By William Shen – TGC
According to The New York Times on 25 April 2014, wealthy Chinese property hunters spent a total of $22.6 billion on Australian property over the last seven years.
Despite a boom in Chinese investment in the residential property market, a significant portion of the aforementioned is made up of investments in commercial properties; retail shops, offices, hotels, shopping centres and development sites.
At the end of 2013 I visited Shanghai, Guanzhou, Fushang and some other cities in the GuangDong province in China. I spoke with a number of business associates and members of the Real Estate Association of GuangDong Province and asked the question: “Why are you interested in Australian commercial real estate?”
Many reasons were offered.
One reason discussed is the fact that land in China belongs to the State. All properties are lease held, which means they have a lease term of 70 years which is obtained via a land grant between the land user and Government Run Land Administration Department. After the lease expires, there is no certainty of what will happen to the land. The majority of the time, it depends on the sitting government’s policies. One common scenario is that land grants are renewed, but at very high rates.
Another scenario is that the Government may take the land back with no compensation to the land user. Not having any control once the lease expires creates huge doubt in potential landowners’ minds. If you are looking for a stable investment, which you can hand down to your children, these circumstances are less than ideal.
Minimal return on investment
In big cities like Shanghai, Beijing and Canton, all of which have huge populations, prices are very high and property yields are extremely low. For example, Shanghai plays host to some of the most expensive commercial properties in the world. Some areas in Shanghai and Beijing are said to be more expensive than in Sydney, with retail property returning as low as a 3 per cent yield.
As for cities not on this scale, where the populations are smaller and there is an oversupply, attempting to rent out a property as a landlord is very hard. This illustrates that in China it does not matter what grade of commercial real estate you invest in, it is very difficult to maintain a return through real estate.
There are also many wealthy Chinese that do not have confidence in the Chinese share market, especially in China’s current economic slowdown. They do not have the channels to invest domestically, so they look overseas to make investments.
In contrast, the majority of commercial properties in Australia are freehold, which means buyers can sit on them forever if they have the financial capacity to do so. Because this is the opposite in China, Chinese investors find the Australian market very attractive to purchase land. It is viewed as a long-term investment, not just for one generation but also for several generations to come.
Small business owners
From my experience, Chinese people both in Australia and China are very commercial minded. There are more and more small businesses opening up and being operated by Chinese people in Australia. Mortgage brokers, migration/educational agents, accounting firms and small law firms have acquired numerous office spaces in the Sydney CBD.
Chinese people also occupy a lot of retail shops such as cafés, restaurants and grocery shops. If they have the chance, these small business owners will buy the properties, with many already owning them. Some Chinese business people have the view their commercial property is a second business to them. This ensures the security that even if their first business is not profitable; the second business in commercial real estate will give them long-term prosperity, which also means capital gains.
With the trend to buy both residential and commercial property in Australia, Chinese buyers are becoming more astute regarding local property, various localities and varieties. I have found they like freestanding buildings with the potential of redevelopment. Low return on investment, or even if the building is not leased does not bother them too much. One of the Chinese owners I deal with, who owns a building in Sydney’s CBD keeps the building empty. He told me only if the tenant meets his requirements, will he consider to lease it out. The building in itself is an investment to him, having it with tenants is not a necessity.
From a Chinese investor’s perspective, Australia is a country where successful residential and commercial investments can be made. The Ministry of Commerce of the People's Republic of China (MOFCOM) (24 April 2014) recently reposted an article by The Australian, who reported that Australia has become the second largest and most sought after country to migrate to after the United States, and therefore, we need to prepare for the next wave of Chinese investment on Australian property.