China not on road to recovery
Rents have moved up much less than prices in China over the past few years. As a result, in five cities in China - Beijing, Chengdu, Guangzhou, Shanghai and Shenzhen - gross rental yields are now a modest 4.42 per cent, based on a sample of high-end used apartments...
Shanghai's gross rental yields average only 3.74 per cent. These are lowest gross rental yields in our China sample, but then Shanghai is the only city where apartment selling prices have apparently not dropped, according to the China Real Estate Index System (CREIS) and eHomeday. Shanghai residential asking prices average £1,878 per square metre (sq. m.).
Beijing apartments earn slightly higher gross rental incomes of around 4.21per cent. These are the country's most expensive apartments, with an average offer price of average £2,039 per sq. m. for the high-end used apartments in our sample.
Chengdu also has rather low gross rental yields, an average of 3.88 per cent. Chengdu apartments are the cheapest among the five cities, at £726 per sq. m.
The highest rental yields are in Shenzhen, where apartments in our sample earn gross rental yields of 5.69 per cent. The high-end used apartments in Shenzhen cost an average of £1200 per sq. m.
Guangzhou apartments earn mid-range gross rental yields of 5.41 per cent. Our sample of Guangzhou apartment prices averages around £1,080 sq. m.
What does "gross rental yield" mean? It's very similar to the Price / Earnings (P/E) ratio in the stock market. Just as share prices have a P/E range, house prices tend to fluctuate around a rental yield range, research shows.
The gross rental yield is the annual rental earnings / the value of the property.
So if the rent is £3424 and the property is worth £68,500, the yield is five per cent.
Our rule-of-thumb is that a gross rental yield of six per cent to seven per cent means a housing market is ‘fairly valued', though importantly, developing country housing markets usually have higher yields than developed, because of structural issues discouraging housing purchase such as the difficulty of getting mortgage finance.
Where yields (and rental costs) are comparatively low:
People will prefer to rent, rather than to buy
Investors are unlikely to ‘buy-to-let'
Rents will tend rise faster than prices
Conclusion: No turnaround in China's residential prices likely soon.
When the Chinese housing market was roaring ahead, rents moved up much less than prices. With the current market downturn, rents have dropped together with property prices (though slightly less). Gross rental yields now average a modest 4.42 per cent.
Why are Chinese rental yields so low? Prices in China surged till September 2007, and then paused - and have not substantially dropped since then, according to CREIS, which uses a hedonic methodology (eHomeday arrives at closely similar results).
How far do gross rental yields need to rise in China? China's gross rental yields of 4.42 per cent are lower than would be expected in a developing economy. They are low, also, compared to other economies with similar income-per-capita.
We conclude that until one of two events occurs - more residential price falls, or substantial increases in rents - residential prices are unlikely to begin a sustained recovery in urban China.
The Chinese Government has taken steps to support the market, such as temporarily suspending the business tax for residential property transfers, and encouraging cities to permit foreign purchases.
China's economy remains relatively strong, because of prompt Government measures. Consumption spending is strong, restaurants are full, optimism remains high.
However, gross rental yields are still too low. Therefore, it is unlikely that there will be a convincing upturn in Chinese residential prices soon, the Global Property Guide believes.
Source: Global Property Guide