More Real Estate Hurdles Coming Soon for Investors in China

Sunday, July 29, 2007 23:51
Comments Off on More Real Estate Hurdles Coming Soon for Investors in China

Beginning in June of 2005, the central government began to put into place policies that were meant to cool off the real estate market as there were legitimate concerns that there was a property bubble forming.

The initial steps take did curb the market for a short period (a week tops) as back doors were everywhere, and with many structured offshore the impact was a minor inconvenience… the second measures that came out June 1, 2006 were a bit steeper (see New Regulations: Real Estate Investment) and went a long way to taking out the small investor, but following the implementation of the measures can a rush of money from larger investors who would take entire facilities (industrial became quite popular)…. see Another Wave of Real Estate Regulations… Who Cares! and Real Estate Reality… Why Investment is Going Up for more

However, despite what the paper says, prices have continued to increase in many sectors and real estate investment is once again gaining a lot of steam (Some friends are reporting 20% gains last month alone) as the stock market has seen volatility recently.

What could make this interesting is if the NDRC implements a ban on the sale of unfinished or partially finished properties in China as many of the traded properties will remain unfinished for years while the title is traded multiple times. It is a common sight, especially in new suburban areas of the second tier cities (Suzhou , Chengdu, and Wuhan), as the game of “if you build it they will come” is played out by investors who speculate the potential growth of the city.

Where this could impact investors, big and small, will depend upon where the investment is, what stage of development the property is at, and how the NDRC intends to verify and enforce this new rule.

For smaller investors who have an apartment in Shanghai, one in Chengdu, and maybe another in Beijing, they are in the highest risk category for sure. The stories of Hong Kong investment tours to real estate developments are well know, and it is these investors who typically would leave a flat untouched for 5 years while trying to flip it. the hurdles for them will be how to flip the property before the law is enacted. Otherwise, investors will need to not only find the money to finished a fit out, they will need to project manage the fit out, and are forced to sit on the property for another 6 months.

For larger investors, the impact would be different (although there are groups that do this with 2-3 floor) depending on the way they structured the agreement and where. For some groups who have taken properties, or have invested in the development, early on, it is theoretically possible that they are locked into that investment after the traditional key pass. While still unclear, groups like Morgan Stanley and others have taken on early investments in defunct buildings, provided bridge loans, and have other structures that could get caught up into this.

While still early on, I suggest anyone who has a real estate investment (retail, commercial, or industrial) to keep an eye out. No doubt there are going to be structures that mitigate this, and there is sure to be a lot of gray area as to what is finished, unfinished, etc…

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