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I just received an interesting e-mail from my brother Jeremy, who is a professional property manager in Los Angeles. He was forwarding me a newsletter from a Beverly Hills-based entity that is touting international investors on the "exciting, unaddressed opportunities" in real estate in China. They're holding an investor forum, meeting with local developers, and they've apparently made several trips here.

Caveat: technology and media are my core areas, so I would not profess to be an expert (or even a specialist) in real estate in China. But I am a property owner in China, spend a lot of time researching the market, and speak and work with professional investors frequently. And, like my brother, I learned the fundamentals of real estate from my parents (who were - and my mom still is - successful real estate investors) at the dinner table and from nights and weekends helping tenants or cleaning up after them.

The fundamentals of China's market would appear to make real estate investment a no-brainer:

• The amount of real estate available is limited, both absolutely and by government regulation;
• there are a lot of Chinese who need places to live, work and shop;
• there is a population shift underway, with tens of millions of people moving into the cities;
• Chinese lifestyles are improving, compelling locals to look to upgrade their current digs;
• business investment is growing, driving a jump in demand for A & B class office buildings nationwide; and
• there is a jump in demand for retail space driven by increasingly prosperous consumers.

All of this is true. Spot on. And all of that is exciting to investors who look worriedly at the softening U.S. market.

But to approach China as if it were a "normal" real estate market would be foolish. There are some critical differences between investing in Chinese property of any kind that U.S. investors need to take into account before being swept up in the China real estate bubble.

1. The lending market for second-hand properties is so small as to almost be non-existent. Banks simply aren't set up to lend on real estate except when it's being developed, or when the developer is selling newly built offices, stores, and homes to buyers. This means that if you have cash you can make some good buys on pre-owned properties, but it also means that if you ever want to sell, you're going to be looking at a limited market. Read "depressed value." That's fine if you're relying solely on rental income to get your return, but if you care about capital appreciation at all, you're going to be challenged a bit.

2. Multiple listing services don't exist - and thus there are no statistics on comparable sales. The only thing you will ever know on any property is the asking price. This means that you are never sure what your property is worth. Nice, huh?

3. In China, you don't own property. You own usage rights for a fixed term. That also changes the dynamics of resale price, and of property value.

4. Chinese real estate law is still evolving. Unlike in the U.S., where you have a solid body of law on which to base your investments, in China the actual rights that you own are subject to change as real estate law evolves. And if you want to evict a tenant? Landlord-tenant law is extremely nebulous here. Zoning is starting to happen, but you shouldn't be surprised to see new apartment blocks going up next door to factories - or vice-versa. Right next door to our upscale residential neighborhood out in the suburbs, they're building a giant international exhibition center. So much for our quiet neighborhood.

5. This is still a market where strange things happen, even to very large, savvy investors.

• A residential development not far from where I live lies 2/3 empty after nearly a decade in part because the government officials who granted land use rights to the developer had not actually cleared those rights, and the peasants who formerly worked the land are fighting.

• Another development lies abandoned next to a major freeway offramp because the developers simply skipped town with the investors' money.

• And let's not forget the case wherein McDonalds signed a 20-year lease on their massive flagship restaurant, only to find that another government agency had granted the rights for land use to a well-connected Hong Kong developer. The restaurant was gone a mere 5 years after it was built.

6. There is no way to check the credit of a tenant, and your options for compelling payment of rents are few.

7. Good management is hard to find. By good, I mean professional, consistent, service-oriented, un-corrupt, and businesslike, managers (or management companies) who will keep tenants happy and make sure you still make money. That's tough anywhere, but it's even harder in China, where tenants and residents think the management company is ripping them off no matter how well the place is run. Frankly, I think it's a bad idea to own a piece of income property that you are too far away from to actually oversee yourself, but if you can put an honest manager in place, you can get away with it. Marriott made a recent move into the property manage

8. Inventory is pouring into the market. Beijing, to give a single example, has been described as "a construction site with a parking lot" and it's little different in any of China's tier one or tier two cities. Some of the largest advertisers in China are real estate developers, and with good reason - they need to pull them in quick. The construction shows little sign of abating, and, given the way they do things here, probably won't until the market collapses under the sheer overhang of inventory.

None of this is to suggest that you should NOT invest in real estate in China. I have no doubt there are opportunities for the adventurous, speculative investor here. But before you invest, whether it's in a piece of property or a China real estate fund, do your homework first. Talking to a bunch of developers during a trip here, or reading the fund prospects doesn't count. Ask hard questions, and ask a lot of people. Then make your own call.

As for me, I own Chinese real estate because I bought when the cost of renting my house over the last six years would have nearly paid for it, interest and all. Would I buy today? I'm not sure.

Source: Dreams Built on Sand: Investing in China Real Estate