Another Wave of Real Estate Regulations… Who Cares!

Wednesday, February 7, 2007 3:30
Comments Off on Another Wave of Real Estate Regulations… Who Cares!

While the government last year tapped the breaks on the real estate market, it was obvious that the measures were not really all that effective (if only look on the surface).

Gross investment was up in almost every category in the major markets, and it left people wondering why investors who were said to have been forced out of the market were still not only able to invest, but chose to do so willingly.

So what happened?

Well, as point out in our previous posts, these new rules were meant to accomplish several things, two of which were to take out the hot money and the other was to make sure taxes were being paid onshore. The laws were not designed to keep foreigners out of the market, but make foreigners make longer termed commitments to the properties they were holding, put more of their own money in rather than use Chinese banks, and pay taxes on profits.

The policy was one that made a lot of sense from a macroeconomic perspective, and it did work to reduce the number of transactions.

However, while the overall number of transactions decreased, the size of the deals increased significantly.

All of a sudden, investment banks upped their portfolios with large asset purchases. Commercial, retail, development… you name it. And the reason was simple… if you are stuck with an asset for 5 years, and you need to use a local entity to do so, the start up costs were too high to do anything else. Between lawyer fees in HK and the mainland, tax advice, WFOE set up in China, Shell company in HK, the transaction costs were just too high for a few apartments… so the private funds funds pooled up and the larger investment banks took up. See Wachovia,

so… in the end, while the smaller investors moved like a heard of wildebeest into the Shanghai exchange (the only other investment in China) the larger houses acted as if little had changed. Cause for them, the only real change to their models was that they now had to invest 60% up front. Which wasn’t a problem for those who wanted to leverage offshore to gain on the RMB appreciation.. so in reality, those that leveraged offshore were seeing their interest payments returned to them through currency gains.

With all this in mind, and the fact that the central government is on a real mission to root out the corruption from real estate (even Shui On had to give money back), the government has gone out and released a bunch more regulations to really curb investment… domestically and internationally.

January 17: Beijing government announces cancellation of VAT tax for developers… effectively amounting to a 30 to 60% tax increase on net gains for new real estate developments. It was an actually a law passed 14 years ago, but until Feb 1 it had not been collected (14 years in the planning… with 14 days notice). See Forbes or Axcess News for more.

February 5: Beijing government looks to reduce foreign investment in residential sector (Shanghai Daily & IHT ). not geared towards your expatriate factory manager, this rule was already in play last June and is really directed towards the HK, Taiwanese, and Singaporean investors who were famous for flying in and building 5 flats that would go undecorated for 18 months before they flipped out.

February 7: Development tax is to be tripled (Shanghai Daily) from 1.2 RMB a Meter to 30 RMB per meter

Ironically, even with the aim of these new measures to cool off the market, many investors and developers are publicly optimistic

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