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Monday June 18, 2007

Tighter real estate rules in China


A STRICTER approval process will be applied to foreign investment into China’s real estate market, especially in the high-end sector, according to a notice jointly released by the country’s top two regulators. 

The notice, published by the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE), will give the MOFCOM authority for final approval of a project. It also imposes a strict threshold on foreign investor applications to establish real estate companies. Only those that have land use rights and own property can establish real estate firms. 

The notice, following a circular last June, is the government’s latest move to tighten and regulate foreign investment in China’s real estate sector. 

However, the top managers of two foreign real estate investment firms say in interviews with China Business Weekly, that they have strong confidence in China’s property market despite the government’s restraining policies. 

Robert Lie is CEO of ING Real Estate Investment Management Asia. As an arm of Dutch financial services firm ING Groep NV, ING Real Estate has been operating in China since 1996. In December 2006 the closing of its China Opportunity Fund raised a committed equity of US$350mil. 

 

Q: More and more local property developers are turning their eyes to the country’s second-tier cities. Do you share a similar viewpoint? Which areas are of higher investment value for you? 

Robert Lie: We are quite optimistic about the economic prospect of China’s second-tier cities. The property demands will grow at an average of five million apartments each year by 2015. 

Among second-tier cities, I am quite interested in Chongqing, Chengdu and Wuhan in China’s western and central regions. Dalian, Qingdao and Hangzhou are also very attractive. 

In fact, our focus this year is on the residential sector in China’s second-tier cities. Among our eight projects over the country, six of them are in second-tier cities. 

 

Do you think the government’s tightened real estate policies will drive away foreign investors? 

Short-term speculative investors may choose to leave. But long-term foreign investors now have a more healthy market. They are attracted to the strong growth prospects of China's real estate markets. The opportunity to develop new real estate to cater to the rapid growth of increasingly affluent urban populations is a compelling one. 

Meanwhile, China is becoming an increasingly important part of the global real estate market. As it grows and becomes more transparent, China's real estate market will become an essential part of international investors’ portfolios. 

 

Some believe that foreign investment is one of the driving forces for China’s sizzling property market and continued price increases. What do you say? 

I don’t think so. The participation of foreign investment, in fact, helps to boost market transparency. Despite rising foreign investment, China’s property market remains mainly domestic-driven, with 95% of total investment coming from local Chinese. 

On the other hand, collaboration between domestic and international partners is increasing. Chinese developers are teaming up with international investors in order to tap into foreign expertise in areas like architectural design, building construction and marketing and sales. In addition, they will welcome foreign capital as a means to help them tackle more projects. 

Changes to regulations that require a greater capitalisation for development projects at the time of land acquisition have made real estate development a much more capital-intensive business. Some local developers are facing cash flow problems due to a recent slowdown in property sales in selected cities. 

Nick Loup, is managing director of Grosvenor Asia, a British property firm that already has three funds in Asia focused on property in Hong Kong and Japan, with around US$1.5bil of assets under management. 

 

Q: Property prices in the country’s 70 large and medium cities jumped over 5% since January this year. What is your forecast for China’s real estate market for 2007? And what is the driving force behind the continued price hike? 

Nick Loup: China's real estate market is expected to continue to grow and mature, which is a reflection of the country’s strong economic fundamentals and positive demographic trends. And we expect an overall 5% to 10% rise in residential prices in China in 2007, a healthy rate of growth thanks to the government’s proactive approach in ensuring the sustainable and healthy expansion of the market. 

 

After such a round of rapid increases in China’s real estate sector, do you think current prices have peaked or still offer growth potential compared with other markets? 

China’s property prices are still quite appealing for foreign investors, due to the emerging and immature market.  

The price growth in the past year is really a bit too fast, and a tightening could be expected in the short term. But we are confident in the growth trend in the long run. And there is still huge room in China’s high-end residential buildings and retailing market to grow. 

 

What are your major concerns when investing in China? 

Policy and the transparency of the market. 

For more news from the China Daily, a partner of Asia News Network, click here

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