LONDON — This is the fourth month that Shen has promptly received the 2,600 pounds ($4,050) from his tenants. The newfound landlord bought a London flat in January, having calculated that even if he doesn't raise the rent, he'll be still able to pay off the down payment in just five years.
Shen is but one of the many affluent Chinese who has recently flocked to London to buy real estate. Barratt Homes, Britain's biggest residential developer with a 60% share of London's newly built housing market, has sold *250 housing units to overseas clients in 2012, which accounts for 15% of its total sales.
In addition to working with intermediary outlets, Barratt Homes is setting up its own offices. Other British real estate developers tend to sell their houses to Chinese only through intermediary agencies.
Shen, for example, bought his flat directly from Barratt Home's Beijing branch. The newly built two-room flat of 70 square meters in West London cost him 460,000 pounds ($716,500) with a 30% down payment — a requirement for foreign buyers. His 25-year loan for the remaining 322,000 pounds ($500,600) was from the London branch of the Bank of China, with an interest rate of 3.85%. With monthly mortgage payments of 1,673 pounds, the 2,600-pound rent will cover the mortgage, with plenty of surplus.
Catering to Chinese
Bai Xi, Chief Executive of Barratt Homes China, told the Economic Observer that about half of their Chinese property buyers purchase the houses based only on descriptions and photographs, while the other half make a trip in person to London. To cater to potential buyers arriving from China, the agency has set up a special Chinese client team and actively takes the initiative to arrange visits rather than waiting for them to make requests.
The first Chinese investors started showing their faces in Britain's real estate market only about five years ago. "In the beginning Chinese buyers bought houses to live in themselves, or for their children who were studying in England. But since 2012, we have seen lots of buyers saying that it's for investment purposes", said Qi Xiawei, the China branch manager for the Assetz real estate agency.
To better understand the Chinese clientele, Barratt Homes West London sales director will be traveling to China next month to learn about the ancient philosophy of Feng shui, and decide if the company's future houses will have to take into account its teachings. His agent once had a Chinese client who abandoned the purchase of a flat because the bathroom didn't have a window.
There are two central reasons why Chinese are so enthusiastic about London's real estate market, according to Bai Xi. First, before 2009, the British pound was weak against the RMB — 1 to 16, whereas now it's around 1 to 10. "This means a cost reduction of 30%," Bai notes. Second, before 2008, China's property market was still developing, and growing very fast. Now the prices in Chinese real estate have risen to a point that worries investors, who are looking for new places to invest.
From March to August this year, London's real estate market rose by 9%. The British press is already worried that such a rise may lead to a new property bubble, as occurred in 2008. However, Barratt Homes insists that London's property demand is far larger than the supply.
When Shen began to consider investing in property abroad, he had three choices: U.S., UK, and Australia. After various consultations, he decided that it would be London. Part of the reason was that his girlfriend had studied there before, but ultimately he believed the city offered the best return on investment. In comparison with Australia, foreign investors are not subject to capital gains tax in Britain, nor are developers constrained to sell real estate only to local people. Take Shen as example. If he sells his flat in London right now, he can make a net profit of 60,000 pounds ($93,300) without paying any tax to the British government. As for excluding the United States, he said American localities tend to protect the tenants more than the owners.
The long list
Before Shen signed up to buy the apartment, he got a very long inventory list from Barratt homes for sale. The potential buyer can type in the housing price and find out both what expenses and rent revenue to expect, as well as how much profit he could expect to make if he was to sell in five years time.
According to the estimation if Shen does sell the flat after five years, then after paying off the remaining mortgage and deducting the cost of the sale and revenue from the rental, he will make a gain of 137,374 pounds ($213,600) based on an estimated of 5% of housing price growth.
The huge profit Shen could make is also thanks to Britain’s policy toward foreign investors. Even before the financial crisis, the British government had already set forth regulations exempting foreign investors from paying property tax, whereas British residents have to pay from 22% to 27% of property tax for a transaction.
Some 60% of Chinese people purchasing houses in London do it for the purpose of investment. And most of them will sell off the properties after a certain amount of time. Meanwhile, the only tax they’ll pay is the stamp duty, which is progressive according to the price of the house. Shen paid 13,800 pounds ($21,500) — 3% of the flat’s price.
Whereas American banks are credit-based when giving loans, the Bank of China regards the cash flow of the client as most important. “All I had to do was to give them an account of my annual revenues, bonuses and a statement of account of my funds — nothing else,” said Shen.
Shen’s girlfriend is now in the process of applying to emigrate to Britain. If all goes well, this process should be completed by the end of this year. Still, the couple plans to continue to rent the apartment out for at least another two to three years, to maximize their gain.
*CORRECTION: An earlier version of this article gave incorrect 2012 sales figures for Barratt Homes. It has sold 250 units to overseas clients.