What You Need to Know...?
Pretty much like other financial products such as stocks/bank savings/government bonds, real estate in general with its unique nature has ever became a hot and more complicated financial derivative to some extent. It offers higher yield with less risks and reasonable liquidity especially in first tier cities such as Beijing, Guangzhou and Shanghai. Nevertheless, not all properties are investment vehicles, it can also be owner occupied. Therefore, you need to understand the type of landlord you are dealing with. It is crucial to distinguish them and have an idea so that your housing expenditure does not exceed the fair market rent.
Literally, owner occupier refers to those ones who purchased the property through equity, mortgage or a combination of both so he/she has the outright title. Another case maybe through conventional heritage. Under such circumstances, the property primarily serves as a shelter. Hence, the property status is generally in a poorer condition due to most of the properties were built decades ago with lagging behind technics and outdated building material at that time. There’s also short supply for new residential dwellings driven by scarcity of the land for residential development. Since most of the properties were acted as a shelter under such basis, there is little motivation to decorate especially labor costs and materials are skyrocketing in recent years other than some essential repairs.
On the other hand, taking a head lease and enjoying the value added profit by decorating the taken property and sub-lease to others for a higher rent has become a trend in the past few years. They were referred to the short-term investors because the head lease will normally last for less than 10 years holding period. This can be triple-win situation: the outright property owner may stay overseas or has another property somewhere else and would like to find a tenant who can produce stable income-stream and manage the property for them, the head leaser can make a profit out of it, and the ultimate tenant enjoys the benefit of capital that’s been spent on decoration by the head leaser. Again, there are a spectrum of head leasers and may adopting different strategies depends on their sensitiveness towards risks. Here’s a breakdown:
Core investors: There are many investor types in this category: ranging from wealthy individual to large property firms and typically leverage-averse. In their property portfolios are likely to comprise assets that possess sound quality consolidated by macro-economic factors such as robust populations and high employment rate, which in turn will produce stable income stream. Core plus investors employs a slightly higher level of gearing and looking at properties that are capable reaching high occupancy rate from an above-average foundation so a large sum of income can be secured with additional incomes that can be adjusted. The similarity between the core and core plus lies in the fact that both eyeing on properties that situated in the best location of the city- In this contest, mainly premium location in Huangpu, Xuhui, Jing’an and Lujiazui region in Pudong). Great transportation network in conjunction with highly concentrated office and retail sector underpins the robust demand for the housing market.
Value-added: Normally refers to property related SME or even some banks (China Construction Bank for instance) are now trying to diversified their business scope. Value-added players tend to employ higher degree of leveraging and seeking properties with underlying opportunities to gain higher returns in a slightly lower premium location (Zhongshan Park/ Gubei in Changning district, Hongqiao zone in Minghang district and North Bund in Hongkou district, etc.). For instance, acquiring properties and capitalizing on countercyclical variable followed by asset management improvement and mediocre refurbishment. In other words, taking the head lease with a higher price in economic downturn that has a great potential to drive values in the near future, this can be the case where property owners need money but reluctant to sell their reasonable quality assets for an under-market price unless bids are around the break-even point, whereas the bids do not appear to match the market landscape. Usually this type of lease contains heavy penalty for breaking a contract as head leaser need to be assured the outright owner do not change hand when the property market turns into a landlord market.
Opportunistic: unidentified speculators whose ultimate goal is to flip the house for appreciation. Differ from core strategy, it focuses on assets that are generally in egregious condition and situated in less developed area, such as Qingpu, Jiading and Songjiang. In addition, they are poised to gear up the most and willing to possess outright ownership. They hope to pursue the highest profits in return for more risk taking activities such as property demolishment and subsequent redevelopment or getting compensated by local authority facilitated by urbanization. They are less sensitive to rent receivable and usually letting their purchased property on short term basis while waiting for an appropriate time to sell the property.