CHINA'S most populated city has lowered the costs for foreign investors to develop low-cost private housing but has capped the investment returns at 15 per cent. The Shanghai Municipal Construction Commission said new policies announced yesterday were designed to reduce the risks and red tape involved in building cheap flats for residents who had to make way for urban renewal and redevelopment. The news would be welcomed by Hong Kong developers, who are among the biggest foreign investors in low-cost housing for residents. The new policies included a new approach for building cheap flats. Under the alternative approach, the government will allocate the land to the Chinese partner in a Sino-foreign venture, with the foreign investor providing the funds. It will buy the entire housing project when it is completed, and will pay the foreign partner an after-tax return of no more than 15 per cent. The local authorities will take care of the demolition of the existing housing units, removing a politically sensitive task from the hands of the developers. Nova Chan, manager at Arthur Anderson (business consulting), said: 'What this effectively means is that the government borrows the money from the foreign developers and pays an interest of 15 per cent.' The risks for the foreign developers would be lower, as would be the returns. Under the existing approach, foreign developers usually team up with local parties to buy a plot of land for redevelopment. Joint ventures have had to pay a land transfer fee for the rights to the land. The Shanghai authorities yesterday said the transfer fees would be cut by 10 to 30 per cent, depending on where the land sites were. The government would also organise demolitions and the resettlement of existing tenants in return for an administration fee of three per cent. So far, 114 plots of land with a total area of 3.124 million square metres have been released for development of low-cost housing by foreign investors. Only 19 plots had been taken up by September. 'Foreign investors have been slow to come in because of the restrictions and administrative red-tape,' a property consultant said. The government would like to build 45 million square metres of low-cost residential housing by the end of the decade, providing a living space per person of about 10 square metres. At present, each Shanghai resident person has a living space of seven square metres. Construction Commission chairman Huang Yaojin said: 'The flats we're building are aimed at local residents in the middle-income group.' In the past three years, the city has demolished 8.6 million square metres of old housing and has built 20.4 million square metres of new flats.