(Yicai) Aug. 13 -- More investors are considering buying properties in core Chinese metropolises as an investment option as interest rates tumble and rental returns surge on falling property prices. But the housing they are choosing now is completely different from before, an industry insider told Yicai.

Sales of small pre-owned apartments, which are a legacy of when state-owned companies would grant employees cheap housing, have surged in Shanghai and neighboring Hangzhou since May, and the hot sales have extended to other cities, such as Guangzhou, Yicai noticed.

“In certain areas in Guangzhou, we will buy a house as soon as it appears on the market. Our main criteria are if the price is low enough and if the apartment is easy to rent out,” an investor who recently bought several such small second-hand houses in Guangzhou told Yicai.

“I visit houses in my spare time, and I mainly visit pre-owned homes located a few kilometers away from core business districts,” said a person working in finance in Guangzhou. “It doesn’t matter how old the properties are, so long as the rental income can cover the interest on the mortgage.”

“If housing prices rise, there is a chance that I can also make a profit,” the person added. “But although there is also the chance that they will fall, there is less risk of a sharp decline as they have already come down a lot.”

The rental yield, which is the income generated by a rental property relative to the property’s value, in 50 key cities climbed 0.07 percentage points to 2.03 percent in the first half from the same period last year, according to statistics from Zhuge Zhaofang Data Research Center. This is higher than the current yield on five-year deposits at state-owned banks.

“Although the average rental return is less than 2 percent in Shanghai, there are still some places with rental yields on old-style, pre-owned apartments that are higher than 3 percent,” said Dong Wang, an investor in Shanghai.

For example, a 30-square-meter home in a residential community in Pudong that sells for CNY1.8 million (USD250,738) can be rented for nearly CNY5,000 (USD696) a month after a simple renovation. This means the rental return on the house is more than 3.3 percent, he added.

In general, according to investment standards, only properties with a rental yield of between 4 percent and 5 percent are considered to generate a good return through renting out. This means that the rental return on these old second-hand homes is still low, and buyers will find it difficult to recoup costs through leasing, said Zhang Hongwei, founder of Jingjian Consulting.

The main reason why investors are choosing to buy houses in old downtown residential communities is due to the value of the land, said Dong. In addition to considerable rental income, owners can also get sizeable demolition subsidies should the complexes be included in the municipal government’s restructuring plan, he added.

Investors don’t care much about the state of the houses, but are focused on the selling price and will spare no effort to bring the price down, a number of apartment sellers told Yicai. Some investors even asked the sellers to put a higher selling price in the contract than what they paid so that they can apply for a bigger loan from banks.

More investors are visiting houses and observing the market trend, said Lu Wenxi, an analyst of Shanghai Centaline Property. Although sales of old-style pre-owned home have rebounded they are not very active because investing in such property has risks, the biggest risk of which is if housing prices continue to fall.

Editors: Tang Shihua, Kim Taylor