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New rules influence real estate
By Liu Jie (China Daily)
Updated: 2004-08-25 13:40

With the approach of August 31, the last date of the so-called agreement transfer system of land use in China, various real estate developers and possible property buyers have noticed different impacts caused by the new policy.

Under Document No 11 issued by the Ministry of Land and Resources in April 2002, agreement land transfer is forbidden from July 1, 2002 and all land used for real estate development will be sold through auction or public tender.

But the policy has not been implemented effectively, because of various historical problems.

To guarantee the success of Document No 11 and strengthen supervision, the ministry promulgated Document No 71, or the August 31 regulation, this year, which stipulated that the land owners, who obtained land via agreement transfer, must get land-use certificates and development licences by August 31, and development should be started within two years after trading. Otherwise the government will take the land back and put the land on the market for auctions and public tendering.

The policy paves the way for the government to take a firm grip on land supply and trading, the crux of the current overheating property industry, and will enhance the transparency of the land market and prevent repetitive land trading one of the root elements of real estate market bubbles.

Since land is the most important raw material for real estate development, the new policy is thought to affect the property market in terms of industrial structure, house price and real estate products supply.

Industrial consolidation

Insiders and experts agree that the most crucial influence of the August 31 regulation will be a reshuffle in the property industry.

"The big losers during land trade reform must be the land speculators and some local governments and specific institutions," said Mou Xin, marketing supervisor of Xie-Cheng, a real estate consulting company.

Before the August 31 regulation, land speculators bought and sold land repetitively for profit instead of real development, which built up market prices.

Under the agreement transfer system, rights for land use used to be vested with central governmental institutions, the army, district and county governments, State-owned enterprises and suburban development zones, to name just a few, who could sell their rights to land use that were allocated by the State.

Money earned from land sales went into the pockets of the organizations, agents and developers but not the national treasury, which led to the illusive prosperity of the land market.

After August 31, 2004, all land will be auctioned publicly, therefore under-the-table transactions will be eliminated and the speculators and specific institutions will be excluded from the market.

In recent years, property companies of various sizes have reserved land via agreement transfer.

But as the August 31 regulations stipulated that developers should start work within two years after land trading, the fund shortage urges small and medium-sized ones to seek co-operation with the large ones or be acquired by their more powerful counterparts.

"Some small and medium-sized developers may turn to explore businesses in second-tiered and third-tiered cities, where land costs are comparatively low and other developing expenditure is relatively affordable," said Mou. Large developers may get land resources at bargain prices due to the eagerness of small and medium developers.

Some giants prefer joining hands for a win-win strategy. Land Merger and the Trading & Property Fund-raising Union, composed of more than 10 large real estate development firms, were set up in Beijing in June.

It aims at pooling larger companies' strength to solve certain problems that could occur after August 31 and co-operating to ease fund shortages as banks rein in property loans in the nation's macro control drive.

"The standardization of the market will also attract more overseas developers to enter the market who have ever been hindered by the complexity and uncertainty of the agreement transfer mechanism in the Chinese mainland," said Mou.

Mao Daqing, deputy general manager of Singapore-based CapitaLand (Beijing) Investment Co Ltd, said the worst problem for overseas developers is the under-the-table land trading caused by agreement transfer.

"The August 31 regulation makes local and foreign developers stand at the same start line, which creates a fair competition arena and is more lucrative for overseas property companies," said Mao.

Southeast Asia's largest listed real estate company CapitaLand acquired a piece of land with a combined area of 101,400 square metres, for 54.51 million yuan (US$6.57 million) from Beijing BNISG Group, the top developer of the Asian Games Village last year.

The property conglomerate has decided to invest 5 billion yuan (US$602 million) to 10 billion yuan (US$1.2 billion) in Beijing to develop high-end residential apartments in the coming years.

As all land for real estate development should be obtained through auction after August 31, some people worry house prices will rise in the coming years because of higher land prices.

But many experts and insiders predict prices will keep stable or just rise slightly.

Feng Changchun, director with the Fixed-assets Appraisal Centre of Beijing University, said that before the deadline of land agreement transfer, real estate developers, especially the giant companies, had bought as much land as they could in an effort to "catch the last train of agreement transfers".

Statistics from the Beijing Municipal Administration of State Land show that during the first half of this year, the amount of first-grade land bought by developers was 20.24 million square metres in the capital city, an increase of 40 per cent over the same period last year.

"Price ups and downs are determined by fluctuations of supply and demand in a liberalized market, while the abundant land reserves imply that housing prices will not significantly increase in a certain period of time," said Feng.

Official statistics show that the average year-on-year growth of Beijing incomes was 10 per cent, however, house sales rose by 30 per cent in the same period.

"The unbalanced increases will be adjusted soon, as consumers become more rational and mature and they think more about their consuming capabilities," said Feng.

"In general, the growth rates of the gross domestic product (GDP) and housing demands should be parallel, thus housing demand should slow down and price rises are restrained. Echoing Feng, Michael Lee, of Regal Lloyds International Real Estate Consultants Co Ltd, said he did not think fluctuating house prices would emerge in the property market.

"The market is maturing and the central government's macro control policies are squeezing the speculation bubbles."

Some real estate developers hold different opinions, with experts predicting that house prices are to climb higher in line with economic development, people's revenue increases and land cost rises.

According to Pan Shiyi, chairman and co-chief executive of Soho China, a trend-setting property developer in Beijing, property prices in China, especially in some key cities, have been far undervalued.

"Money put into infrastructure construction and environment improvement has been ignored to date," said Pan.

The National Bureau of Statistics' sources revealed that during the second quarter of this year, average housing prices and land prices went up by 10.4 per cent and 11.5 per cent over the same period of last year.

Meanwhile, figures in Beijing, Shanghai and Hangzhou have exceeded 20 per cent.

Pan predicted that the price hike in Beijing and Shanghai will be more severe, taking the 2008 Olympic Games and 2010 World Expo into account.

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