Resettling costs worry investors

Higher expenses needed to move residents have made some international funds hesitate before investing in new projects

As house prices continue to climb in some mainland cities, so do resettlement costs, raising concerns for property investors in China.

Property consultants said the minimum resettlement costs set by the city governments - on the basis of property price movement - had risen more than 150 per cent in some cities since 2003.

The rising trend has made some international funds hesitate before investing in new projects.

'Major institutional investors will not invest in projects where resettlement costs have not been settled,' said Kenny Ho, the head of research of Jones Lang LaSalle's Shanghai office. 'It is not just about cost. It is about time.'

The discussion of resettlement costs can drag on for months and that will lengthen the project's investment period. Foreign funds will usually set an investment period of three to five years with double-digit returns from every investment.

'Resettlement fees are rising mainly because of the rising housing prices,' said Charles Zhang Xiaolong, an associate director of the research department at Colliers International Shanghai.

'Residents moving out will ask for compensation fee at the average housing prices near their old neighbourhoods. And they will ask for a price that allows them to buy back a big enough house after resettlement.'

Resettlement costs are paid in different ways depending on the situation, the city and the district.

Resettlement costs in major cities have surged since 2004, according to Mr Ho.

'There are two reasons for the surge,' he said. 'One is that residential prices went up a lot after 2004. As a result, more people living in downtown saw their flats being bought out for new development. That boosted the resettlement costs.

'The other reason is the introduction of a constitutional amendment in 2004 that has a clause to protect private property.'

Since then, residents have more power to negotiate with developers on relocation compensation.

In Shanghai, residents demanded crazy prices when the market boomed, he said. But it became more realistic in these two years while the government imposed macroeconomic measures to regulate property prices.

'In one case, an investor was asked to pay seven million yuan for one house, which comprises two households, on a site where the investor plans to develop a project,' said Mr Ho. This was the last house left on the development site.

To resolve the resettlement cost problem, some municipal governments will be responsible for relocating residents.

In recent cases in Shanghai, the land that developers get after bidding is usually 'cultivated', meaning the destruction of old houses and resettlements are already completed and developers do not have to deal with the resettlement problem directly, according to property consultants.

The destruction of old houses is carried out by demolition and moving companies while valuation of the old houses and compensation fee are dealt with by asset valuation firms. They are usually hired by local governments.

However, resettlement costs still weigh on a developer's budget, if not in a direct way.

'Resettlements are already contained in land costs,' Mr Zhang said.

'Municipal governments of different cities will valuate the resettlement costs and add that into the consideration before they put a piece of land out for public tender.'

But there are also cases in which developers will get involved more directly with the resettlement.

In some second-tier cities, such as Nanjing, Suzhou and Wuxi, developers may get a piece of land that is still in the 'undeveloped' stage.

'Some developers will team up with local governments to set up joint ventures and get involved in the resettlement,' Mr Zhang said. 'The governments will have certain shareholding in the joint venture.

'In cases like this, developers still rely pretty much on governments to resettle former residents.'

Alan Ngok Fung-kong, a senior associate director of DTZ Debenham Tie Leung (Beijing), said: 'Resettlement will not be done without government support. Policies and guidelines are all set by the governments.'

Despite the high resettlement costs, many developers will continue to invest in the fast-growing real estate market in China.

'Unlike institutional funds, developers do not have a restricted time frame to get their investments profitable. Developers usually will pay the cost as they do not want to give up the plan,' Mr Ho said.