North Central China Real Estate Association

North Central China Real Estate Association
Jiefang East Road 161
Changzhi, Shanxi 046000
Membership@NCCREA.com

Renting your Purchase

Renting your Purchase

Jeff LoCastro, September 4, 2011

Founder & President, NCCREA

Since the late 1980's when the Chinese government began the process of

economic reforms in an attempt to enliven their comatose economy, one

of the most dramatic of these reforms has been the notion of personal

"ownership" of real estate. However, this ownership is not the same as

is defined in the US specifically or in the west in general. The Chinese

form of ownership or concept of private property is fundamentally

different and will likely have profound effects on how the real estate

industry unfolds, how private property is defined and how the concept

evolves in this continued Revolution Evolution.

In China all land belongs to the People as administered by the CPC. The

People own the the land. All of it. If there are buildings on them, the

People own them as well. However, the "private property" reforms allow

individuals or corporations to "purchase" the real estate from the People

. . . for a limited time. For commercial uses the "purchase " is for a

period of 50-years. For residential purposes the "purchase" is for

70-years. Therefore, ownership in China is what would defined in the

west as a long-term lease. You can not purchase the fee simple

ownership of the property but rather the ownership of the right to

occupy the space, the dwelling, or improve land. Essentially, one

purchases the license for the real estate with a predetermined

expiration. Fee simple, as it were, resides with the People while the

license belongs to the "owner" with certain rights to improve and alter

as the owner may see fit (pending standard government approval).

This creates significant market and economic considerations. For

example, a developer purchases a large tract of land in bustling Tianjin

City from the local government and builds 3,500 luxury

apartments/condos on the land. The developer acquires the land for a

70-year period with the right to improve it. Let's suppose a typical

Chinese family purchased one of these luxury condos. They too are

purchasing a 70-year license for their unit. However, after 70-years

control of the land and improvements reverts to the Government. As

most Chinese do not have a "Route 66" mobility consciousness, they

generally tend to stay in one place for a long time so they may live in

this apartment for 50 years, raise their family, and eventually bounce

their grandchildren on their knees. Upon their death, with 20 years

remaining on their "ownership" to whom do they sell? What value does

the remaining interest hold? And with each passing year, what dips in

the motivations of "pride of ownership" going to take? In the west, for

example people tend to take good care and maintain their owned-home

as the future does not have an end-date as such; ultimate ownership

resides with no one but themselves or their assigns. This is not to

suggest that Chinese owners will not maintain their property, but rather

to submit that the psychology of pride of ownership will be tested with

each passing year on their license.

What does it all mean? It means that as the system stands, the only sales

industry (as opposed to the apartment rental industry) is likely to be in

new construction sales. In all probability the market for resales will be

non-existent. There will be no real estate brokers showing property to

potential buyers and the thousands of other industries and the millions

and millions of jobs that support the aftermarket sale of real estate will

likely never materialize. It means we have another China upside-down

world scenario: real estate prices going up on new construction, but the

value of each condo unit going down with each passing year . . . unless

the revolution evolution makes another adjustment.

Further, other than a handful of cities in China, e.g., Beijing, Shanghai,

Guangzhou and a few others, the profession of real estate broker does

not even exist. And in those cities these are commercial real estate

professionals working for Colliers, CB Richard Ellis, Jones Lang LaSalle and

the like leasing office and industrial space. In fact, outside these cities

the concept of real estate agent is completely unknown. To mention the

profession you are met with complete bewilderment. When the

concept is explained, most don't seem to even know what type of

follow-up questions to ask as the notion is so foreign as to be from Mars.

Renting your purchase for commercial projects does make some

economic sense as there is an obvious 70-year window in which to

derive returns. Buying the license, building a shopping center and

collecting rent is a good business. New apartment rental construction is

also a good business. Residential resale does seems a bit more

problematic. But the truth is that Chinese buyer's don't seem to mind in

the least. They want to "own." What happens in 70-years and its affect

on equity is a non-issue. Not because they don't care about money, but

rather the notion of equity is as foreign as the concept of the real estate

agent. At this point in the revolution evolution it's simply not important

to the Chinese buyer. If structured markets don't exist for equity, what

is the use of it.

To go from the forbidden nature of private property to even the

remotest convolution of ownership would have been unthinkable

35-years ago. But it lives and breathes. Given its current structure, the

resale market will likely never find an economic foothold and the

industries and professions it spawns will therefore never develop. Yet,

the control of real estate (if even for 50 or 70 years) is a strong lure.

Pent-up desire perhaps coupled with economic ability are the siren's

song. A large, growing population and economy where massive financial

markets and industries fundamentally don't exist sounds to some as

opportunity. And right now, renting your purchase is the ways it's done

in China. But stay tuned.

Contact the author at: Jeff@NCCREA.com or Jeff@CaliforniaSecured.com

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North Central China Real Estate Association
Jiefang East Road 161
Changzhi, Shanxi 046000
Membership@NCCREA.com