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Chinese Landlords in London
Summary:When Shen began to consider investing in property abroad, he had three choices: U.S., UK, and Australia. After various consultations, he decided that it would be London. Part of the reason was that his girlfriend had studied there before, he also believed the city offered the best return on investment.

By Wu Haishan (吴海珊)
Issue 635, September 2, 2013
News, page 1
Translated by Laura Lin
Original article: [Chinese]

This is the fourth month that Shen Fei (a pseudonym) has promptly received the 2,600 pounds ($4,050) in rent from his tenants. The new landlord bought a London flat in January, having calculated that even if he doesn't lift the rent, he'll be still able to pay off the down payment in just five years.

Shen is but one of the many affluent Chinese who have recently flocked to London to buy real estate. Barratt Homes (邦瑞房地产), Britain's biggest residential developer with a 60 percent share of London's newly-built housing market, has sold 2,250 housing units to Chinese clients in 2012, which accounts for 15 percent of its total sales.

In addition to working with intermediary outlets, Barratt Homes has already set up its own offices in China. Up until now, most other British real estate developers have tended to sell their houses to Chinese investors through intermediary agencies.

Shen, for example, bought his flat directly from Barratt Home's Beijing branch. The newly built 70 square meters two-room flat on the banks of the Thames in West London cost him 460,000 pounds ($716,500), 30 percent of which he was required to handover as a down payment — a special requirement for foreign buyers.

His 25-year loan for the remaining 322,000 pounds ($500,600) was from the London branch of the Bank of China, with an interest rate of 3.85 percent. With monthly mortgage payments of 1,673 pounds, the 2,600-pound rent will cover the mortgage and then some.

Catering to the Chinese Customer

Bai Xi (白兮), chief executive of Barratt Homes China, told the Economic Observer that about half of their Chinese property buyers purchase the houses based only on descriptions and photographs, while the other half make a trip in person to London. To cater to potential buyers arriving from China, the agency has set up a special "Chinese client team" (中国客户协调小组) and actively takes the initiative to arrange visits rather than waiting for them to make requests.

The first Chinese investors started showing their faces in Britain's real estate market only about five years ago. "In the beginning Chinese buyers bought houses to live in themselves, or for their children who were studying in England. But since 2012, we have seen lots of buyers saying that it's "for investment purposes", said Qi Xiawei (祁小玮), the China branch manager for the Assetz (安赛思) real estate agency.

To better understand the Chinese clientele, Barratt Homes' West London sales director will be traveling to China this month to learn about the ancient philosophy of Feng Shui (风水), and decide if the company's future houses will have to take into account its teachings. His agent once had a Chinese client who abandoned the purchase of a flat because the bathroom didn't have a window.

One interesting fact about the kind of Chinese investors that are buying property in London is that not all of them are from first tier cities like Beijing and Shanghai. Quite a number of these investors come from second and even third-tier cities including cities like Jining (济宁) in Shandong province and Shijiazhuang (石家庄) in Hebei Province.

Why London?

There are two central reasons why Chinese are so enthusiastic about London's real estate market, according to Bai Xi. First, before 2009, the exchange rate between the British pound and the RMB was 1 to 16, whereas now it's around 1 to 10. "This means a cost reduction of 30 percent," Bai explained.

Second, before 2008, China's property market was still developing, and growing very fast. Now the prices in Chinese real estate have risen to a point that worries investors. Many are now looking for new places to invest.

From March to August this year, prices in London's real estate market rose by 9 percent. The British press is already worried that such a rise may lead to a new property bubble, as occurred in 2008. However, Barratt Homes insists that demand for property in London far outstrips supply and there is no bubble.

When Shen began to consider investing in property abroad, he had three choices: U.S., UK, and Australia. After various consultations, he decided that it would be London. Part of the reason was that his girlfriend had studied there before, he also believed the city offered the best return on investment. In comparison with Australia, foreign investors are not subject to capital gains tax in Britain, nor are property owners constrained to sell real estate to locals. Take Shen as example. If he sells his flat in

London right now, he can make a net profit of 60,000 pounds ($93,300) without paying any tax to the British government. As for excluding the United States, he said American localities tend to protect the tenants more than the owners. Shen explained that in London the tenants are the ones that pay the local council rates of 2,200 pounds a year.

The Long List

Before Shen signed up to buy the apartment, he got a very long inventory list from Barratt of various homes for sale. The potential buyer can type in the housing price and find out both what expenses and rent revenue to expect, as well as how much profit he could expect to make if he was to sell in five years time.

According to these estimates, if Shen does sell the flat after five years, then after paying off the remaining mortgage and deducting the cost of the sale and revenue from the rental, he will make a gain of 137,374 pounds ($213,600). This is based on the assumption that housing prices increase by 5 percent over the coming 5 years.

Britain's policy toward foreign investors help increase the potential profits available to Shen. Even before the financial crisis, the British government had already set forth regulations exempting foreign investors from paying property tax, whereas British residents have to pay between 22 and 27 percent in property tax for a transaction.

Some 60 percent of Chinese people purchasing houses in London do it for the purpose of investment. And most of them will sell off the properties after a certain amount of time.

Meanwhile, the only tax they'll pay is the stamp duty, which is progressive according to the price of the house. Shen paid 13,800 pounds ($21,500) — 3 percent of the flat's price.  

Whereas American banks will examine your credit record when issuing loans, the Bank of China regards the cash flow of the client as most important.

"All I had to do was to give them an account of my annual revenue, bonuses and a statement of account of my funds — nothing else," explained Shen.

Shen's girlfriend is now in the process of applying to emigrate to Britain. If all goes well, this process should be completed by the end of this year. Still, the couple plans to continue to rent the apartment out for at least another two to three years, to maximize their gain.

The Challenge of Moving the Money

How to transfer funds out of the country can also be a problem for Chinese investors.

According to the regulations that govern foreign exchange in China, each individual is only allowed to transfer $50,000 worth of funds abroad each year.

When Shen decided to buy the apartment he first needed to put down a 10 percent deposit of 46,000 pounds. When he was given the keys to the place and obtained ownership he was required to pay another 20 percent or 72,000 pounds.

To transfer the money out of China he used the foreign exchange quota of four family members. However, for clients that wish to move even more money abroad, some financial institutions are able to offer special channels.

For example, a client can purchase a certain number of wealth management products from a bank and then a foreign branch of the same bank can use this investment as collateral to extend a loan to the client or directly deposit in the real estate agencies account.

That said, because of the risk involved, most Chinese people who purchase property in the UK will opt for investments of between 200,000 and 300,000 pounds.

News in English via World Crunch (link)


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