China took a significant step towards economic liberalisation earlier this year with sweeping new laws to grant private property rights. The National People’s Congress (NPC) finally rubber stamped proposals that had been 14 years in the making – drafted, redrafted and honed – heralding a victory for advocates of the free market.
Three decades after leaders of the world’s most populous country began to devolve central planning, the NPC waved through the landmark property bill and another to end tax privileges for foreign companies. The move offers China’s emerging middle class a chance for better legal protection against government interference, and foreign investors the prospect of renewed incentives to help build a robust urban infrastructure.
Under the new law, while land will remain in state hands, individual-use rights can be renewed automatically after terms of between 30 and 70 years. It introduces principles for compensation and provides for transfer rights and mortgages. For investors, bluntly, the law is a sign of a strengthening legal system that will greatly boost confidence.
Unfettered investment
The government’s continuing effort to control the pace and direction of foreign investment through taxation and other measures has failed to dampen outside enthusiasm. Foreign direct investment (FDI) has been one of the most important contributors to China’s rapid economic growth over the past 15 years. Steady reforms that were begun in the late 1970s have resulted in the private sector, including foreign investment, growing to account for 65% of gross national product (GNP) and up to 70% of tax revenues.
Beijing, host to the 2008 Olympic Games, has attracted half of the FDI in China’s property market, chiefly in the form of new high-rise buildings. The overwhelming majority of foreign real estate investment has been concentrated in Beijing and Shanghai, the latter claiming 43% of foreign money, according to Nicholas Cho, a director of global real estate adviser DTZ.
About 7% of the investment went to smaller cities, including Dalian and Harbin in north-east China, Wuhan in central China and Nanjing, capital of east China’s Jiangsu Province. Mr Cho says Beijing eclipsed Shanghai because it offered bigger deals. Morgan Stanley recently signed a deal in Beijing worth $50m and Merrill Lynch has forged a property deal worth $30m in central Beijing. Foreign investors acquired $4.5bn-worth of property in China in the first quarter of 2006, a surge of 32% over the figure for the whole of 2005, according to DTZ.
Growth rate races
China’s economic growth rate reached 10.7% in 2006. Premier Wen Jiabao said last month that the country would maintain the current momentum of fast economic growth. Until July 2005, the currency was pegged to the dollar and was estimated to be about 20%-40% undervalued. The government’s decision to align the currency instead to a group of other currencies freed it to appreciate. Now all Chinese assets are beginning increase in value, a trend that is tipped to continue in the next few years. Investor interest has surged as a result.
In the past five years, the total investment in China’s booming real estate sector has stormed ahead to an estimated Rmb5300bn ($657.6bn). According to the People’s Bank of China in its third-quarter monetary policy report, national real estate investment in the first three-quarters of 2006 reached Rmb1300bn, although even that may be a significant understatement.
Although Beijing is the capital and seat of government, Shanghai is the commercial hub of the country, and is more open and westernised due to its long heritage of international trade and a strong European influence. In terms of growth, Shanghai Industrial Real Estate ranked first on the top 10 list, with 10 million square metres (m2) of reserved land and 10 million m2 of floor space under planning.
Policy overhaul
The government is actively – if selectively – encouraging foreign investment and has recently relaxed the mortgage market and overhauled policies concerning foreign ownership of property. In Shanghai, 70% mortgages are available on property in addition to 70-year leases for foreign property purchasers.
Foreign investors include the World Trade Organization (WTO), of which China is now a member, which has established a regional headquarters in Shanghai in response to the city’s growth in significance in the worldwide financial sector. A resulting need for top quality commercial space and residential property is fuelling a fresh demand for newly built property that far outstrips supply. Offices, serviced apartments and hotels are all in demand. The World Expo is due to take place in Shanghai in 2010, further focusing global attention on the city’s unique qualities.
A total of $8.23bn of overseas capital was invested in the mainland’s real estate sector in 2006, up 51.9% year on year, according to figures from the National Bureau of Statistics of China. The bureau said fixed asset investment in urban areas rose to Rmb653.5bn in the first two months of this year, up by almost one quarter on the same period last year.
Nevertheless, the actual growth rate was slightly slower than that in 2006 and some projects suffered due to developers’ fears that plans to collect a land appreciation tax might rob them of much of their profit. The State Administration of Taxation’s decision to resume collection of value-added tax on land has spread panic among property developers, who will have to pay 30% to 60% of their net gains.
Developers’ apprehension may be well founded. The government has been keen to stamp out property speculation just as a wave of new funds are targeting the country, including those set up by global players ING Real Estate, Citigroup Property Investors and Invesco.
RREEF is one that is stepping up its exposure to China. It announced last month that it was in talks to invest a total of $100m in two residential projects. The company, which manages $73.82bn globally, committed about $100m to a housing project in the city of Zhuhai last year and has set its sights on further residential projects in southern China. It will also invest between $300m and $500m over the next five years in a hotel venture with private equity firm H&Q Asia to build a 5000-room hotel chain to be managed by Hilton Hotels.
Business demand
Demand for prime office space has continued to outstrip supply by a significant and widening margin. Much of the demand is fuelled by the influx of foreign companies to Shanghai, which is the location of choice for doing business in China. In addition, many established foreign companies in Shanghai are taking advantage of the opportunities arising from China’s WTO membership.
China also continues to grow its tourism industry, with a consequent improving demand for hotels. Wyndham Hotel Group announced last month that it will launch its brand in China during the fourth quarter of this year with the opening of a newly constructed 550-room, 26-floor luxury hotel that it will manage in Xiamen, Fujian Province. It will feature three full-service restaurants, a 300m2 lounge, fitness room, sauna, pool and 1500m2 of meeting space, including a 1000m2 ballroom, boardroom and additional function rooms. Yan Wen Liang, owner of He Ping Li Hotel Company, has signed a 10-year agreement to manage the property.
Industrial development is similarly buoyant. Singapore-based company Ascendas will more than triple its investment in China in the next five years, having ploughed Rmb3548m into the economy since it entered the market in 1995. Its strengths in China include industrial parks – its flagship project being the Suzhou Industrial Park, a multi-billion-dollar government project funded jointly by Singapore and China. The company has recently introduced IT parks in Nanjing, Xi’an and Dalian.
Ascendas CEO Chong Siak Ching says: “China’s thrust toward higher value-added and more knowledge-intensive activities such as business process outsourcing will drive demand for such facilities. This is an area where Ascendas can leverage its expertise. Deepening our presence in the existing cities is one of the keys for us.”
Property frenzy
As the government continues in its attempts to cool red-hot property markets in Beijing, Shanghai and other large cities, attention is switching to the nation’s second-tier population centres, among them Wuhan, Chongqing and Chengdu, where the stage is set for the next big Asian property frenzy.
Stephen Chan, a director of LaSalle Investment, says it is important to get a foothold in the second-tier market now – especially because such cities have high internal rates of return (IRR), a benchmark that tells investors what they can expect to make from an investment on an annual basis. Development projects in the country’s second-tier cities typically produced IRR of more than 20%, beating the performance of first-tier cities, according to Richard van den Berg, ING China manager.
Of particular interest to developers and investors are the cities in the south and west of the country, according to David Faulkner, Colliers International’s regional director for China. “There have been increased levels of investment in many key cities in the Pearl River Delta region as well as more centrally located transportation hubs, such as Wuhan, Xian, Chongqing and Chengdu,” he says.
Channelling investment
Central government is encouraging this geographical shift of real estate investment from east to west with the introduction of a number of controls, including the creation of special economic zones, high-tech development zones and economic technological zones.
Zhai Baohui of the ministry of construction has claimed programmes such as the western regional development strategy were of key importance to encourage foreign funds to invest in second-tier cities. “Second-tier cities have greater potential for investment. They are experiencing increased transparency and consolidation in the market,” he told China Daily in March.
