Tipping Point

Tipping Point

All eyes keep turning towards Beijing ... but are they seeing it?

Beijing and its overheated property market has regularly been in the news for the last several years. It seems every day the central government introduces new regulations designed to cool rampant speculation and get things down to a manageable pace. For the most part, it's working. Logic dictates that things are getting back to normal and business as usual. And for real estate, "usual" means investor-friendly.

Those well-reported cooling measures have included limiting foreign purchases, raising lending rates and down payments and tightening pre-sales regulations and loan policies vis-avis second purchases. The immediate result was an immediate market slowdown in late- 2010. Colliers International's Beijing Residential Property Market Report for the fourth quarter stated supply was up in all sectors, demand was softer than usual (the season had an influence), the vacancy rate increased to just over 20 percent and luxury flat and villa rents slipped slightly. In addition to the continued tightening measures, a property tax was introduced early in 2011, yet another potential fly in investors' ointments.

A wait and see attitude prevails despite what many consider strong economic fundamentals, but it's not all doom and gloom. "The surging inflation pressure across the board will cause many cash rich investors to choose real estate investment as the vehicle for risk aversion of their capital," Colliers' report predicted. The international firm speculated that residential project volume would be small, per square metre capital values would steadily increase in 2011 and property would hold steady as an investment.

Not so fast says Tim Murphy, managing director of property investment services provider and analysts IP Global, which has brokered US$900 million worth of pure investment properties in the last five years. Murphy is that rare breed that isn't convinced Beijing is close to being a strong investment right now. "I think Beijing looks kind of like the rest of tier-one city China. I think the regulations are going to, and have slowed down the market. After months of high inflation, interest rates are coming up; I think the market needs to have a very slow year. And it will. I'd be very surprised if you see positive growth in Shanghai and Beijing this year," he theorises.

Ask him point blank if this is a good time to buy in Beijing and Murphy has a quick, emphatic "no". "I think the market will have a challenging couple of years and even if it survives this year there's going to be a point where there's a correction." Murphy is careful about where and how IPG invests, continuing, "If you're risk tolerant and you want to invest in China but you don't know whether you can get your RMB out and whether you can get a mortgage and you live in Hong Kong you're just as well buying here. Because it correlates pretty well China anyway ... But we don't have any of the issues."

So why is Murphy hesitating to rush into Beijing when everyone else seems to be making the mad dash? "Short-term there are over-supply issues in a lot of the big cities and there a quite a lot of investors who buy and leave them empty. The greatest migration programme in the history of the planet is taking place in China, and that will keep driving supply back down. So long-term there are definitely no supply issues," he says. More crucial to the state of the market are its most basic concepts: affordability and pricing.

"At the end of the day, no matter where you live in the world, the thing that drives property prices more than anything else is affordability. People generally need to borrow money to buy real estate ... In London for example you could reduce property prices by 50 percent tomorrow but if you increase interest rates by 10 percent the whole market would crash. You'd have all these people that have mortgages and can't afford to pay them."

And for the enormity of a burgeoning middle class in need of homes, most potential residents still can't afford Beijing, putting a crimp in the domestic market. "Exactly, and so you will see empty units. This goes back to my previous point. If you have to put down more cash to hold it, and you don't have a tenant, previously you thought, 'Oh, it doesn't matter.'" Murphy reasons. Investors can ride out a purchase made at 2 percent interest, "But if rates treble, suddenly it's 30 or 40 percent of your wages, and you think 'I need to sell this.' And generally if you think you need to sell, there are 100,000 other people thinking the same thing at the same time. That's when the market's in trouble." Meaning all that news coming out of Beijing could be very different this year.