Tighter property rules fail to deter foreign investors
First-quarter investment up 30pc to US$5.4b, says Deloitte
Foreign investors have not lost their appetite for mainland property despite the latest measures by the central government to cool investment, tax experts said.
Nancy Marsh, Deloitte China's real estate tax leader, said foreign investments in mainland property would not be adversely affected by measures targeting them because of the attractive returns of up to 30 per cent return in inner cities.
'So far, we have only seen one foreign institutional investor back out from the mainland as it failed to identity properties that could meet its target investment yield,' she said.
Overseas investors, particular those who had expanded into second- and third-tier cities, faced a new challenge when a circular jointly issued by the Ministry of Commerce and State Administration of Foreign Exchange in May urged local authorities to support Beijing's effort to slow foreign investment in the property market.
The circular announced tax investigations would be carried out on all municipal-level enterprises this month and next month, followed by a sample examination by provincial and state authorities from September to December.
The circular follows central government measures introduced last year to slow the level of foreign investment.
Foreign entities that intended to purchase properties other than for their own use must do so through a wholly foreign-owned mainland company or a joint venture with a mainland firm. They must also pay at least 50 per cent equity for projects worth more than US$10 million.
To further stabilise property prices, the central government in February began enforcing a land appreciation tax of 30 per cent to 60 per cent on capital gains on developers' projects.
Despite the tax measures, Deloitte said foreign investment rose 30 per cent in the first quarter of this year from the previous quarter to US$5.4 billion.
Anthony Tam, Deloitte's southern China deputy managing partner for tax, said the new tax regulations would not damp the interest of foreign investors, including Hong Kong developers. 'Developers still enjoy a good margin in the mainland while private equity funds are taking more of a long-term view,' he said.
Apart from greater potential in second and third-tier cities, overseas investors were also drawn by preferential terms granted by local governments as a means to attract funds for development of the local economy.
'Local governments of second and third-tier city governments are treating foreign investors in a friendly manner in order to attract investment,' said Ms Marsh. 'That is why local governments resist [implementing austerity] measures that will keep investors away.'