China’s Real Estate Pillar..

Friday, April 27, 2007 22:24

When dealing with various city governments and zones, you get use to hearing about pillars. Our pillars of competitive strength and will bring a bright future to our area (That’s a quote).

Pillars, really a fancy word for focus, are really just guideposts for investors who are looking at the city. For where there is a pillar, there are economic incentives, supporting services, an educational focus at local universities, etc.. essentially, the pillar is the local billboard that says “we are open for business”

For years, one of China’s pillars was real estate. Besides having a lot of it, there was a need to attract the capital and expertise necessary to develop it. However, as many of you will know from our posts, and the WSJ, there has been an active effort to curb the irrational exuberance in the market as prices were rising beyond the affordability level of average Mr. and Ms. Zhou.

Again, as we discussed in a few posts (here and here), many of these efforts have largely failed as investment in the sector has actually increased in size (volume levels have dropped), and it appears that the government could be prepared to take further steps on a macro level.

From the China Daily comes an article highlighting a recent report put out by the NDRC (National Development and Reform Commission) whereby it is being recommended that further action be taken, including removing real estate as a pillar industry… i.e. remove all incentives related to real estate investment:

Some control measures proposed in the report include increasing income tax rate from residential property transactions, establishing a property tax system, and abolishing sales houses whose construction is incomplete.

Other control measures put forward in the report are: putting a levy on windfall profits on property sales, and setting up a new house vacancy tax on developers, and increasing land value-added tax rate, in an effort to hold back surging investment in property sector

As I have stated previously, these regulations coming out are on the whole sound and make good macro sense as prices are out of whack with the local ability to pay. however, these are policies that need to be implemented on a local level (not national) as there are still a number of cities still in need of the capital (and the speculation that went with it).

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3 Responses to “China’s Real Estate Pillar..”

  1. rbrubaker says:

    April 28th, 2007 at 1:58 am

    In another article on
    East Day
    it is being reported that 12 industrial projects were denied approval recently on a local level, and that a total of 43 have been rejected by SEPA.

    Having recently finished a site selection project for a chemical company, this article is timely as we recently conducted interviews with 5 chemical parks… and it was obvious that the days of old were gone, and projects were receiving a higher level of scrutiny.

  2. john richardson says:

    April 28th, 2007 at 7:06 pm

    If the real estate sector is subject to these measures, the knock-on effect for the construction industry could be quite alarming, and for the sector I cover – polyvinyl chloride. The main use for PVC is in construction materials. See my blog for more on the Asian chemicals and related industries – http://www.icis.com/blogs/asian-chemical-connections/
    A sharp decline in costruction could leave to greater volumes of PVC being exported from China.
    The global market is already struggling to absorb a big increase in shipments of low cost PVC from China. As seems to be the case in so many industries in China, overcapacity is being built up in PVC on the low cost of capital.
    On the comment about chemical approvals being harder to obtain, this interesting. A lot of noise has been made about the environment. This is evidence that there might be some substance behind the noise from SEPA. As always, though, what about local implementation, given that industrial production growth is still the tried and tested way of delivering strong regional GDP growth?

  3. rbrubaker says:

    April 28th, 2007 at 11:03 pm

    Hi John,

    I do not see that there will be any decline in building in the near turn, and hopefully the U.S. market will have enough time to recover.

    What I am seeing is that deal are getting less in terms of volume, but the deal are getting much larger. In addition, the trend in the 2nd tier is to keep building in the middle ground area (insulate largely from the recnt changes).

    With regard to the chemical issue, there is a lot of pressure right now. several of the parks we spoke to told us they were full, others said that EPA documents would be reviewed in their area and in Beijing. For some cities, they are setting up chemical parks that are seperate, and are somewhat isolated from the rest of town. TEDA is a great case of that.

    For either case, different locations offer different flexibilities, but it is best at this point to really stick to the regulations as what is said one day may not be implemented the next. By sticking to the current trends, and working within well tested areas, investments that are given approval will be approved.. even if the area comes under investigation.

    Have a good weekend
    Rich

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