Buy vs. Rent Calculus for Different China Property Types

Market Insights
by CNBW member



Buy vs. Rent Calculus for Different China Property Types
In Shanghai an apartment that costs USD 1 million typically rents for around USD 1,900 per month, while an office unit that costs the same typically rents for around USD 3,800 per month. Where does this difference come from? Have we discovered a rule of thumb, that when it comes to property in China one should rent residential but purchase commercial?

Even greater contrasts arise if we compare factory buildings to commercial or residential properties. Let’s say three tenants are paying a monthly rent of USD 10,000 per month for, respectively, a factory, an office and an apartment. How much it would typically cost each to buy their property can be seen in the table below.

Typical purchase prices for ~ USD$10,000 / month rental
(based on rough average property values in Shanghai)
.  Factory $ 1.2 million
.  Office $ 2.7 million
.  Apartment $ 5.2 million

It’s mostly about money
There are many reasons why residential properties are much more expensive to buy than offices or factories. The main one is probably that in China – as well as in some other Asian countries - people tend to invest into apartments with a goal of asset appreciation, largely ignoring the property’s annual yield, or how much income the
property will generate compared to its purchase price. For China’s big city apartments, that income is often so low that it cannot even cover mortgage payments.

With commercial properties the opposite holds true. Whether an office building, shopping mall, factory or warehouses, a commercial property is typically developed and bought with the aim of having an attractively high yield – high enough in order to be cash flow positive even after making one’s mortgage payments.

What this boils down to is that essentially nobody in China buys an office if the actual or potential annual rental income isn’t at least about 4.5% of the purchase cost, but people are willing to buy an apartment even if the actual or potential annual rental income is only 2.3%.

Read more: here

Contact:
NAI Sofia Group Shanghai
www.sofiagroup.com