Deloitte's China Real Estate Investment Handbook highlights uncertain outlook for China's property market in 2012DOWNLOAD
Publish date: 13 March 2012
Government measures will continue to create short-term uncertainties for China's property market in 2012 although real estate companies have now become more capable of locating alternative capital sources to handle their funding challenges. While real estate companies will continue to face an uphill battle in the residential market, the hospitality and senior housing sectors are emerging as potential growth areas, according to Deloitte's China Real Estate Investment Handbook 2012 Edition ("the Handbook").
"There is not a strong likelihood for the government to lift the measures to curb property speculation. With the yet-to-be seen impact from the 12th Five-Year plan and the negative influence from external factors, the outlook of China's real estate market will remain uncertain in 2012," said Mr. Richard Ho, National Real Estate Industry Leader, Deloitte China.
Mr. Ho added, "Regionally, the government has re-affirmed its commitment to enhancing the railway networks in China and other infrastructure developments across China will smooth out the real estate variances among cities in the same location, for instance Beijing and Tianjin, Shanghai and Hangzhou, and Guangzhou and Shenzhen."
The Handbook remarked that since 2003, the Chinese government has been trying to introduce a real estate tax, which aims at levying annually based on the market value of a property during the holding period. "The government is assessing the impact of real estate tax in pilot areas Shanghai and Chongqing and indicates that the scope of charge of the tax will expand geographically into other major cities in China. Not only does the nationwide introduction of real estate tax provide the funding for affordable public housing, it also manifests the government's determination to tighten the control of prices for residential properties" said Mr. Gary Chan, National Capital Providers Industry Leader of Deloitte China.
The Handbook also highlighted that investors need to closely monitor the development of anti-avoidance and tax treaty abuse in China when they set to structure their real estate investments. To avoid unexpected tax traps, investors need to conduct a detailed tax analysis and planning throughout the cycle of a real estate investment in order to develop an optimal company structure.
As a result of the government's curbing policies, Chinese property companies have been trying hard to explore new financing channels over the past two years. The Handbook presented a number of emerging channels, such as property bonds, property trusts and offshore renminbi (RMB) real estate investment trusts (REITs), with each characterized with different costs, investment terms, yields and risks.
"Property companies have development projects at different stages and scales. To identify a suitable funding source, companies have a number of considerations, including regulations, cash flow, cost of borrowing, tax deductibility and currency," said Ms. Rebecca Wong, Real Estate Fund Service Leader of Deloitte China. "Among all the financing instruments, the financial market expects property bonds have the greatest growth potential with the development of offshore RMB markets and the demand of RMB denominated products."
Looking ahead, Mr. Ho concluded, that real estate companies are looking forward to the development of China REIT (C-REIT), which will bring additional finance and liquidity into the market. However, it will take more time for C-REIT market to mature as C-REIT legislation is yet to come and it is also unlikely for the government to immediately address issues on REITs.
"We see the hospitality and senior housing sectors will bring more excitement to the market. For the hospitality sector, it is enjoying fast growth in the number of hotel from about 237,800 in 2003 to approximately 328,000 in 2010. The rapidly aging society in China and the associated increase in the demand for senior housing will also generate opportunities for real estate companies," Mr. Ho said, noting that China is expected to have 450 million of people at the age of 60 or above by 2050.