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The Australia-China Trade and Economic Framework was signed during

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The Australia-China Trade and Economic Framework was signed during

    Why Invest in Chinas Property Market?

    WHY INVEST IN

    CHINAS PROPERTY MARKET?

    China's real estate industry has seen rapid growth over the past twenty years and become the pillar industry in the country's national economy.

    A recent report by the Chinese Academy of Social Science states that investment in real estate last year(2003) exceeded 1 trillion yuan or over 120 billion US dollars, accounting for over 18 percent of the country's total fixed asset investments.

    The direct result of this was a 1.3 increase in GDP. The report predicts that investment and consumption in real estate will keep increasing this year. It also indicates that real estate industry will play a more important role in the country's economic and social development in line with a growing trend towards urbanization.

    Compared with U.S. and other developed markets, China's real estate industry is less experienced and immature. Currently, there are approximately 25,000 real estate brokerage agencies employing over 200,000 agents. In addition, an estimated 20,000 property management companies employing over 2 million people exist in China. Many of the brokerage companies, however, may not possess business licenses and qualification certificates. For instance, it was reported that, of the 4,000 real estate agencies currently operating in Beijing, only about 700 have business licenses. In a recent inspection in Shanghai, 982 real estate brokerage firms were found guilty of operating without registration with the appropriate government agency.

    During the middle and late 1990's, real estate markets in big cities were overheated. Price of prime land in Beijing has fallen from the highs experienced in the boom development period of the early 1990s. In 1999, the vacancy rate for Grade A buildings was 30% in Beijing and 38% in Shanghai. Some experts estimated that the vacant space might take two to three years to be absorbed if the recent trends in demand continue. The market now seems to be picking up the momentum when many residents are upgrading into bigger housing.

    A research report by Shanghai Real Estate Economic Association for the preparation of WTO entry cited that, in comparison with companies in developed countries, China's local real estate

    companies have the following weaknesses:

    1. Lack experiences because of short history;

    2. Limited competing capability due to smaller sizes;

    3. Insufficient capital and backward marketing means;

    4. Lower management skills;

    5. Not service-oriented in general.

    To regulate the market and protect consumer's interest, the government released the revised Model

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    Why Invest in Chinas Property Market?

    Commercial/Commodity Housing Purchase/Sell Contract in September 2000. The model contract serves as a standard contract and allows potential real property buyers and sellers to understand what are involved in a real estate transaction. The government hopes it will eventually help consumers reduce the risk in home purchase.

    The overall real estate market in China is dynamic and grows fast in terms of capital flow and development speed in spite of the problems. The resale housing market is almost non-existent in China a few years ago. In 1999, the government completed its basic policy for secondary housing market and encouraged urban residents who owned their homes to sell smaller, older, and low-quality houses in exchange for bigger, newer, and high-quality ones. Some cities, e.g. Shanghai and Ma Ansan of Anhui province started to experiment the secondary market earlier than other cities in China. Since 1996, there have been 67,333 residential properties being put for sales on the market in Shanghai, accounting for about 5% of the total sold properties there in the same period. In 2000 alone, about 7.5 million square meters (80.73 million square feet) existing houses were sold in Shanghai. The total transaction amount was valued at RMB 65.6 billion (about U.S. $8 billion). There are over 5,000 foreign funded real estate companies, including China-foreign joint ventures (JVs) or cooperative enterprises, and over 1,000 wholly foreign-owned companies currently operating in China. Hong Kong is the top investor, accounting for over 75% of total foreign investment, followed by the United States and Taiwan. The following chart shows the amount of total foreign investment in the Chinese real estate market in recent years. There was a drop in investment in 1997 and 1998 that could be attributed to the Asian finance crisis and over heating of the real estate market in late 90's.

    The housing industry has become a powerful engine behind the rapid economic development in China and contributed about 1.5 percentage points to 1999's 7.1 percent economic growth.

U.S. Focus on Chinese Housing Market

    U.S. government and companies have participated in the development of the. In 1999, President Clinton called on the Department of Commerce to send U.S. experts to China to discuss how to build a stronger housing finance system by, for example, strengthening property rights and developing stronger mortgage markets.

    On November 1st, 2000, then U.S. Housing and Urban Development (HUD) Secretary Andrew Cuomo and Chinese Construction Minister Yu Zhengsheng signed an agreement in Washington. Both nations agreed to create a U.S.-China Residential Building Council (RBC), which was expected to provide new housing opportunities for families and to create housing industry jobs and stronger economy.

    The new Council would participate in activities that the U.S. and China undertake to exchange information and to cooperate on housing development. The National Association of REALTORS, the National Association of Home Builders, the Mortgage Bankers Association of America, Fannie Mae, the National Association of Housing, Redevelopment Officials, and other

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    Why Invest in Chinas Property Market?

    organizations and corporations are represented in this Council.

    Dennis Cronk, 2000 NAR president and a member of RBC, led a delegation and visited China in July 2000 and signed the Memorandum of Understanding with China Real Estate Association. The agreement called for the sharing of information between the two nations, related to the real estate industry and for each association to alternatively send a delegation to visit the other on an annual basis. In addition, both countries have agreed to enter into discussions to identify areas of substance where they can develop a U.S.-China relationship surrounding real estate professionals.

    In June 2001, NAR President Richard Mendenhall, led a delegation visited China and met with representatives from China Real Estate Association (CREA), the Society of Hong Kong Real Estate Agents, Limited (SHKREAL), and many real estate professionals from local and U.S. companies. The members of the NAR delegation included two former NAR presidents: Norman Flynn and Russ Booth; and David Michonski who serves as the Asian Regional Director for NAR. This visit greatly enhanced the mutual friendship and understanding among the three real estate organizations.

    According to a survey reported in the China Construction magazine, about 59% of the urban residents in China now own their own homes. The average living space for most of urban residents who own their homes is 50-80 square meters (538-861 SF). The majority of households surveyed have 2 to 4 people. About 19.7% of respondents live in rented dwellings and 11.5% receive rental subsidies from their employers or work units. It was also reported that 21.9% of the residents surveyed indicated they would like to purchase new houses with a size of 70-150 square meters (754-1615 SF) within 5 years. Family savings were the main financing resources, which

    stood at about 6700 billion RMB (1 trillion U.S. dollars) in 2000. However, government funding and bank loans were also among favorite options.

    China's Real Estate Industry in a Boom

    China is expected to increase 5.5 to 6 billion square meters' of housing floor space, or 70 million sets of houses in the coming ten years, said Yang Shen, chairman of China Real Estates Association.

    Statistics from Ministry of Construction show that from 1980 to 2000, China's real estate industry had kept a rapid growth momentum with newly-built houses in rural and urban areas to have reached 20.3 billion square meters, an increase of two folds as compared with the past 30 years.

    Chinese government has taken real estates industry as a new drive for its economic growth, and has taken various measures to support the industry. So far, total investment in real estate hit 80

    billion Yuan in China, accounting for 25 percent of the social fixed asset investment.

    Experts predicted that as people's living condition has been raised continuously, and housing consumption will become an important motivation for economic growth. Therefore, to own a spacious and comfortable house will no longer be a dream for Chinese people, the current housing floor space for each resident being 20.4 square meters on the average.

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    Why Invest in Chinas Property Market?

    According to this development speed, the average floor space for each house will be increased to 90 - 120 square meters from current 70 meters and average floor space for each resident will be increased to 35 square meters.

    Experts say that China's real estate market promises a great potential, but it sees an unbalanced development, and it may incur certain risk during its rapid development.

    Up to now the idle commercial housing floor has space reached 73 million square meters, the mainly reason being that housing design is not reasonable and bad location.

    Restricted by economic development level, requirements for houses are quite different due to different regions and different people, and housing consumption sees strong regional and multilevel characteristics. Experts warn that housing construction should be carried out based on the real needs and blind construction should be prevented.

    Mortgage & Home Loans

    The housing mortgage system currently in China has just started. Several cities have enacted legislation and regulations to provide guidelines for mortgage processing on real property. For instance, in Guangzhou, the local government published regulations handling mortgages and required domestic mortgage lender to be licensed by a central bank.

    The maximum period of home loan repayment is 30 years. Prospective homebuyers are normally required to pay down 20 percent of the purchase price out of their own savings. It's not unusual to see buyers to put down as much as one-third or half of the cost of a new home in cash mainly thanks to the high saving rate (about 45%) and limited financing resources.

    The biggest provider of home mortgage loans in China is the China Construction Bank (CCB). The housing loans made by the four state-owned commercial banks were RMB355.6 billion (about U.S. $43 billion) in 1999 according to a report. Of the total loans, RMB217.2 billion (about U.S. $26.3 billion) went to real estate developers and RMB 126 billion (U.S. $15.2 billion) to the mortgage loan sector accounting for about 35% of the country's overall real estate loan amount at the end of 1999.17 From January to November of 2000, the home mortgage loan amount was RMB 296 billion (about U.S. $36 billion). Since the market is so new that most homebuyers do not have significant collateral to back up a loan. Most banks require borrowers to have a guarantor. Foreign lenders are not allowed into home loan area at this time. But this will change after China's accession to the WTO.

    In addition to bank loans, city workers may also borrow money from the housing provident funds (Zufang Gongjijing) if their companies or work units are participants of the funds. The fund allows employees to contribute four to eight percent of their salaries into the fund. The employers then pay a matching five percent of payroll. The interest rate in the provident funds is usually lower than those offered by banks. By September of 2000, 67.77 million employees nationwide have joined housing provident funds.

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    Why Invest in Chinas Property Market?

    How WTO Entry Will Impact the China Real Estate Market

    WTO entry sends a positive message to foreign companies about China’s commitment to

    economic and market reforms. Demand from foreign companies - the primary occupants of

    top-quality commercial, industrial and residential projects is likely to increase as new

    companies enter the market and others expand as restrictions are gradually lifted.

    It is, however, premature to say exactly how much the real estate market will benefit. To predict that WTO entry will mean rising rents and demand for more construction in the short term is, perhaps, misguided.

    The impact will be gradual and unevenly spread amongst businesses and in different areas of China. Financial services, telecommunications, distribution and logistics, information technology, agriculture, and professional services industries, as well as Chinese consumers, are likely to be significant winners.

    Dyfed Evans of Cushman & Wakefield in Shanghai notes that Shanghai will see benefits due to easing of restrictions on financial services companies. "Banks and insurance companies are a major industry sector in Shanghai, and the lifting of restrictions on their activities could unleash significant latent demand for real estate as the reforms take hold".

    Evans continues "the lifting of trade restrictions, the lowering of tariffs and the easing of restrictions on distribution over the next five years will be a boon for warehousing, logistics and distribution real estate in China’s busiest port city, as well as in the rest of China."

    In the medium to long term, the institutionalized reforms required by WTO rules are likely to have a positive impact for real estate investors and occupiers as a result of increased business activity and the more systematic development of China’s economy as a whole.

    Based on a forecasting model developed by Cushman & Wakefield Research, a 1.5% increase in GDP growth (a figure suggested by China’s State Council Development Research Center) could increase demand for offices by an additional 20 percent in major Chinese cities.

    Like the commercial market, the expatriate housing market will be positively affected. While certain companies have been reducing expatriates in the last several years (or at least the proportion of expatriates to overall employees), the wave of new companies coming to China will likely bring more senior expatriate managers. However, there is probably no Motorola or Shell waiting to enter China and it is expected that the majority of newcomers will be small to medium-sized businesses.

The Big Players in this field

    **Sun Hung Kai Properties, Goldman Sachs (Asia), Rodamco China B.V., Recosia and Wing Tai Land of Singapore,etc

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    Why Invest in Chinas Property Market?

    Sun Hung Kai Properties (SHKP) is the lead developer of Shanghai Central Plaza, which had the grand opening of its shopping arcade on August 28, 1999. The development is one of SHKP's principal long-term investments in Shanghai.In addition to SHKP, the other shareholders in Shanghai Central Plaza are Goldman Sachs (Asia), Rodamco China B.V., Recosia and Wing Tai Land of Singapore and the Shanghai Fuxing Development Corporation.

**Morgan Stanley

    Beijing, March 13, 2003 - A Morgan Stanley led consortium and China Huarong Asset Management Company (Huarong) today announced the final regulatory approval and closing of the purchase from Huarong of a portfolio of non-performing loans (NPLs) totaling 10.8 billion RMB. The NPLs were acquired by a Sino-foreign joint-venture between the Morgan Stanley consortium and Huarong. The transaction is the largest portfolio sale of NPL assets in China's history.

**Rockefeller International Group, Australia SPG Group

    In May 7, 2004, the New Huangpu Group and the Rockefeller International Group established a JV to jointly develop the Waitanyuan project. With a budget of US$ 250 million, the first phase of the project is scheduled to be finished by the end of the year 2006. Shanghai Peninsula Co.,Ltd., another JV launched by Australia SPG Group and Hongkong Shanghai Grand Hotel Co., Ltd, is going to build the Shanghai Peninsula Hotel in the Waitanyuan area. The construction of the hotel is planned to be completed and put into operation by the end of the year 2008 .

**Macquarie

Macquarie’s activities in China are focused in the property and mortgage sectors.

    An office in Tianjin was established in 1995, from where we undertake a funds management role in relation to the development of over 2500 residential units and 48,700 sqm of retail space in four projects. Our Shanghai property development office was established in 1996 to undertake both development management and funds management for an 88,000 sqm residential unit project in Pudong.

    In March 2002 Macquarie established a mortgage and securitisation operation in Shanghai. The business, Macquarie Securitisation Shanghai Co, Ltd (MSS) trades as "HomeLoan Highway" and provides loan introduction, loan application processing, title registration and related services to homebuyers, borrowers and real estate agents in Shanghai.

**Deutsche Bank

    Beijing, 31.05.2004--Deutsche Bank today announced that it had been the successful bidder for a

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    Why Invest in Chinas Property Market?

    portfolio of settled-assets in Northern China in an auction by China Construction Bank.

    The auction by China Construction Bank sold assets totaling RMB 4.0bn (approximately USD483m) for RMB1.4bn (USD171m). The sale was divided into three pools spread geographically in Central, Northern and Southern China. Deutsche Bank was successful in bidding for the Northern pool of assets. The price paid for the individual pools of assets is not disclosed.

    The portfolio comprises settled-assets including real estate located in Heilongjiang and Inner Mongolia in Northern China. The properties include office buildings, retail shopping centres, hotels, mixed use (office/ residential/ retail) properties, residential apartments, industrial properties and vacant land. The provinces of Heilongjiang and Inner Mongolia are of a high level of economic growth, in excess of 10% per annum, and have a combined population over 60 million.

**GIC, CapitaLand, Sino Land, Temasek Holdings

    May 17, 2004--Singapore Deputy Prime Minister Lee Hsien Loong Sunday called on Singaporean businessmen to actively venture away from home to invest in China's growth.

    "That way, we make China a growth engine for the Singapore economy," the deputy prime minister said at yesterday's official launch ceremony of Raffles City Shanghai.

    Raffles City Shanghai was developed by a consortium called Shanghai Hua Qing Real Estate Development Co., Ltd, comprising CapitaLand China, Sino Land, GIC Real Estate, Temasek Holdings, and Shanghai Ever Shining Culture (Group) Co., Ltd. It is one of the single largest property investments led by a Singapore consortium with the investment amounting to US$350 million (RMB2.9 billion).

    Lee said China has created "a friendlier business environment" for Singaporean businesses due to its effort to clarify laws and simplify government procedures.

    "Therefore, investing in China is no longer a daunting proposition that involves climbing mountains and crossing oceans," he said.

** CapitaLand

    Since 1994, CapitaLand China has been a developer of premier homes and quality commercial properties in China, with a total project value of over RMB 12 billion. CapitaLand was proud to be accorded the coveted "Wholly Foreign-Owned Enterprise" investment company status, by the Chinese government in 2002.

    CapitaLand China's premier homes include residential Chrysanthemum Park, Manhattan Heights, Summit Panorama, Summit Residences, La Cité and Oasis Riviera. Its office portfolio comprises

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    Why Invest in Chinas Property Market?

    Pidemco Tower, Raffles City Shanghai (a landmark office and retail development) and Luwan Office Project. Currently more than 80 percent of CapitaLand China's developments in China are in Shanghai. Developments outside of Shanghai include residential project La Forêt in Beijing.

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