given property.

If assessed on the annual rental value, the tax rate is 12% (4% for residential property). Otherwise, the rate is 1.2% on the original value. If a taxpayer elects to be assessed through the original value method, a local standard deduction may be available (from 10% to 30%).

Example

Jenny has purchased residential property worth RMB2m. She can lease it for RMB80,000 a year. A 30% standard deduction is available in her local area.


Method

Assessable value (RMB)

Tax rate (%)

Tax due (RMB)

Original price

1,400,000

1.2

16,800

Rental value

80,000

4

3,200

Jenny had better pay property tax through the rental value method.

Higher land taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.

Letting your property

On average, Chinese landlords can expect a gross rental yield of less than 3% with rents possibly going up.

However, foreign ownership restrictions are likely to simply bar you from leasing real estate in China.

Taxation

Chinese rental income received by an individual is taxed at 10%. Other property investment income (including capital gains) is taxed at 20%.

There is no mortgage interest tax relief in China.

 

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