Deloitte revises handbook for real estate investors tackling China’s latest regulations, cooling measures, and rising environmental pressure amid sustained market growth

Foreign and domestic investors with an appetite for China continue to have significant opportunities in the country’s resilient real estate market. However, investors’ capability to overcome the challenges of stricter financing requirements, ongoing regulatory changes and heightened environmental concerns to foster greener buildings will substantially impact their net returns.

"Market sentiment is positive about the potential for sustainable growth in China's real estate sector, driven by the country's continuous economic growth, the rapid pace of urbanization and upcoming events drawing international attention including the 2008 Olympics and 2010 Shanghai World Expo,” said Mr. Richard Ho, Deloitte China National Real Estate Industry Leader, at a press conference launching Deloitte China's Real Estate Investment Handbook 2008 Revised Edition ("The Handbook").

"While such optimism indicates a continuously active real estate sector in China, it may also trigger the Chinese government to further tighten measures on what is perceived as an overheated property market,” continued Mr. Ho. “Investors should strategically assess the regulatory changes in a variety of areas from tax, accounting, financing and structuring - if carefully managed, this can make a significant difference to net return on their China real estate investments."

To keep companies abreast of significant changes in the property market in China, Deloitte has updated The Handbook which serves as a resource for investors, investment advisors, fund managers and others participating in the real estate industry, providing guidance to assist the planning or maintaining of real estate investments. 

The revised edition covers the major changes of Circular 50 and Circular 130 in relation to restrictions on foreign investments, particularly the prohibition of foreign debt for foreign invested real estate projects, increased approval and filing procedures, and foreign exchange registration and requirements for structuring joint venture project companies.

Given the restrictions on foreign investment in China's real estate sector, Mr Malcolm Tam, Financial Advisory Services Leader of Deloitte China Real Estate Industry Group, expects an increased number of joint venture projects and offshore deals.

"The prohibition of foreign debt and other restrictions on foreign investments together with the tightening monetary policy may push investors to look for other financing options for their real estate investment projects.  Developing strategic relationship and establishing an equity joint venture with reliable local partners has emerged as an alternative solution for foreign investors," said Mr. Tam.

On the tax challenges for real estate companies, Ms. Nancy Marsh, Tax Leader of Deloitte China's Real Estate Industry Group, said: "There are various taxes of which China’s real estate investors must be aware with the key ones being Business Tax, Enterprise Income Tax, Urban Real Estate Tax, Stamp Duty and Land Value Appreciation Tax.  Investors, whether they are financing an investment, repatriating funds, or exiting the investment, all require detailed tax analysis and modeling in order to reach the right conclusions for an optimal structure.  It is critical for investors to have careful tax planning throughout the entire lifecycle of a real estate investment project."

Ms. Marsh added:  “We are now seeing a fast spreading recognition both by the Chinese central government and by responsible businesses and individual consumers of the importance of environmental concerns.  They are beginning to understand the high percentage of total energy usage that relates solely to buildings, and this realization will significantly affect their buying and rental habits in the future.  As such, we are now seeing a sense of excitement amongst developers on the potential for both easier regulatory approvals and increased attractiveness in the market if they develop something that is truly “green”.”

Deloitte China has a strong track record as a professional services provider to foreign and domestic clients in China's real estate sector.  It audits more than one third of the property development and construction companies listed on the Stock Exchange of Hong Kong.

Mr Ho added: "This Handbook draws on the insights that we have gained from our understanding of the developers' real estate investment strategies as well as our professional experience of serving real estate sector clients.  We will continue to update the Handbook when there are important changes in the investment environment of the real estate sector." 

The Deloitte China's Real Estate Investment Handbook 2008 Revised Edition can be downloaded here.