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Overview of the Real Estate Industry in China February 8, 2018
Overview of the Real Estate Industry in China

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In the last few decades, the Chinese economy has been expanding dramatically, and China is now the second largest economic entity in the world. As a pillar industry, real estate made an unprecedented contribution in stimulating economic growth and increasing government revenue aspects compared to other industries. 

1.History Of Chinese Real Estate Industry

The government of China first began real estate development in 1981. After the policy which demanded all corporations controlled by government and all government agencies providing permanent residence to their employees was abolished, the real estate industry officially entered its “Golden Period”. Moreover, to help the corporations who set foot into this business passing through the economic crisis in 2008, a large amount of new regulations was created by the Chinese government which resulted in residence trading business increased rapidly. Meanwhile, the real estate industry reached a peak of expanding. From 2008 to 2012, residence price grew steadily, and from 2013 to 2015, under the effect of austerity measures that Chinese government released, the speed of real estate property growth was slowing down. However, the real estate market awakened from its “down time” in 2016. The sale in the first six months was 4,868.2 billion RMB – a 42.1% increase compared to other years. As for now in 2017, the Chinese real estate market is still vital even though the global economy is relatively down.

2.The Characteristics of the Chinese Real Estate Market

After overviewing the history of the real estate industry, it’s clear to draw the growth curve. We can say overall the market is healthily expanding, and mainly it is determined by the characteristics of Chinese real estate market.

A.Urbanization Leading To Massive Consumer Demand  

First of all, China has the largest population in the world which means consumer demand will not be satisfied easily. This demand can be divided into two parts – residence in urban area acquisition and residence improvement. According to census report, currently the population living in urban area in China is 0.77 billion. Urbanization ratio is 56.1% for now and the 13th national five-year plan suggests this ratio will be 60% in 2020. There is no doubt the amount of residence acquisition will be keeping increasing caused by such urbanization process and provide more spaces for real estate market growth. As many people starting to earn more income, the satisfaction for residence improvement which mainly is the satisfaction for average living space per person also needed to be fulfilled in a short time. In most of the developed countries, average living space for one individual is 387.36 to 667.12 square feet. Chinese government is dedicating providing the same, and based on primary estimation, it will be accomplished by the end of 2020.

B.Financial Pillar of Provincial Government

Not only the market factors, but monopolistic control to real estate industry provided by provincial government’s “tangible hands” is another reason which keeping pushing the real estate property price that cannot be ignored. Land-transferring fee collected by provincial government before October in 2016 was 2,654.6 billion RMB, which is 88% of their revenue at the corresponding levels. On the other hand, many different types of taxes like increment tax on land value, urban land utilization tax, tax on the occupancy of cultivated land, and deed tax are also involved into real estate industry. The total revenue from all taxes mentioned above is 3,044.8 billion RMB for the first ten month in 2016, and is 41% of the public budget. After a rough estimation, 40% of provincial government’s revenue is from real estate. Without a fundamental economy structure, it is unlikely the real estate market growth will be shifting into a side that is not favoring government.

C.Market Differentiation & Macroscopic Adjustment

Comparing to west side of China, the economy in east side is more developed which causes real estate market differentiation. First and second tier cities which has significant impact to both political and financial activities have geographic position advantages including a full set of public facilities, high level of income, advanced education and attract many people. The real estate markets in these cities have a tight supply pattern. However, third and fourth tier cities which only have relatively developed economy comparing first and second tier cities are facing the pressure caused by population loss. To establish and improve a procedure that will guarantee the healthy and steady growth of real estate market and to enhance the control of property in different market categories, government has pointed out that designing policies specialized for third and four tier cities has already become their main focus. On the other hand, new policies including “limited purchase, limited mortgage, limited price, and limited sale” are preventing the real estate market in first and second cities from too “hot”. In order to ensure the good will of residence trading in the market, Central government defines “rental right” as tenant has the same right comparing to residence owner in basic service provided by community, defines “joint right” as residence purchaser who pay part of the total price of sale and government can be the owner of the property simultaneously. And to restrain the speculative investment, enhanced property tax policy has been created and will be implemented in Shanghai and Chongqing. Pilot Cities will be increased. With the help of macroscopic adjustment made by government, residence price increasing speed in first and second tier cities is slowing down. Third and fourth tier cities which have larger amount of residence reservation release policies to encourage more people settling down. Many new policies for example, residence purchasing rebate, low percentage of down payment, and mortgage rate preference etc. could not be more helpful in saving local market and resolving storage problem.

3.Trend Of Development of Real Estate Market In Future

To summarize, under the double effect from both market and government, the real estate industry is filled with uncertainty. Nevertheless, the market in China still has lots of potential which means the increasing speed of demand can exist for a long time. The real estate market indeed will have a healthy and steady growth.      

 

Article by Eric Dong from Baicheng Tax Consulting Services, member of HLB's Real Estate Group. Contact Eric on dongh@baichengtax.com