china property

Proper land sale system may cause more Kaisas

PUBLISHED : Wednesday, 04 February, 2015, 6:05am
UPDATED : Wednesday, 04 February, 2015, 6:05am

The troubles facing mainland developer Kaisa Group are expected to increase efforts from both the government and the corporate world to cut down under-the-table deals, particularly in land transactions.

In a country where corruption is rampant in the real estate industry, some analysts estimate bribes can cost a fifth of property sales. If so, that would amount to trillions of yuan.

Property sales hit a record high of 8.1 trillion yuan in 2013 and fell to 7.6 trillion yuan last year.

“The government has been trying to establish a transparent and fair land sale system in recent years,” said Hui Jianqiang, vice-head of the Beijing Institute of Housing Technical Services Association. “Public auctions have become mainstream and private agreements with developers are phasing out.”

President Xi Jinping’s anti-corruption investigations over the last two years have found the property sector a hotbed of power-for-money deals.

The People’s Daily on Monday cited top party investigation teams as saying that over 90 per cent of property projects were illegal in some areas and property- and construction-related corruption was detected in eight of the 10 areas under regular checks.

As part of its efforts to stem bribes, the mainland last year launched its first nationwide audit of local governments’ land sale revenues between 2008 and 2013, totalling about 15 trillion yuan. But the findings are yet to be published and an announcement on it delayed.

How the officials use the proceeds from land sale has been unclear and there is rising public call for transparency. That money typically makes up a third of government income on the mainland, and as high as over 80 per cent in some cities.

With the anti-corruption campaign widening, analysts now warn other mainland developers may meet Kaisa’s fate this year.

How officials use the proceeds from land sale has been unclear and there is rising public call for transparency

Before Kaisa, the chairman of Agile Property, Chen Zhuolin, was put under house arrest for over two months as part of investigations into corrupt officials in Yunnan province.

Various reports from the media and analysts point to troubles of Shenzhen-based Kaisa are closely linked with disgraced former local officials. The company has denied these allegations but has given no reasons why its projects in the city have been barred from sale for over two months now.

Kaisa is known for its active involvement in redevelopment projects in Shenzhen, which brought in hefty profits as land parcels were often acquired at low prices. That made it very attractive to investors at a time when the industry was grappling with squeezing profit margins.

However, city redevelopment is still at an early stage in China, with proper regulations yet to be established. That makes it important for developers to have close relationship with local officials as land deals can be negotiated privately.

“City redevelopment established Kaisa’s fame and also caused it big trouble,” said Fang Ling and Cai Jianlin, analysts at mainland property consultancy China Real Estate Information Corp, in a report.

China would gradually improve policies to reduce ambiguity and grey areas for possible bribes, said Fang and Cai.

“Developers need to enhance self discipline and increase risk oversight of its subsidiaries, particularly in redevelopment projects,” they said.