Saturday, 27 December 2008
The Ultimate Attempt to Rescue House Market, But Then What?
The Chinese government is putting effort into its attempts to reverse the slump of the real estate market. Besides cutting transaction taxes, it is also now allowing developers with sound credit to issue debentures and real estate investment trusts (reits). This is the government’s first clear funding support for developers in two years.
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The Ultimate Attempt to Rescue House Market, But Then What?
CSC staff, Shanghai
25 December 2008
The Chinese government is putting effort into its attempts to reverse the slump of the real estate market. Besides cutting transaction taxes, it is also now allowing developers with sound credit to issue debentures and real estate investment trusts (reits). This is the government’s first clear funding support for developers in two years.
Although domestic developers have already issued reits in Hong Kong, so far no reits products (corporate trust investment fund issued publicly) in a real sense have been issued in China.
Tax problems are the biggest obstacle for reits. As, according to China’s current laws, companies issuing reits must pay corporate income tax on them, while shareholders must pay personal income tax on the dividends, the rate of return as well as the attraction of reits is reduced. Some countries, such as the US, Germany, Australia, Japan, and Singapore, exempt corporate income tax for dividends distributed to investors to avoid double tax charge and lift the rate of return.
Supervisory departments haven’t issued any detailed regulation for reits, so as yet there is no solution. But real estate companies and fund companies are still eager for reits. Many fund companies have already established reits departments. Song Liping, general manager of the Shenzhen Stock Exchange (SSE), declared at a forum at the beginning of December that SSE had submitted a reits product scheme.
Shanghai and Tianjin are eager to give them a try. Tianjin is very likely to be the birthplace of the first reits product. The process will be decided by the formulation of trading rules and the approval speed of supervisory departments.
Everything looks to be ready, but a real problem is that housing prices are still in decline. Consumers at present prefer to hold on to their cash and banks are unwilling to grant loans to developers, even though the central bank has lowered the deposit reserve ratio and cut loan interest rates five times this year.
The central government is encouraging local governments to stimulate real estate consumption in their own ways to promote economic growth, and local government policies tend to be more far-reaching than those of the central government. Even these, however, are offset by out-of-line housing prices.
Tax refunds to housing buyers may be the last the government can do. In 2003, Shanghai implemented such a policy, but it was cancelled one year latter due to booming trade volume. Now Shanghai and Chongqing are planning to resume the policy.
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