There is an allegory, oft-repeated in China. It goes something like this: An elderly Chinese woman meets an elderly American woman in Heaven. Both look very happy. The elderly American woman asks the elderly Chinese woman, "Why are you so happy?" The elderly Chinese woman answers with a smile, and says, "I am so happy that I was finally able to afford a big house after saving for 30 years," and then asks of the American woman, "What about you? Why are you so happy?" And to this, the elderly American woman replies, "I am so happy because I finally paid off the mortgage on my big house in which I had lived for 30 years."

To many, the traditional Chinese notion of consumerism, with its emphasis on saving and conservation, is unenlightened. Increasingly, modern thinking is the opposite - spend tomorrow's money today. Over several short decades, the Chinese have adapted to this trend, with a greater number than ever before becoming mortgage holders.

The total value of mortgages in 1998 was 40bn Yuan (£2.6bn); last year it was nearly 5 trillion Yuan (£327bn), a more than 100-fold increase in less than 10 years. As a result, both construction costs and the price of property in major Chinese cities have risen significantly.

Residential trends
Current residential ownership is hovering at just above 70% and, unsurprisingly, is considered a sign of wealth and social status, and a motivating force among the hard-working younger generation. 

As is the case in so many other regions of the world, home prices are quickly rising beyond the reach of the urban population.

 In just three years, prices have increased by 42% in Beijing - from 6 178 Yuan per sq m (or £37.86 per sq ft) to 8 792 Yuan per sq m (or £54 per sq ft), bringing the cost of an average 900 sq ft flat to approximately 745 000 Yuan, (or £48 688).

With the average salary in Beijing's urban areas around 3 000 Yuan (or £196) per month, owning a home can prove elusive and those wishing to buy have to budget. 

One consequence of price rises is that the luxury housing market has softened considerably, casting a future focus towards the affordable housing market, and also the senior sector. It is estimated that by 2040, 60% of the population will be older than 60, therefore increasing the demand for larger homes to accommodate multiple generations.

Despite the speed of technological, infrastructure, and financial services development, China's real estate industry remains immature compared to that of developed nations.

The Chinese have gone for quantity over quality and the resulting property nightmare is referred to as Strata Title. This is the selling of residential multi-family units with a 40 year lease on the land (all land is still owned by the Chinese Government) to individuals or families unit by unit.

Each owner has the right to keep, sell, or sub-lease his unit. The finite amount of time for these land leases creates an eventual penalty to the buyer, of course, and 40 years of mortgage payments is, in essence, money out of the door.

Where commercial property is concerned, it is a different story.  Buildings are going up in China's major cities like hotels on a Monopoly board - rather recklessly, without real thought for use and consequences down the road.

The process of building multi-use projects in China is often described as the Wild West, with developers striking deals through Government connections and a handshake, pushing commercial expansion to almost untenable levels. It isn't unusual to find land leases for commercial property structured for as long as a 75 year term.

For well-connected developers, this entire 75 year leasehold payment can be converted into a three-year term. Plans are submitted to the planning agency on a fast track, and construction loans are obtained. Then the rush is on.

There is no time for a market feasibility study or other critical research, as the building must be built and sold within three years to meet the developer's obligation to pay the land lease and reimburse the bank for construction costs. 

Once permits for construction are issued, it is very difficult to obtain change orders.  The construction path is held firm, and the merchant developer, who is building to sell, holds the short-term view to sell off all the components of the development as quickly as possible, with little attention to creating a smart tenant mix of retail stores, meeting customer demand, or undertaking proper property management and customer service.  In other words, projects of this nature are unlikely to provide any meaningful long-term value.

Beijing
Beijing, the capital of China, has experienced dramatic changes after becoming the host city of the 2008 Olympic Games. Developers and investors continue to aim for maximised profits from both residential and commercial developments, and more than 180bn Yuan (or £11.6bn) has been allocated by the Beijing Government towards the building of municipal infrastructure.

Economic growth therefore remains strong, reflected in the rise of Beijing's GDP in 2006, and an increase in urban resident per capital income growth of 12 per cent.

According to the most recent NAI global market report, property development investment in Beijing also rose - to £5.8bn in 2006, up nearly 17%, almost equally divided between residential and commercial/retail development.

In the prime office sector, rentals increased 8.2%, to £0.99 per sq ft per month, and retail space rentals increased to a high of £4.95 per sq ft per month. High-end residential rentals saw an average of 5% growth, to reach an average of £0.61, £0.84, £1.22 per sq ft per month in the apartment, villa and serviced apartment sectors, respectively.

As with any trend of rapid growth, though, there must come an adjustment, and in Beijing this is being seen primarily in the retail and office sectors, with many more vacant buildings becoming the norm.

There are concerns that following the Olympics a downward adjustment in both rental rates and pricing will begin in the final quarter of 2008, and last for two to three years.

Shanghai
Shanghai, with a population of more than 18m, is the largest Chinese city, as well as the world's biggest cargo port. More importantly, the city is the cultural and economical centre of China and has become the focal point of investment into China by multinational corporations.

Its GDP rose to approximately £63bn, up 12.4% year-over-year, through late 2006. In this same period, demand for office leasing accelerated, as foreign and domestic companies continued to enter and expand in Shanghai.

The entire inventory of new Class A office space - an estimated 5.4m sq ft - was quickly absorbed.  With overall commercial vacancies at 6% (and even lower than 3% in the Class A market), rentals in this area have continued to increase.

Prime rents in Grade A offices ended the year at an average of £1.88 sq ft per month and a high of £2.38 in some buildings, with an expectation for further increases in 2007 (NAI 2007).

Although most of the large developers in Shanghai are merchant builders, there has been an emergence of commercial buildings, too, influenced by investors from firms headquartered in Singapore and Hong Kong. Needless to say, these are encouraging indicators for Western investment and management opportunities.

One cannot understand the future without careful study of the past. Two hundred years ago, China had the largest economy in the world; today it ranks fourth.

Historically, it was a nation built on thrift and conservatism, with nearly half of every individual income saved.  Now China is joining most of the rest of the world by becoming a nation of spenders and investors, risk-takers and entrepreneurs.

To achieve a wise and pragmatic economic evolution in this country of 1.3 billion, it will be vital to create greater economic balance between sustainable development, trade, investment, and the environment. 

While China has serious challenges ahead in controlling the economy, addressing some of the highest pollution rates in the world, and a large aging population - as well as problems in energy, social security, health care, and education - it is a vastly different country than it was a generation ago.

It is estimated that by 2010, there will be more than 100 million outbound tourists, investors, and businessmen from China annually - an unheard of statistic just a short while ago.

The opportunity abounds for Western property professionals, investors, developers, managers, and entrepreneurs to being a part of this impetus for change and growth in a country ripe for relationships.  

Robert M. Taylor, CRE, FRICS, CPM is President of The REMM Group and Vice Chair of the International Membership Development Committee for the Counselors of Real Estate (CRE), the organisation for leading estate agents with whom RICS has a formal alliance to promote information exchange and foster an international network of likeminded professionals. Lu Gao, MBA, co-author, is currently director of REMM-China. 

For further info, please see external websites top right of page.