Reits still a way off in the murky mainland market
The life of a real estate developer is one of intrigue and backroom dealing even in the world's most transparent economies. In a market as opaque as China, land sales traditionally have been treated as state secrets as developers make deals with officials.
But over the past two years the central government has made some efforts to establish a more transparent and regulated system to release land to the market, in part because of fears of social unrest over land requisitions by local governments working in collusion with property developers. The law now requires all land sales to be conducted by auction, offering a small level of transparency.'Of course there are still back room deals being done, this is China, but it is a lot more transparent than before,' said a senior manager at a large international real estate firm.
The new transparency and a crackdown on land requisitions have led to complaints from developers about supply shortages.
'Before, the biggest concern for us was selling apartments but now it is land supply,' said Pan Shiyi, chairman and co-chief executive of Beijing property developer Soho.
Liu Xiaoguang, chairman of Hong Kong-listed Beijing Capital Land's parent company, agrees the government is limiting the supply of land, even for state-owned giants such as his.
Restricted supply, combined with more open competition, has driven land prices up and put a strain on the finances of even state companies at a time when they were already under pressure from the government's macroeconomic policies.
Stringent rules were introduced early last year, aimed at cooling price rises and wiping out speculation, which curbed state-owned bank lending to property development projects and imposed heavy transaction taxes to deter speculators.
Now, to secure a bank loan a developer must first meet a set of onerous requirements, including securing a construction engineering permit, providing land usage and construction plans, paying resettlement costs for all former residents and, most burdensome of all, own the land outright before being allowed one yuan of bank finance.
Many mainland developers previously awash in cash have had to look beyond the state-owned banks to find funding, including contemplating Hong Kong listings.
'Local developers need financing from overseas and we will see more capital being raised in Hong Kong,' according to Lina Wong, Colliers International's managing director for East China.
Selling shares to foreigners in Hong Kong is not the only way for mainland developers to secure capital. Although the curbs on bank lending to developers led to a temporary slowdown in the construction boom, macroeconomic figures show a pronounced rebound in the second half of last year as developers began tapping alternative finance.
And the government's crackdown had virtually no effect on foreign investment banks and private equity funds that have been pouring into the commercial property market in particular. Many of the properties being snapped up are intended for inclusion in real estate investment trusts (reits), the popular new investment tool across the region. The mainland has not even resumed new share issuances following a nearly year-long ban, and mainland-listed reits are at least five years away.
For most mainland developers a Hong Kong or Singapore-listed reit is also out of the question, due to tax issues and something called the 'cash trap'.
The cash trap is created by mainland registered-capital requirements which force real estate investment companies to set aside a portion of their profits against depreciation costs on their properties.
A traditional reit is supposed to pay more than 90 per cent of its profits to shareholders in the form of a dividend, but under the mainland system that is impossible.
Of course, for reits to work they also need to be transparent. At present, that probably is too much to ask from most players in the murky world of mainland property development.
