A Real (Estate) Hassle

New regulations aimed at cooling speculation are throwing foreigners for a curve—some say unfairly

The “one residence policy”

A few months ago, Andrew Archison, a technology consultant from California, finally found a place in Beijing he could call his own. Like many of the luxury apartments that appeal to foreigners here, the one-bedroom near Chaoyang Park, in a complex called Chateau Regalia, wasn’t finished yet. Still, without much Chinese and only a scant familiarity with the city, Archison had landed an apartment in the world’s hottest and most convoluted real estate market, a system tangled in an increasing mix of market forces and decades-old government regulations. With “a big smile on my face,” he says, he signed his name and made his requisite down payment.

“Then, the bomb dropped: ‘No sales to non-Chinese citizens,’” the sales manager told him some days later. In his mind, nine weeks of scouting apartments and tens of thousands of renminbi vanished as fast as a block of unprotected hutong [courtyard homes]. He felt helpless. “Can you imagine the horror?”

It might have been just another bump on the rollercoaster ride of Beijing real estate, but Mr. Archinson had actually banged up against a set of regulations issued last summer by the central government aimed especially at stemming foreign property purchases. Intended as an “urgent” measure to cool Beijing’s steaming property market, the rules stipulate that a foreigner must have lived and worked or studied in Beijing for at least a year before buying a new apartment (and soon, perhaps, a second-hand one), and that they may only purchase a single unit for personal use. In addition, any profits from home sales must be registered with the government before being expatriated. The rules also close an old tax loophole by mandating that foreign companies investing in real estate have offices in China, and that foreign companies investing in projects worth more than USD 10 million put up more than half the capital. Though Mr. Archison eventually received his deed through some guanxi-powered rule bending, his housing fate still rests in the hands of the government.

Increasingly, home buyers from abroad are finding themselves similarly caught in a labyrinthine, anti-free market system that some call unfair, and perhaps unproductive. From message boards to boardrooms, foreigners have cried foul, claiming laowai discrimination. “And what if the rest of the world made it illegal for Chinese to purchase real estate?” one Internet comment read soon after the regulation was issued in July.

Experts meanwhile point out that the intention of calming the market is wholesome. “If that’s the aim of the government, it may not be an unreasonable policy to implement,” says Nick Jones, Beijing director of Knight Frank Property Consultants. “The question is whether it will actually work.”

Indeed, no one can question the fact that the need for lower housing prices is especially dire in Beijing – a crunch that officials claim stems from a spate of over-construction at the luxury end of the market and increasing market speculation, especially from abroad. The tent cities that have cropped up outside the Fifth Ring Road are only the most extreme symbols of a costly housing market, and the government has already committed to providing more low-cost apartments. But the greatest brunt of the market’s effects is being borne by a young middle-class, says Wang Xiaowei, a broker with real estate agency 5i5j. “Lots of Beijing’s young professionals, for personal financial reasons, can’t afford a mid-sized apartment at around 45-70 square meters in size,” which, Wang says, are in highest demand. But as much as he hopes for a slight cooling of the market to attract more buyers, Wang is mostly indifferent to the new rules aimed at foreigners – and not because he has few foreign clients. “The real estate market for foreigners is quite minimal, and much of the money coming into the market is from Chinese investors,” he says. “I don’t think [the policies] will work.”

Considering that foreign buyers make up a mere 5 percent of real estate investment in Beijing (and only 12 percent of foreign investment in Beijing real estate goes into residential property), some say the rules are aimed at the wrong people, with little effect on the market at all. “In a way, it’s a public appeal to Chinese sentiment,” says Anna Kalifa, associate director and head of research at real estate consultancy Jones Lang LaSalle, of the government’s move. “There’s this media perception that foreigners are buying up everything, but the fact is that foreigners don’t make up a huge part of the effect.” Instead, domestic investors, and especially locals, are the actual source of the market’s “hot money,” she says. Only 15 percent of investment in the “top luxury category” in Beijing comes from abroad, while 88 percent of all Beijing housing – “the good, the bad and the ugly” – is purchased by Chinese citizens, she adds. “I’ve met many Chinese who own three apartments in Beijing, but I don’t know one foreigner who does.”

Another group of big buyers are Chinese from Hong Kong, Macau and Taiwan. But unlike non-Chinese foreigners, overseas Chinese are not affected by the one-year residency rule. And while the law requires overseas Chinese to use their property for their own use, it’s unclear how that – or the rest of the regulations – will be enforced.

So far, experts say this sort of vagueness has meant that, no matter where you’re from, dodging any of the new regulations is possible, somehow. For Mr. Archison, it was a matter of going to another sales manager, with fingers crossed. “I have no idea what discussions were taking place behind the scenes, but the sales agent assured me it would work out.” Says Kalifa, “a sale is a sale is a sale” to agents, developers and landlords. In other words, where there’s a will – and luck, guanxi and hard cash – there’s a way.

For potential buyers, it’s a question of how much of those things you have. “There’s always going to be a gap” between regulations and enforcement, says Phoebe Gluyas, a manager at property investment firm Sinolink. For instance, banks and landlords – those presumed responsible for enforcing the regulations from the start – are unlikely to keep track of whether an owner is using a property for their own use.

Although they have not necessarily made buying a home impossible for foreigners, the new rules have had one definite effect: purchasing property has certainly become more expensive. “Once there are rules like this, people,” as in real estate agents, lenders, developers and landlords, “can simply demand more money,” says Gluyas. To get around the one-year residency requirement for instance, foreign individuals and companies must arrange to have their purchases registered as assets of a local company, rather than as personal assets. “It’s a loophole we have used before,” says one agent. “Now the prices have just gone up.”

Another deterrent issued last summer has also made things more expensive: the minimum down payment for foreigners purchasing new apartments larger than 90 square meters has been raised from 20 to 30 percent of the unit price. Meanwhile, based on the government’s recommendation, many banks have upped their deposit and lending rates for those intending to take out a mortgage. This is what’s really a pain for foreigners,” says Kalifa. “If you have your eyes set on a home, these sorts of changes would push back your plans a bit.”

Already, buying an apartment in Beijing is a confusing and frustrating process. Littered with multiple bank trips, long waits, and a hefty dose of uncertainty even for the most grizzled China hand, the process is said to take at least a year – six months just to find the right place, plus another six to close the deal. The new national rules only make purchasing more Byzantine, paper-heavy and costly, analysts say, capable of deterring purchases by middle class foreign residents. “People living here for a few years and interested in investing just don’t have the money,” says Kalifa.

For those who do have the money, experts advise homebuyers use added caution – even when sellers promise that the new rules don’t matter. Using an escrow account to transfer payments and a good lawyer with bilingual abilities are two of the most crucial tools. (“And always wait until the seller has the deed in hand before buying,” warns Kalifa). And for those who currently own property, the new regulations may also throw a wrench into future plans. The government has levied a 20 percent capital gains tax on sales of second-hand properties, and imposed a 5.5 percent resell tax on units sold within five years of purchase, up from the previous standard of two years. The new rules also state that foreigners must obtain government approval before repatriating any proceeds of property sales or rentals. And for anyone considering selling their upscale property, the new market restrictions mean they could be selling to a tougher market.

According to recent reports, prices for housing throughout Beijing saw their lowest month-on-month increase on record, .03 percent, in October. Still, say analysts, the market outlook for Beijing remains strong in spite of the new rules. Property prices for upscale housing are expected to continue their rise. “In the real estate market in general, we saw a bit of a quieting-down of the residential luxury sector, but it’s starting to go back up now,” says Oliver Thirwall, a senior real estate manager at institutional investment firm GSS. Buyers’ attention has shifted to second-hand properties, which are currently unaffected by the rules, while demand has remained high even for new property centered around the Central Business District and Finance Street in Xicheng. “I don’t think [a slower rise in sales] is a long term thing at all,” he says.

To many, it’s a sign that the new rules are ineffective. Despite government assurances, the vice-chairman of the Beijing Real Estate Association acknowledged to the China Daily last month that the regulations have achieved little success. In part, experts say, that’s because the property market is so heavily driven by local buyers and developers, whose appetites continue to grow along with the city’s booming economy (13 percent a year) and skyrocketing salaries (11 percent). “You just can’t have that type of growth in massive infrastructure investment and expect the housing market to only grow one percent,” says Kalifa.

In addition, the new restrictions are easily avoided by large companies, which the government partly blames for driving the property boom through their investments in luxury properties. While the cost of doing business may have risen, interest in Beijing’s real estate sector hasn’t faded, and large investors have the capital and expertise to wade through new policies that small buyers do not. But the ones hit hardest may be the small foreign buyers and investors who have lived in Beijing for years and now find themselves lost in a sea of double-talk, added paperwork, and high costs. Says Sinolink’s Glyuas of the rules: “It’s aimed at the wrong people.”

The experience of people like Andrew Archison, the buyer of the apartment near Chaoyang Park, proves just that. “I'm not in this for the speculation … but these types of rules leave a bad impression for someone who wants to invest in the people and the culture of China – the law has made it hard for me.”