Enter the dragon

China's economy may be booming, but does its property market offer foreign buyers anything other than red tape?

Buying a holiday home in a foreign capital is rare. Getting one with a special history is still more unusual. And when that city is Beijing - well, it beats hands down the humdrum villa in Spain or gite in France.

Buying a holiday home in a foreign capital is rare. Getting one with a special history is still more unusual. And when that city is Beijing - well, it beats hands down the humdrum villa in Spain or gite in France.

Housing authorities in the Chinese capital have just announced they are to allow the sale of some of the city's older buildings - historic peasant properties near the Forbidden City. Many of the capital's finest buildings were bulldozed or requisitioned between the 1940s and 1970s as part of Mao's Cultural Revolution. But many "siheyuans" - courtyard buildings - were confiscated instead of destroyed, kept by Mao's regime for use by workers or for storage. Now derelict after years lying empty since Mao left the stage, they are being sold with strict guidelines for restoration.

Siheyuans date back to the 13th century, although most of those standing today in Beijing were built in the 17th century. They are single-storey buildings with interiors conforming to the principles of feng shui. Many siheyuans are formed by four tiny linked huts arranged around a small rectangular courtyard. The entrance to the courtyard is through a gate, always at the south-eastern corner of the rectangle, with a screen wall just inside to maintain the residents' privacy from passers-by.

The buildings are usually located along narrow lanes called "hutongs", arranged according to the etiquette systems of the Zhou dynasty. Those siheyuans located on hutongs closest to the Forbidden City were originally occupied by diplomats and aristocrats. Cruder siheyuans were located further north and south of the City and were occupied by traders and workers; in these locations the hutongs are often only two feet wide. Prices of the buildings will start at about £275,000 but having the money is not enough - you have to get through the red tape, too.

An application to purchase must be considered by the Beijing Security Investigation Office for Foreign Projects, in case a siheyuan is close to what the office calls "a sensitive building" - in other words, a government department. Then title deeds have to be located and solicitors have to verify the 70-year lease, which will accompany most of the properties.

Once you get possession, you are obliged to start restoration. Most are currently in very poor condition with shared bathrooms and sewage systems, and patches in roofs and walls. New private owners will be obliged to return the exteriors to their historical appearance by using original materials such as timber, tin and silk.

The siheyuans on about 400 of the 7,000 hutongs in Beijing will be sold privately in the next two years as their current inhabitants are rehoused in modern apartments.

Until demand becomes clear there is uncertainty over how much they will appreciate. The 2008 Beijing Olympics may well make them look a tempting prospect, but if you are a hard-nosed capitalist investor wanting more profitable returns you should look further south towards Shanghai, where London property consultancy City Trading Post has just started China's first international buy-to-let scheme.

CTP is selling small two-bedroom apartments in Shanghai priced up to £180,000. A deposit of about £15,000 is required and British buyers are advised to add 10 per cent of the purchase cost to cover the creation of a mandatory Chinese bank account, arranging a mortgage and lining up a local agent to find and manage tenants.

City Trading Post director James Hughes says annual rental yield may be as low as 5 per cent depending on where the apartment is in Shanghai, and whether other new flats are being built nearby. "But the real attractions are rising capital prices, not rents. We're tapping into the catch-up potential of Shanghai, which many see as an aspiring Hong Kong. Progress will be erratic but the international investment being put into the city will see demand soar in the next few years."

CTP acknowledges that a fast-growing market such as Shanghai's can be volatile. In the past two years some local developers have filed for bankruptcy, but Chinese authorities are now introducing stricter vetting for building firms to ensure new developments are completed. CTP also warns that investors must produce a detailed audit trail of invoices, receipts and statements before being allowed to withdraw rental income from the country.

Other analysts point to the huge supply of property coming on to the market in the city, potentially upsetting the classically capitalist balance of supply and demand. For example, a report by property consultancy Colliers CRE says there is a "rush of speculators [in Shanghai] dumping their flats on the market". Even so, Colliers predicts price rises of 10 per cent this year and further growth over the following two years for most investors who hang on.

Shanghai is mainland China's most strident example of growing private enterprise. The city is set to expand from 16 million to 19 million in the next 10 years, more than 400 Western companies have local offices there, and Bernie Ecclestone's Formula 1 circus came to town for the first time (26 September).

CTP is now considering similar schemes in other Chinese cities including Xian, home to the terracotta warriors tourist attraction, the industrial city of Chongching in Sichuan province, and of course Beijing. "China is opening up" says CTP's James Hughes. "There is no going back."

For more details on Beijing siheyuans write to the Beijing Foreign Affairs Office at 2 Zhengyi Road, Dongcheng District, Beijing, PRC 100744. Fax 0086 6519 2775.

City Trading Post: 0845 222 0085.