Raymond Ho

Executive Director, Vigers Asia Pacific Limite

The Beijing Games "are probably going to be the grandest games ever," said the Chief Executive of the Sydney Olympic Park Authority.

Judging from the sheer size and grandeur of the Beijing Olympics, I have no question Beijing is going all out for the Games. The questions as to how the city will manage its facilities after the Games had baffled me until I found out that those such as the dormitories to house the Olympic athletes are being quietly sold to buyers at more than HK$ 16,000 per square meter doubling the current average price in the city.

Many small businesses in Hong Kong, however, are bucking conventional wisdom and holding off on jumping to set up office in Beijing since most entrepreneurs perceive the real estate market to be fast-changing and the future operating costs including the office rent unpredictable. Here's what's really unnerving: Since China's authorities took steps to cool nation's real-estate market in 2004, the market recently has shown slow down in the growth of real estate investment demands, hinting towards a stabilization in price rise.

A number of control measures have been announced from the 2nd quarter of 2006. The People's Bank of China announced that from 28 April the required reserve ratio for commercial lenders was raised by 0.27% to 5.85% while the saving rate was changed.

On 17 May 2006, State Council has announced 6 measures to control the real estate market. After that, more details have been refined according to the above 6 rules. The most influential points include:

-- Flats of less than 90 square meters must account for at least 70% of units built in each project.

--Business tax will be levied on the selling price of properties resold within 5 years of the date of purchase.

--The maximum mortgage amount is 70% of the price of a unit. For the flats of less than 90 square meters, the maximum mortgage amount is still 80% of the price of a unit.

--The minimum supply area of cheaper and smaller commercial housing units and rental units should not be less than 70% of the total supply area.

The State Council has released 6 policies to guide and control the real estate market with the emphasis on developing more new property developments on cheaper and smaller commercial housing units and rental units for low-income families. In addition, it is clearly stated that flats of less than 90 square meters must account for at least 70% of units built in each project. This will ensure that the amount of cheaper and smaller commercial housing units and rental units will be largely increased in order to solve the housing problems of the low-income families. However, this policy has also affected the flexibility of development. Some developers have postponed development of their projects because their project plans have to be changed to build more number of smaller housing units and therefore their incomes have been decreased a lot. On the other hand, the supply of flats of more than 90m2 will be limited and therefore the price of those flats will have more rooms for increase.

Besides, the new policy has regulated that 5.55% business tax charged for sales of properties will be extended from less than 2 years to 5 years. Also, the ratio of initial payment of home mortgage has been restricted. So the willingness of residents to change their properties was reduced.

On the other hand, the People's Bank of China announced in June that from 5 July the required reserve ratio for commercial lenders was raised by 0.5%. Furthermore, on 21 July, such reserve ratio was further increased by 0.5% to 8.5% starting from 15 August. It is believed that the People's Bank of China concerned the growth of lending and it was hoped that the increase of reserve ratio will reduce the amount of lending from the banks.

"Our latest research reported that during the first quarter of 2007, Grade-A office rent in Beijing, Shanghai and Shenzhen rose by 1.1%, 8.2% and 7.7% respectively. The sales market recorded average price rises of 4.3%, 11% and 15.6% respectively. During the same period, the residential price recorded a 3%, 5% and 6% quarter-on-quarter increase in Beijing, Shanghai and Shenzhen respectively. The rental increases were 1%, 2.7% and 0.7% accordingly."

The average GDP growth in this quarter in the above three cities exceeded 12%, almost doubling than that of Hong Kong. Quarter on quarter rental growth of the Grade-A office in these locations has achieved level in the range of 0.6% - 2.7%. Scrutiny of the Government's anti-speculation policy has resulted in such observations:

There was some blind and reckless atmosphere in the market, and since the government's tightening up, the sentiment tended to be wait-and-see. Since the start of 2004, hyper-investment is encouraging a frenzy of construction and expanding skylines. Chinese Government sought to curb buildings' excess. Tightened capital fund and lower expectations on price rise slowed the construction rate of the office projects, leaving a massive size of under-construction projects. However, restricted by the fixed construction cycle, developers have to expedite the construction works in the following months, which will boost the supply and thereafter lower the price growth.

Like my worried clients, you might frown upon the strong demand for Grade-A office that will continue in the medium-term. My research department has revealed to me the total stock of office in Beijing is expected to reach 13 million sq.m. in the 1st half of 2007. The stock for Grade-A office in Beijing recorded 6.4 million sq.m. in the 1st quarter of 2007.

Which means?

The supply of office is very sufficient.

Currently, the government's administrative decisions have shown effect in curbing the acceleration. Guided by the policy, Grade-A office price increase, for instance, will decelerate to around 5 – 10% by year-end, compared with over 10% price growth from 2005 to 2006. The office market is still in the sweet spot as the growth prospects are good and stable especially compared with that in Shanghai and Shenzhen. With more office space in the works, I am confident that Beijing's continuous supply of large floor plates will help you – and others planning to set up establishment in the capital city – to get a bargain.

Who else but the foreign business entrants will be the next after the starlet athletes to seize the Olympic torch?

(China.org.cn May 11, 2007)