China's real estate market seen more active in 2013
The emergence of business trust as a new fund raising vehicle
Published: 30 July 2013
Despite China's commitment to price control, the government will ensure that any measures taken will not hurt the property market as an economic growth engine, especially when the economy is still on the road to recovery. In 2012, tightening measures contributed to a partial deflation in property prices in China and undoubtedly, these manoeuvres will continue to exert substantive impact on the property market this year and beyond, according to Deloitte's China real estate investment handbook 2013 edition ("the Handbook").
"The government understands the importance of controlling prices in the property market due to its welfare nature and that was behind the release of the State Five Measures in February. However, the country still relies heavily on fixed investment especially in the current economic slowdown. The overall investment in the property market is likely to climb gently along with the recovery in sales this year. The regulators will keep a close watch on the industry and if prices rise sharply, more restrictive macro measures will be put in place. It is a matter of maintaining the right balance but we can anticipate more rational prices and volumes going forward," said Mr. Richard Ho, Real Estate Managing Partner, Deloitte China.
The Handbook continued to emphasise how urbanisation is constantly driving the real estate market in China and the country's urban population is expected to rise to nearly 1 billion in two decades from the current 691 million. Yet, economic growth and urbanisation cannot alleviate the funding challenges faced by property companies as a result of their declining profitability and operating efficiencies, as well as the tightening of monetary policy in China since 2010.
"Funding constraint is serious in China and the average debt-to-equity ratio for Chinese property companies stands at 0.98 reported in 2012, which is double the norm of 0.5 in general. Funding challenges have a number of implications for property companies. First, smaller property companies which have been struggling to survive will become the acquisition targets by their larger peers. A number of landmark transactions highlighted the possible acceleration of future strategic moves by leading property companies," Mr. Ho added.
Mr. Matthew Sze, Developers Managing Partner, Deloitte China said another important implication is the emergence of business trust as an alternative funding vehicle for Chinese real estate companies. The Langham Hospitality Investment, a spin-off by Great Eagle was listed in late May 2013. Any businesses that are fast growing and having mature, stable and adequate operating cash inflow characteristic could be ideally structured into a business trust for an initial public offering. As such, business trust is a viable fund raising channels for real estate companies, especially for those anchored with loans.
"Compared with Singapore, Hong Kong does not have the same level of maturity in having the framework and track record for the listing of business trust. Yet, we can envisage the growing popularity of business trust for Chinese real estate companies in the Hong Kong market because business trust is relatively more flexible in its distribution policy and gearing requirement. This would give better leeway for Chinese real estate companies, which are currently under tremendous funding pressure," Mr. Sze added.
The Handbook also covered major tax regulations for the real estate sector in China. Irrespective of industry sector, offshore corporate investors (including HKSCC Nominees Limited, corporate nominees or trustees such as securities companies and banks) may now be subject to a withholding tax of 10% for dividend received from any Mainland resident company. Even with an offshore domicile, a company may be regarded by Mainland tax authorities as a Mainland tax resident if its effective management is located in the Mainland. Many red chip Chinese companies, which were incorporated outside the Mainland and listed on the Hong Kong Stock Exchange, may be regarded as Mainland tax residents.
"For Mainland real estate enterprises, given the recent trend of land auctions and shell acquisitions in Hong Kong, outbound investments and the like, they may consider revisiting the location(s) in which their listed vehicles in Hong Kong may be effectively managed." said Mr. Gary Fung, Tax Partner, Deloitte China.