Why is buying property in China as a foreigner a bad idea?

This article was updated on July 29, 2021

This article will answer a simple question: why is buying property in China as a foreigner a bad idea, as a non-resident or indeed for expats living in the country?

If you want to invest in more productive assets, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

I am specialised in the expat financial services niche, and have seen how many people have had their fingers burned with Chinese and Dubai property in particular.

Introduction

“Buy low, sell high” is one of the main investment concepts. Yet it is truly amazing how many people seem to forget this mantra of value seekers everywhere.

For much of the 2000s, China’s real estate market has been on the rise. In fact, local property buyers have benefited more from the country’s economic recovery than anyone else has.

Homes in major cities in China posted the highest returns. Property prices in Shanghai, Shenzhen, Guangzhou and Shanghai have tripled from the millennium to the 2008 global recession.

But something has changed. The volume of real estate transactions since the “boom” began to fall, especially in most cities of the first and second tier of China.

Meanwhile, Chinese developers are slashing prices for their new projects – often by 30%.

There are also rare signs of protest and public anger. Would you be upset if you bought a condominium, but after six months, prices dropped, giving new buyers a better deal? This scenario has become a reality for some Chinese property buyers.

So we are here to figure out is it worth buying a Chinese property or not, what kind of restrictions there will be, what commissions you have to pay an much more, in the end we promise you’ll get all answers to your questions. 

Is it worth buying a property in China?

Have you ever thought about buying property abroad? Now this issue is gaining momentum, and many are trying to snatch a piece of land in different countries.

Well, it’s very convenient. You can come to the resort in YOUR house or apartment, and rent out this apartment when you leave. Good passive income.

Let’s look at this housing issue on Chinese soil. First you need to understand that all the land of the Celestial Empire belongs to the state, and if you decide to buy real estate, then you will not be a full-fledged owner, you just rent the area from the state for a very long time, precisely for 70 years.

This law applies to both Chinese and foreigners. If you buy a secondary home, then you have even less time to live in it (depending on when the first “owner” bought it).

Accordingly, the older the apartment, the cheaper it is for sale.

When buying an apartment, a FOREIGNER signs special papers stating that he undertakes to use the living space only for personal residence.

Foreigners do not have the right to rent the apartment. After that, interest in buying disappears altogether, right?

What happens to the apartment in 70 years? Well, in fact, since the inception of this law, another 70 years has never passed, therefore, the devil knows what will be there.

But! In theory, you can (or rather, your children) pay extra 50% of the market value of the apartment and extend the lease for another 70 years. No money? Then there is no apartment.

If, nevertheless, a foreigner decided to buy an apartment, then first he must live in China for at least 1 year, and provide this information when buying. What are the prices? Really expensive! It’s cheaper to rent a house. In big cities (Beijing, Shanghai, Guangzhou, Hong Kong, etc.) prices are 2-3-5 times higher than in Europe.⠀

If you count the money for rent (multiplied by 70 years) and for the purchase, then the rent is much more profitable. Where is the logic then?

There is logic. But it is more about the Chinese. When buying an apartment, a piece of paper is issued – an analogue of our registration or registration, but it is very important! Without this piece of paper, you are not a full-fledged Chinese!

Real estate in China: restrictions for foreigners

No doubt that in China, there are restrictions for foreigners when buying real estate. Despite all the difficulties, it is predicted that China will become the largest investment market in the Asia-Pacific region.

Barriers to the purchase of residential and commercial real estate appeared in China quite recently – in 2006. As with all subsequent measures, the barriers are intended to control the rise in prices in the real estate market. 

The legal regime for purchasing real estate in China differs in each Chinese province. It is much more difficult to buy real estate for a foreigner in Beijing or Shanghai, as well as near government and strategically important facilities.

The government of the People’s Republic of China introduced regulations for the acquisition of housing by foreigners. They can be found in the resolution “On the management of foreign investments in real estate” (Notes of the Ministry of Construction of the PRC, the Ministry of Commerce of the PRC, the State Committee for Development and Reform of the People’s Republic of China, the People’s Bank of China, the General Directorate of the Industrial and Trade Administration of the People’s Republic of China and the State Administration of Foreign Exchange Control on regulatory issues and the procedure for access of foreign capital to the real estate market No. [2006] 171 of 11.07.2006). One of the main points says:

“Branches and representative offices of foreign enterprises and organizations in China (with the exception of enterprises engaged in real estate operations with the approval of the Chinese government) and foreigners living or studying in China for more than 1 year are entitled to buy real estate in China for their own residence and use.

Foreign enterprises and organizations that do not have branches or representative offices in China, and foreigners who have lived or studied in China for less than 1 year are not allowed to buy real estate in China.”

Thus, renting out apartments by foreigners is impossible, this type of investment is not for the Middle Kingdom. The fact that you have lived, worked or studied in China for more than one year will need to be confirmed by any documents. Note, however, that this restriction is sometimes lifted briefly in some areas of China in an attempt to stimulate the property market.

The next limitation is how much property you can purchase. Using the example of Beijing: buying more than one apartment in this city (like many others, including Shanghai) is prohibited.

Only the Chinese living in the capital can own two apartments in Beijing. Foreign citizens and even residents of other regions of the country are allowed to purchase only one residential property. Moreover, in order to buy an apartment in the capital, a non-resident must provide evidence that he has paid income taxes or paid social contributions for five years.

Today, the tax on the purchase of real estate is quite standard:

  • Property transfer tax – 3-5% (Depends on the province of China)
  • Stamp tax on the contract – 0.05% (Depends on the province of China)
  • Contribution to the public housing and communal services fund

According to the current “Temporary Real Estate Tax Regulations” of 1986, the owner of real estate up to 1 million RMB is required to pay property tax of 8,400 RMB per year. If the property is rented out and the rental income is over 100,000 RMB per year, then the tax is 12,000 RMB.

Now a new tax on luxury real estate and a second home is being experimentally introduced in several cities in China. On average, the new tax can reach up to 1%. Experts argue that these measures will not in any way affect buyers, but will only reduce the number of speculative transactions.

Foreigners can purchase commercial real estate (but not for an individual, only for a legal entity) and luxury real estate, but they cannot buy land.

It must be remembered that you are not buying real estate in freehold ownership, but only renting it for 70 years. The fact is that according to the legislation of the PRC, all land is state property. For commercial real estate, the land is leased for 50 years. After this period, the right to use the land plot is extended.

All new and new restrictions, not only for foreigners, are called upon to somehow control the “hot”, as analysts call it, the real estate market in the Middle Kingdom. Over the long term, China’s role as the world’s second largest economy is likely to help the country also become the world’s largest real estate investment market.

Housing prices are skyrocketing in the country. The barriers introduced have led to a decrease in the number of transactions in the largest cities of the country – Beijing and Shanghai. However, in small settlements, there is still an exuberant demand for houses and apartments – in the first half of 2011, sales there grew by 31% compared to the same period in 2010. In June alone, housing prices in the country rose by an average of 0.4%.

The expression “soap bubble” has become one of the most popular when describing the real estate situation in China. The recent example of the United States, where real estate prices rose to a huge bubble, which then burst and provoked the global financial crisis, is not at all like the Chinese. 

The government of the country also fears the growth of social tension in society, which could be caused by the crisis. In the capital alone, housing prices rose 42% – more than anywhere else in the country, and reached an average of 8,000 yuan ($ 1,213) per square meter (the average monthly salary in Beijing is half that).

The authorities accuse speculators of real estate price hikes who, by buying up apartments, create their deficit. But the point is also that many representatives of the middle class now have the opportunity to invest more and more in real estate.

And of course, the real estate market in China depends on its location in this truly huge country. It is not only the capital, megalopolises, industrial and port centers, but also tourist seaside towns and houses on the islands.

No job – no apartment: how the right to housing was limited in China

To buy real estate in Shanghai, a person will have to prove that he works in this city, and then live in a rented apartment for three years

It is possible to become the full owner of a house or apartment in Shanghai only with the permission of the authorities. 

Residents of the People’s Republic of China (PRC) have long been accustomed to this rule, but for Europeans it sounds crazy: potential buyers of real estate in Shanghai will have to prove that they really need an apartment in this city. Otherwise, the deal will not be registered – even if the seller has already received the money, and the buyer is determined to move to Shanghai.

There can be many reasons for relocation: now Shanghai occupies one of the leading places in terms of economic growth throughout the country, and a well-thought-out infrastructure makes the metropolis one of the most convenient Chinese cities for everyday life. In addition, there is a sea and four airports, and the subtropical climate relieves Shanghai people from the cold winter. In July, prices for Shanghai real estate broke a record: the cost of 1 sq. m reached 34.6 thousand yuan ($ 5.5 thousand).

The advantages of the economic capital of China have long been appreciated by residents of other regions: according to official statistics alone, 24 million people live in Shanghai, of which only 14 million are legally registered as urban residents. 

Everyone else is not eligible for access to schools, health insurance and other social benefits, but they still come to Shanghai in search of work and a better life. The Shanghai people themselves are confident that at least 30 million people live in the city, and among them at least 0.5 million are foreigners. Including the Europeans.

Especially for those who are thinking about permanent housing in the economic capital of China, the editorial staff of RBC-Real Estate has selected five key features of the Shanghai real estate market: from lack of space and tax refunds to restrictions on the duration of ownership of an apartment.

First for rent, then for ownership

The first thing to know about Shanghai real estate is that there is a real lack of space. While uninhabited skyscrapers and entire cities are empty in the rest of China, the construction boom in Shanghai is only gaining momentum: the ever-growing demand for housing, hotels and offices leads to the construction of more and more residential areas.

To limit the influx of migrants and prevent a bubble, local authorities have imposed restrictions on the purchase of housing. 

To become the full owner of a Shanghai apartment, a visitor will have to live in the city for at least three years, and then prove to the authorities that he really spent this time in Shanghai. This rule applies to both the Chinese and citizens of other countries. Thus, at first, a migrant from Europe will have to live either in a hotel or in a rented apartment.

When the coveted deadline comes, the home buyer will have to pay a deposit of 1% of the cost of the purchased apartment to a special state account – the money is paid simultaneously with the application for registration of the transaction. 

After that, the local government checks whether the investor is worthy to receive an apartment. If at this stage the Chinese analogue of Rosreestr finds out that the foreigner has deceived the government agency and tried to buy housing before the expiration of the three-year period, the transaction is canceled, and the 1% deposit is not returned.

The unemployed are not allowed to own a property

To date, the average number of retirees (that is, residents over 60 years old) in China has reached 40%. In Shanghai, their share does not exceed 10% – usually young professionals come to work in the economic capital. 

Perhaps this proportion is partly due to the ban on the purchase of real estate by the unemployed. To buy an apartment here, you need to pay taxes to the city budget for at least two years. 

It does not matter whether the expat has his own business or is considered an employee – the main thing is that the person has at least 24 months of tax payments. This is the second prerequisite for buying a home in addition to living three years in Shanghai.

After buying real estate from the newly minted Shanghai citizen, an additional real estate tax immediately arises. On average, expats pay 10,000 yuan ($ 1,500) a year for their own housing. 

The good news is that after the three-year period, the owner of the apartment has the right to return the entire property tax paid – and after that no longer pay the fees. If a person sells an apartment before three years, the tax is not refundable.

Differentiated tax rates apply when selling real estate. If a person has owned an apartment for less than five years, then the seller will have to pay 5% of the cost of housing. If more than five years – 1%. 

If a foreigner decides to donate real estate to a relative or friend, the tax rate will immediately increase to 20%: the amount will be calculated by the state based on the average amount of transactions in the area.

Sellers overestimate the footage

Buyers accustomed to European realities will be unpleasantly surprised: the real area of ​​apartments in Shanghai is about 67% of what the developers indicate on their websites. 

The thing is that in China it is customary to take into account the total area of ​​a residential complex, taking into account all entrances, elevator shafts, adjacent territories and even green spaces around the house. 

The area of ​​this entire territory is summed up and then divided by the number of apartments in the house. The resulting share in the common building area is added to the documented area of ​​the apartment, and the buyer has to pay for it along with the housing.

Therefore, you should not rush to buy an 85-meter one room apartment in a new residential complex – in fact, the area of ​​such an apartment will hardly exceed 50 square meters.

You cannot live longer than 70 years

Finally yet importantly, you can only become a homeowner in Shanghai for 70 years. For commercial real estate, the term is even less – 40 years. 

What will happen after the expiration of this period, Shanghai people do not know themselves: the rule appeared recently, and no one has yet lived to see the moment when an apartment or office has to be given to the state. 

It is possible that in the coming years, the PRC government will still change the rules, and expats will still be able to live in their own apartment for more than 70 years, but right now law prohibits this.

Bonus: mortgage at 1%

Not a rule, but an exception: foreigners can take out a mortgage on Shanghai real estate at a rate of 1%. To do this, a loan must be issued in Taiwan, and the loan itself will be in Taiwanese dollars – on such conditions, local banks willingly lend to foreigners to buy Shanghai real estate. In Shanghai itself, a mortgage will cost 5-6% per annum, but a loan can be taken in yuan.

Here is all you have to know before making a purchase of property in China, buy it or not it’s still up to you, but definitely it has a lot of disadvantages which makes the purchase unworthy. The only this that is a great advantage is 1% mortgage that you’ll never meet in any other country, but the rest makes us to better think before serious steps. 

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Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 232.5 million answers views on Quora.com and a widely sold book on Amazon

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