Buying an apartment in China

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Makane
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Buying an apartment in China

Post by Makane » Sun Oct 21, 2018 12:21 pm

Hi all,

I've lived in this 10+ million Chinese metropolis for three years renting, make a decent living and stow away extra money in index funds.
I'm an expat, fluent in Chinese and need to stay in this city for at least another 2.5 years to complete my assignment here.

Me and my girlfriend seem to have found a nice deal where properties are assigned by the government to special talent to attract/keep them in the region. If we win that lottery we would be able to buy an apartment at 20.000 RMB/sqm whereas these apartments have traded for 28.000 RMB/sqm already and next door compounds are trading for 30.000 RMB/sqm and higher this year. We would buy it together with the deed recording both of us, with 50% ownership for each.

Upside: You pay 30% in down payment on an apartment which immediately jumps to 150% of the value you bought it for, so it's an investment which is immediately well in-the-money. Barely any taxes and transaction costs at point of sale and you're allowed to repatriate your money afterwards.

Downside: You can only sell after 5 years. Also, we live in a $400/month rental apartment now because I'm stingy, but then we'd have to pay a mortgage every month of $1200, but we can easily handle that, that's still only $600 per person.

Basically: If in five years the apartment's value hasn't appreciated at all (so still at 30.000 RMB/sqm in January 2024), then at the point of sale we still get back almost twice the amount we put in: down payment + 60 monthly mortgage payments + basic refurnishing and maintenance. So if the market goes flat, you make 1.7x your investment. If it hits 40.000 RMB/sqm which everyone thinks is likely, you make 2.6x your initial investment.
Bonus: next to doubling or more of your money you also get to live in an apartment.

I have a decent sum in a stock portfolio and I would still contribute to it, I would just allocate a bit less towards it than now.

Did I miss something?
Could you provide me reasons not to do this?
Would you take this gamble?

HEDGEFUNDIE
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Re: Buying an apartment in China

Post by HEDGEFUNDIE » Sun Oct 21, 2018 12:35 pm

Currency risk. Your RMB asset might appreciate 10% a year but the RMB has depreciated 10% against the USD in just the past six months.

Regulatory risk. The Chinese government has been heavy-handed in the past in trying to cool property markets. You may find real estate liquidity to be constrained at the worst possible time, when you are trying to sell.

What kind of interest rate are you getting on that mortgage?
Last edited by HEDGEFUNDIE on Sun Oct 21, 2018 12:42 pm, edited 2 times in total.

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ResearchMed
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Re: Buying an apartment in China

Post by ResearchMed » Sun Oct 21, 2018 12:37 pm

Also, what about that 2.5 yr min on the current assignment, combined with the "can't sell" for 5 years?

Is that at all likely to be a problem, from your perspective or perhaps employer's?

RM
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FireProof
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Re: Buying an apartment in China

Post by FireProof » Sun Oct 21, 2018 12:44 pm

Purchase prices are insanely out of wack compared to rent in China, which would give me pause personally, although of course there's no reason to believe that will change completely, given that it's largely cultural. Still, to the extent that those prices are an expectation of infinite growth, there might be some risk.

123
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Re: Buying an apartment in China

Post by 123 » Sun Oct 21, 2018 12:53 pm

In the US there are special "low income" housing offerings. In all of the ones I have read about there are usually special conditions involving transfer or sale of property that largely prevent the "low income" person who purchased the unit from profiting a whole lot from the sale. So in your area you should explore all the conditions that could apply to your particular unit at the time of sale. As an incentive for desired residents to stay they may be making desireable housing available but it is likely their intention is not to let you skip out after 5 years with a wad of cash. In the US "low income" housing often uses things like "silent 2nd mortgages" to restrict resales (these "silent 2nd mortgages" are held by the housing authority). If wads of cash will be freely availalbe they are generally scooped up by the promoters themselves.
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denovo
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Re: Buying an apartment in China

Post by denovo » Sun Oct 21, 2018 12:57 pm

Makane wrote:
Sun Oct 21, 2018 12:21 pm
Hi all,


Me and my girlfriend seem to have found a nice deal


Did I miss something?
I would not recc. buying property with your girlfriend jointly if that is what you are planning on.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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wabbajack
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Re: Buying an apartment in China

Post by wabbajack » Sun Oct 21, 2018 2:17 pm

HEDGEFUNDIE wrote:
Sun Oct 21, 2018 12:35 pm
Currency risk. Your RMB asset might appreciate 10% a year but the RMB has depreciated 10% against the USD in just the past six months.

Regulatory risk. The Chinese government has been heavy-handed in the past in trying to cool property markets. You may find real estate liquidity to be constrained at the worst possible time, when you are trying to sell.

What kind of interest rate are you getting on that mortgage?
Cultural risk. Chinese have a cultural view that renting is for losers. They need to buy in order to signal that they've "arrived". Many private rental properties in the Asia-Pacific region are bought by Chinese who think that rental income will offset all the costs of ownership. They discover too late (if at all) that the market price of a rental is too low compared to the market price of buying.

OP mentions their current small rental is $400/mo compared to the new mortgage of $1200/mo. What is the cost of renting a comparable apartment that you would have bought?

This is why there are special government programs like lotteries for buying. I would give you all the normal home ownership cautions, but this one is enough. Take advantage of the inefficient markets. Keep renting.

majiaknight
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Re: Buying an apartment in China

Post by majiaknight » Thu Oct 25, 2018 12:10 am

The Chinese RE market is highly regulated and gov policy driven which may restrict purchasing or selling at any time overnight by local gov. Chinese banks also have tightened the foreign currency exchange rules to control capital outflows due to the trade war with US. I have several Chinese friends complaining increasing troubles in transferring borrowed money from their parents to the US for house downpayment. Besides, as you can't sell it before you leave China remote (oversea in your case) rental management could also be challenging in China not to mention the extremely low rent-to-price ratio.

IMHO it's not worth it after weighing in all the major risks including bubble-level RE price, currency depreciation and capital control.

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Lancelot
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Re: Buying an apartment in China

Post by Lancelot » Thu Oct 25, 2018 3:07 am

I've lived (mostly) in Asia since 2002; I can't speak about China but I'm living in the Philippines now and I would not consider buying. Rent is cheap and my perception of the legal system here is that it is inefficient... to be diplomatic :) Other than Singapore, Australia or New Zealand I would not buy property in Asia. But that's just my opinion so good luck to the OP.
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minimalistmarc
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Re: Buying an apartment in China

Post by minimalistmarc » Thu Oct 25, 2018 3:17 am

Do you trust the Chinese government?

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OptimusPrime
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Re: Buying an apartment in China

Post by OptimusPrime » Thu Oct 25, 2018 4:24 am

Property asking prices in China going DOWN now!! Banks stricter at lending now and wages/job security under pressure with the trade war. Stock market been terrible also, a cold wind is blowing. Do your own local research in your area!

Combined deed with a Chinese citizen?, unmarried? dodgy, they will always win any legal battle in China if things go pear shaped. You're just a temporary guest and don't ever forget it.

RMB could devalue so your real profits in USD affected massively.

Those special zones often have major selling restrictions to prevent speculators.

How much will any profit be taxed and how will you get your money out of China ?

Chinese real estate is scary enough, a real Ponzi scheme at the moment, with all the players involved.

When will the apartment be ready to move in? most places in China you have to pay all the deposit and start paying the mortgage for a few years until it is actually complete and habitable.

Too high risk for the potential upside.

CarpeDiem22
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Re: Buying an apartment in China

Post by CarpeDiem22 » Thu Oct 25, 2018 5:36 am

If things look too good to be true, they probably are. If government controls who buys and at what price, what is the assurance that they will not do so when you try to sell?

motorcyclesarecool
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Re: Buying an apartment in China

Post by motorcyclesarecool » Thu Oct 25, 2018 5:58 am

OptimusPrime wrote:
Thu Oct 25, 2018 4:24 am
Combined deed with a Chinese citizen?, unmarried? dodgy, they will always win any legal battle in China if things go pear shaped. You're just a temporary guest and don't ever forget it.
I wouldn’t buy residential real estate in my home country (whose laws I reasonably understand) jointly with a non-spouse. Period. Too much risk.

I’m not willing to say that OP would lose any legal battle automatically, but it seems reasonable that he’d be at a substantial disadvantage due to less familiarity with Chinese civil laws. OP, you state that you are fluent in the local language. Are you literate, or will you be dependent on a translation in something like a Notarial Certificate? From the POV an Anglophone who has perused PRC civil documents, I have found the official translations to English as found in Notarial Certificates to, ahem, lack precision at times.

If OP is literate in Mandarin and married to a PRC spouse, then perhaps the risk would be manageable.
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OptimusPrime
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Re: Buying an apartment in China

Post by OptimusPrime » Thu Oct 25, 2018 10:04 am

But you have forgotten that there is no rule of law in the PRC.....that's in part why Hong Kong is so successful.

gotester2000
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Re: Buying an apartment in China

Post by gotester2000 » Thu Oct 25, 2018 10:27 am

Buying with wife is fine. With girlfriend in a foreign country is high risk. Add to it currency risk, taxation and repatriation difficulties after 5 years when you are no longer staying there.
Mortgage payments in China and India are about 3 times rent, which is cheap.
Upside is leverage on down payment and buying at low cost.

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