ADELAIDE REAL ESTATE – WHAT CHINA THINKS
On a recent trip to the Chinese mainland the writer had a unique opportunity to find out what 20% of the world thinks of us.
Going to Hong Kong has, for Australians, been something akin to going to Bali; we have known them as popular places to go discount shopping but they have not seemed like parts of mainstream Asia. Bali is as different to Indonesia as Hong Kong is to China. For me the task was to find out more about mainland China.
Chinese people from Hong Kong have been a part of the life of Adelaide since ‘almost forever’ but Chinese coming from the mainland in any significant numbers have been a comparatively recent phenomena yet they and China in general are having an increasingly significant effect on us. I was keen to understand how Adelaide real estate fits into a larger world market with the goal of selling Adelaide properties in China.
WHY DO WE WANT CHINESE BUYING HERE?
Before I left in March 2015 some people asked, “Why do we want Chinese coming here to buy our homes because they will only inflate prices and push locals out of the market.”
The fact is that Chinese nationals, and other foreign nationals, are restricted by the Foreign Investment Review Board (FIRB) to buying off the plan or brand new homes. The logic is that they must contribute to increasing the country’s housing supply by building new homes because we have a significant under-supply. Locals therefore have the market in established homes all to themselves.
But obviously too many foreign purchases of new homes could drive prices up for this part of the market. Any fear of this happening has been projected from the eastern states because this has not happened in Adelaide yet.
An article dated 14 October 2014 entitled, “Zombie economics: the notion China is to blame for Australia’s property bubble refuses to die” appeared on www.theconversation.com where James Laurenceson said;
According to FIRB, over the period 2009-10 to 2012-13, approvals for Chinese investment in Australian real estate totalled $16.6 billion.
At first blush this seems an impressively large figure. But it is actually less than 10% of the total value of foreign investment approvals in the sector.
Approvals to Chinese investors have lagged behind those from the United States. They have also not been much more than those from the United Kingdom, which has an economy around one quarter the size of China’s and less than 5% of the population.
And we must remember these figures are for the whole of Australia of which Adelaide makes up a small part so the impact on our market would be minimal.
It is the opinion of this company that we should be very happy to assist investment or immigration of any foreign national who does not have an extreme political, economic or religious agenda and this includes the Chinese. We see them as a highly desirable addition to the fabric of this country. They have historically shown their willingness to assimilate with their adopted country and as such we gladly welcome them to Australia in general and Adelaide in particular.
ADELAIDE & SHENZHEN AN UNLIKELY COMPARISON
My trip was launched from Hong Kong into the closest part of mainland China, the city of Shenzhen. It is only a 20 minute ferry ride from Hong Kong but it’s a world apart.
The rows of 30 storey apartment buildings may be be similar but there is an order and a calm in Shenzhen that comes from a city that was planned almost from the ground up, like Adelaide, whereas Hong Kong, Sydney and Melbourne, grew like an organism piece by piece with little real forward planning.
After the leader of China, Deng Xiaoping, visited Singapore and met the Prime Minister, Lee Kuan Yew, in late 1978 he decided that Singapore would be the model for the development of China’s cities and economy. He was greatly impressed by the beautiful, clean, and dynamic garden city, especially its urban construction and the Build-To-Order (BTO) system. As a consequence in 1980 Shenzhen with its then tiny population of just 30,000 was declared China’s first Special Economic Zone.
Shenzhen soon became China’s fastest growing city and would have its highest population density.
Shenzhen covers around 1997 square kilometres which is just over 9% larger than Adelaide at 1827 square kilometres but whereas Adelaide has about 1.3 million people Shenzhen has maybe over 15 million, including temporary residents.
The similarities between Adelaide and Shenzhen at first seem unlikely but gradually they start to become apparent.
Both Adelaide and Shenzhen are cities that were designed from the ground up.
Shenzhen has a central business district much like any big city with all its associated problems created by vehicles but as you move out from the centre you will notice a comparatively relaxed lifestyle, like Adelaide, with few traffic jams, little congestion, small queues and an expectation that life can be easy.
Construction is banned on 45% of Shenzhen so that parks, gardens and pubic space dominate over buildings and highways. Even bikes are relatively few with public transport from buses, underground railway and simply walking taking pride of place. The feeling is of a city that was built during the era of the car but that kept its worst vices in check. Being a compact city good facilities are close to everyone so the need for cars is greatly reduced.
Adelaide was also a city that was inspired by a single visionary, Colonel William Light, but this was back in 1836 when horse transport dominated with the result that now it has to fight for its sanity with the car. It has been far more successful than Sydney and Melbourne in achieving this but nowhere near as successful as Shenzhen.
The speed limit in Shenzhen on minor residential roads is 30km compared to 50km in Adelaide. In many places there is a dedicated road for cars with a separate path for bikes and another for pedestrians all divided by manicured miniature hedges. We would hate this speed limit In Adelaide but with everything so close the 30km speed feels just right. Unfortunately drivers rely a bit too much on their horns but certainly not as much as in Bali. Without a doubt, though, we would feel quite at home with the order, control, management & friendliness there.
SHENZHEN REAL ESTATE AGENTS
So I met with Tina from a company that aspires to become the leading real estate agency in China.
They had a map of the world in their front reception which had various markers in Europe, China, 1 each in Malaysia and the USA but 2 in Australia which were predictably Sydney and Melbourne.
Her original email to me said in part,
Even though we don’t know much about Adelaide and its property marketing situation now, we have great interest in communicating with you about the two aspects. Since we have some clients who want to buy property in Adelaide, I hope we can meet when you arrive in China, and I expect more communication between us and future cooperation.
And so after 2 meetings with them I was invited to return to Shenzhen in 5 weeks to present our properties for sale during a 2 day forum of 500 investors. This was an event that would be advertised extensively on TV in China and would have some big financial backers. There would also be developers from Sydney and Melbourne presenting what they had. They expected to sell 50 properties so the question was how many of those 50 could potentially be sales from Adelaide.
I also travelled to the city of Guangzhou, formerly known as Canton, which is about 120 km northwest of Hong Kong. It has a population about the same as Shenzhen but otherwise the difference between these 2 cities is marked. You will notice immediately that this city is dominated by vehicles and congestion and lacks the sense of peace in Shenzhen. Little things stand out like the taxis that have metal cages behind the driver. Citizens of Shenzhen expressed their feeling that this is not a place they would like to live in. Maybe that is just their civic pride showing but I could relate to what they were saying; the pace of life here seemed so much faster and impersonal.
I visited an immigration agent here with a front reception area displaying a huge photo of Sydney Harbour and had a video presentation from a Sydney agent on a loop.
I went into a private meeting with two company representatives including the Business Development Director. Like the previous company they confessed to knowing little about Adelaide and immediately everything I said about Adelaide was thrown into sharp contrast with Sydney. Their investors liked the 20% market increase Sydney had last year so Adelaide’s 4.5% was not in the running.
ADELAIDES LOWER PRICES NOT ENTICING TO THE CHINESE AGENTS
Sydney’s higher sale prices also benefited this agent because they could get up to 4% of a sale in commission. This meant that for a sale of say $700,000 their commission would be $28,000. If we assumed the Sydney agent was getting something similar that meant the Chinese investor was paying around $50,000 or more in commissions!
Although buyers might like lower prices the agents who were selling to them profited more from higher prices because commission payments were based on a percentage which is the norm. So a cheaper $500,000 sale would only net them $20,000. Since we could not talk directly to the local buyers we were at a distinct disadvantage here.
I suggested there was some feeling that the eastern capital cities might be slipping into a real estate bubble which could burst resulting in those 20% increases heading into the negative whilst Adelaide will likely remain stable. That is conjecture, of course, but if true it would mean that Adelaide could yet become an attractive market. Not surprisingly these agents will stick with Sydney for the time being.
Looking at more precise figures now such as a report ‘Australian Housing Outlook 2014 -2017’ prepared by BIS Shrapnel for QBE in October 2014 it suggested that over the next 3 years the increase in Median house prices would be; Sydney 9%; Melbourne 4.9%; Brisbane 17% and Adelaide 6.4%. But it is a bit more telling that in the last of these 3 years in 2017 the change will be; Sydney (-3.3%); Melbourne (-0.7%); Brisbane 1.3% and second only to Brisbane will be Adelaide 1.1%.
Perhaps the emphasis should not be to have Adelaide compete with Sydney, Melbourne or Brisbane so much as to offer it as an alternative in the way that a tropical holiday is not really competition with a European tour of historical sites; they are just different and offer different things to different people.
THE McDONALDS ARGUMENT
Why buy an inferior product? Adelaide might not seem very attractive on the surface to these immigration agents but then consider the philosophy behind McDonalds.
When I saw a McDonalds store in Shenzhen amidst all those fabulous local restaurants I wondered how McDonalds first rationalised their move here. How did their executives sell the concept of marketing fast food to the Chinese who are renowned to be very particular about what they eat?
Is there something about poor quality, tasteless, low nutritional food served at armpit temperature that is fundamentally so irresistible that it must inevitably infest the entire globe? No, I suggest that McDonalds success has more to do with marketing and ultimately about offering consumers choice.
Even royalty don’t wear tuxedos and bow ties every day, sometimes they like to sloth around the palace in shorts, singlets and $4.95 fluffy slippers.
The lines at McDonalds were as big as anywhere else but I couldn’t force myself to join them. But don’t take this argument too far because Adelaide is not an inferior market it’s just different and may even be considered superior in that it offers a more relaxed and more affordable lifestyle than in many parts of Sydney & Melbourne.
My time here did identify clearly who was buying;
THERE ARE THREE GROUPS WHO SEEK TO BUY IN AUSTRALIA
- Investors who either do not have a lot of confidence in the long term suitability of the Chinese market and/or who simply want to have a more diverse portfolio.
- Those looking for a stable residence for their children studying in Australia
- Those looking to buy as a stepping stone to immigration.
We might suspect that groups 1 & 3 will, more often than not, choose one of the eastern cities but Adelaide has a big international student population so group 2 will be our initial market.
As the market changes in Australia and if we continue to say more good things about Adelaide we will increasingly see groups 1 & 3 come to us.
Under the Chinese Communist system property ownership is limited. Any citizen can buy a home but they only have 20 years to pay off any loan or risk it reverting back to state control. Nevertheless ownership will revert back to the government in 70 years anyway. For commercial properties controls are tighter; any loan must be paid off in 5 years and ownership will revert back to the government in 50 years. This follows the communist dogma that does not recognise private property; all property is owned by the state.
These time frames for to occupy residential & commercial properties would exceed what most people need. Most people would never own a house for more than 70 years and their working life would most likely be less than 50 years. But the time frames to pay them off are not so generous; they clearly favour the rich. There is also a genuine desire among all people to create intergenerational wealth for their families by owning property for the long term. Investing in a country like Australia therefore becomes attractive.
There are also varying restrictions on owning a second home in China. Currently only Beijing, Shanghai, Guangzhou, Shenzhen and Sanya still have these restrictions but rules change which is something investors don’t like; stability is always desirable.
The National People’s Congress (NPC), China’s top legislature, and the Chinese People’s Political Consultative Conference (CPPCC), China’s top political advisory body, held their annual meetings in Beijing in March. The emphasis was upon stabilising the economy and numerous measures were passed to bring this about including setting a goal for a 7% growth in the coming year with a 3% increase in the CPI. Predictably they did not see this downturn as a problem saying there is enough growth to sustain employment but this may well give a boost to further movement of money out of China into foreign real estate markets.
Forbes magazine lists the 10 most popular countries that Chinese invest in as;
1. USA 2. Australia, 3. United Kingdom 4. Singapore 5. Canada 6.New Zealand 7. Germany 8. Thailand 9. Portugal 10. Cyprus.
Upon returning to Adelaide I was advised that the Shenzhen Real Estate agent had decided to conduct their investor forum with only one Australian company so both Melbourne and Adelaide were discarded. The choice, for them, would eventually be between Brisbane and Sydney.
These set-backs should be expected since making solid business relationships will take time and the Chinese need to know more about Adelaide first. We all like to stick with the familiar until we learn there are better options.
We need to tell China things like; Adelaide has made it to a UK newspaper’s list of best places to live overseas. On 22 March 2015 the Sunday Times published an article, “Best Places to Live in the World: Earthly pleasures” where it described Adelaide and Australia’s best kept secret. And there are many other similar quotes we can relay.
The more they hear things like this the sooner Adelaide will become a destination of choice.
Bringing buyers to the Adelaide market can only boost our economy. We are so far away from being in an overheated market that at this point it is not worth considering.
We should not be afraid to engage in this apparently impenetrable market because of competition from Sydney and Melbourne and even Brisbane because we are offering something different.
We are offering them what in some ways, I thought, was the Shenzhen of Australia; Adelaide.