Changes could help to level playing field

The Shanghai residential market is set to change as the mainland government prepares to launch new regulations to unify the granting system of land for foreign and domestic housing.

Property consultant DTZ Debenham Tie Leung Shanghai said the city planned to replace the present segregated foreign and domestic land-use system to stimulate overseas investment interest.

Under the present system, foreign and domestic investors face a different real estate environment. Foreign investors are not encouraged to set up wholly foreign-owned enterprises for developments in Shanghai and the participation of a local partner is needed.

In addition, a 30 per cent land-price premium is imposed on land granted for foreign use, which substantially increases development costs compared with domestic developers.

These two obstacles, along with stagnant market conditions resulting from the Asian financial crisis, had discouraged foreign real estate investment in recent years, the consultant said.

The lack of foreign investment has led the Shanghai government to reconsider the system.

'Foreign developers now show scant interest in paying premiums for land purchase, given low returns resulting from a declining rental market and high project development costs,' DTZ said.

'To stimulate direct foreign investment, the government is contemplating removal of the foreign land premium, which should create a more level playing field.' The company said the move would grant foreign developers greater flexibility in project selection and permit more active participation in the burgeoning domestic housing market. This could help revitalise a stagnant investment environment.

'There is also a political factor imperative to the removal of the segmented land system. China must initiate land system reforms as part of the requirements for entry into the World Trade Organisation, which prohibits discriminatory practices towards foreign investors,' it said.

It said new land-use policies should create more incentives for foreign investment by eliminating the need for local partners, which should allow greater project control, improve cost management and increase overall project profitability.

The consultant said new supply in Shanghai's foreign residential market would decline over the next 12 months, given the tight government control of land allocation.