Property Tax to Impact China's Hot Real Estate Market

Despite government's measures to curb property prices, China is having the biggest property market in Asia Pacific, underpinned by strong economic growth. The potential introduction of property tax on a nationwide basis is one of the biggest new factors affecting the real estate market in China and there is a stronger likelihood of such an introduction after Chongqing and Shanghai municipalities have announced their respective pilot property tax programs, according to Deloitte's China Real Estate Investment Handbook 2011 Edition.


"In 2010, there was no obvious sign of a price correction in China's real estate market despite cooling measures put forward by the government. More real estate projects were completed in 2010 and real estate companies were also exploring new fundraising channels to support new projects. We anticipate that further policy changes may be introduced in 2011, but the market will still enjoy considerable growth in the medium- to long-term," say Richard Ho, National Real Estate Industry Leader, Deloitte China. According to China's National Bureau of Statistics, the investment in real estate development in the first quarter of 2011 amounted to RMB 884.6 billion, up 34.1 percent year-on-year. In the first quarter of 2011, the sources of funds for real estate development enterprises reached 1,926.8 billion yuan, up by 18.6 percent year-on-year.


According to the Deloitte report, the real estate sector is likely to be affected by China's 12th Five-Year Plan, which includes steps and guidance for a sustainable industry growth. For instance, local governments are encouraged to increase their efforts in building affordable housing.


The report advises property developers to have proper funding plan, explore alternative funding sources, and adopt flexible strategies to handle the challenges posted by the uncertainty in government policies.


The report also highlights that real estate companies will have to make a choice between first- and second-tier cities as high property prices in the first-tier cities have encouraged people to shift to other locations. In addition, preferential policies enjoyed by the first-tier cities may be impacted amid concerns about the imbalance of regional development.


More pan-Asian focused private equity funds would invest in China and they may become one viable and cheap funding source for China's property developers which are still facing the challenges of a credit crunch and high costs of funds, notes the report.


The Handbook also says commercial properties will continue to offer attractive return although overpriced offices and retail properties in certain prime areas have raised some concerns for investors regarding prospective returns.


"A lot of things are happening in the real estate market in China and there is an important step taken in the development of real estate investment trusts (REITs). As the first RMB-denominated REIT, the initial public offering of Hui Xian REIT has been rolled out recently in Hong Kong. As the reporting accountant for Hui Xian REIT, we believe that this launch will pave the way for the further development of offshore RMB REIT, especially when it can provide a stable return in the current low interest environment and when there is a strong likelihood for RMB appreciation," says Matthew Sze, Developers Leader of Deloitte, adding that REITs will eventually emerge as an alternative funding source as investors gain more confidence towards China's property market, but this will be subject to the timeline for regulatory framework.


"We have seen new tax rules being launched in China and property developers should not be ignorant about some of the recent developments in taxation law and regulations," says Nancy Sun Marsh, Capital Providers Leader, Deloitte China. First, the State Administration of Taxation has issued various circulars which clarified the settlement and collection of land value appreciation tax (LAT). Second, circular Guo Shui Han [2009] No.698 and Bulletin No. 24 were issued to strengthen the administration of taxation on capital gains arising from non-resident enterprises' equity transfer.


"Even after we have seen the recent tax changes, mounting pressure for the government to control property prices and re-adjust its housing policy will prompt more tax changes, including the potential introduction of property tax in China on a nationwide basis," Marsh adds.




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