Austerity measures stem buying, but owners wait it out

PUBLISHED : Wednesday, 31 January, 2007, 12:00am
UPDATED : Wednesday, 31 January, 2007, 12:00am

Hong Kong investors remain optimistic on the mainland residential market

When Hongkonger Mr Hung made his first bet on the growth of mainland property last year, he did not expect his profit would be squeezed by a fresh round of austerity measures.

Although his 600,000 yuan, 60 square metre serviced flat in Guangzhou has gained 1,000 yuan per square metre, he may realise only a small profit if he were to sell his flat today.

A large proportion of his net profit from the sale probably will be eaten up by higher transaction costs even if he found a buyer willing to pay the market price.

The red-hot mainland property market has suffered from consolidation since Beijing imposed a series of measures to stem rising residential prices. A heavy property tax was one of the major measures to eliminate speculators.

There is now a 5.5 per cent sales tax on homes that change hands within five years of purchase, from the original two years; and 20 per cent capital gains tax, after deducting interest expenses, decoration and 5.5 per cent sales tax, on secondary sales.

The central government last week was considering introducing rates on property owners, the first time such a tax would be levied in the mainland. According to a mainland tax expert, the rates would be 1 to 2 per cent of a property's value a year.

'The transaction cost will double to about 10 per cent. It is higher than Hong Kong's 3 to 5 per cent charges for individual property sales,' said Land Power International Holdings chairman Michael Choi Ngan-min.

Now, Mr Hung would not advise any of his friends to invest in property on the mainland.

'Today, apartments are getting more expensive,' said Mr Hung, who is just one of the many local buyers that contributed 14.7 billion yuan in the mainland property market last year, up 11 per cent from 2005.

With a series of measures taming the residential market, Mr Hung believes investment this year would be lower. Other measures include steeper deposit requirements for non-first-time buyers.

Beijing has also imposed restrictions on property investment by foreigners, although it is uncertain if overseas Chinese will be affected, by far the largest source of the US$20.8 billion in foreign funds that poured into mainland real estate last year, according to the State Administration of Foreign Exchange.

Shrugging off the austerity measures, Mr Hung is in no hurry to sell his flat as he expects prices in Guangzhou will continue to rise.

'The price for my apartment has gained 1,000 yuan per square metre in the past year. The unit was leased to a Hong Kong tenant for about 2,000 yuan a month. The rental not only covers the monthly mortgage payment but also provides some pocket money as well,' he said.

Mr Hung has now changed his investment plan and will hold on to the serviced flat long term.

Property agents remain upbeat about the market outlook, saying the robust economic growth coupled with escalating land value and household income will propel housing prices in major cities.

Samuel Wong, a general manager at Midland Realty's Shenzhen branch, said the property tax would not deter Hong Kong and Taiwan investors who remain optimistic on the long-term prospects of the residential market. 'Most home owners will transfer the property tax to buyers,' Mr Wong said.

After a short period of consolidation in Shenzhen, he said prices and transaction volume had rebounded in the fourth quarter.

For the whole of last year, he said the number of transactions increased 20 per cent compared with 2005 while residential prices also jumped 15 to 20 per cent during the corresponding period.

'Compared with Shanghai and Beijing, residential prices in Shenzhen and Guangzhou still lagged behind. Some investors have shifted to southern China where they believe has better upside potential,' he said.

According to Land Power, Hong Kong residents spent 11 per cent more on mainland property last year, almost 50 per cent of which was invested in Shenzhen.

The agent made a bullish forecast that Hong Kong buyers would spend more than 17 billion yuan on property this year, against 14.7 billion yuan last year.

'Hong Kong spending on mainland homes will climb to a new high this year,' Mr Choi said.

He estimated residential prices in Shenzhen, Guangzhou, Shanghai and Beijing could see double-digit growth, given China's robust economy and strong domestic demand.

Last Friday, data released from National Development and Reform Commission indicated property prices in large cities rose an average 5.4 per cent year on year last month, 0.2 percentage point faster than in November.

However, the agents' bullish views have not convinced home seekers such as Mr 'Sunny' who runs a small boutique in Hong Kong, to buy a second-hand home in Shenzhen.

He was shocked by the high asking prices after spending a day looking for a flat near the Huangguang check point. 'The prices are outrageous,' he said.

He owns a 40 square metre unit in Huangguang which he bought last year for 330,000 yuan or 8,250 yuan per square metre, and wanted buy a bigger unit to upgrade his living environment and for investment.

'Hong Kong properties are too pricey. So, I decided to invest across the border last year,' he said. He also owns a flat in Causeway Bay.

During his flat hunting in Shenzhen, he saw a 43 square metre two-bedroom unit in the same housing estate that he lived in. The owner was asking for 580,000 yuan or 13,400 yuan per square metre.

'It is hard to believe home prices can jump at such a fast pace even with the implementation of measures to stabilise the residential market,' he said.

After learning that the asking prices had been increased by the inclusion of the property tax, he said he would shift to the primary market. A new project nearby offered units at an average price of 11,000 yuan per square metre, he said.

'It is reasonable and I probably will go for a new flat instead of second-hand apartments as I do not need to pay extra for the tax,' he said.