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Chinese Bidding Wars Driving Up Land Costs

[ Posted December 29th, 2009 ]

With new legislation set to take effect as of January 1 next year many major players in the real estate industry in China are locked in major bidding wars currently in heated competition with each other in order to snatch up as much land as they can as quickly as possibly in order to develop a strong foundation for development. This has led to the most recent price battle drawing to an end at a grand total of $545 million for a roughly 114,000 square meter plot of land in Shanghai, a price roughly 217% more than the initial asking price.

The irony of the matter is that the new legislation that is the cause of instigating these price wars that are continuing up until midnight December 31 was originally designed to prevent just such a thing as this from occurring. The law would require all new purchases after January 1 utilizing bank mortgages to have at least 50% of the purchase price paid back within a year, meaning in the case above that if the deal had closed in January instead of now a grand total of over $272 million would need to be paid back within one year’s time whereas the old law allows for the repayment of the costs to be spread out over a much longer period. This would make any land such as this that will most likely be treated as a “buy to let” plot for the time being in 2010 be feasibly unreasonable to purchase at that price, regardless of intent.

While it is anticipated that the new law will have some effect upon the Chinese housing market eventually the fact still remains that the price wars that are going on before it takes effect are causing prices to sky-rocket. By allowing the bidding wars to take place the value of the land is becoming artificially inflated and real estate development companies are forced to charge extremely high amounts to turn a profit. In the most recent case, for example, the developer would need to charge over $7,500 per square meter alone in order to make some sort of profitable gain out of the venture, effectively pushing up the value of neighbouring land even further.

For individuals not living in China this trend could be seen as a sign of what may be to come in some domestic urban areas where supply can not reach demand and as a result prices are soaring, especially in regards to some commercial property in key locations.

Chinese Investors Buying ‘Out’.

[ Posted November 23rd, 2009 ]

China’s robust and booming property markets have recently led to an influx of property investors coming to mainland China to capitalise on the ever upward property prices.

This would lead most people to think that mainland Chinese are doing the same, and they would be correct. However there is another trend that has occurred as a double -wammy of the strong Chinese economic markets and the recently crashing prices of the rest of the world. This is particularly noticeable in the markets of Hong Kong and Macao, as well as key areas in Japan.

Despite strong currency regulations restricting the flow of money out of mainland China many Chinese are turning to the depressed markets to invest their money in property. Hong Kong recent property prices shot up 30% in the last few months, responding to the sharp increase in demand.

But many of the Chinese are essentially breaking the law by doing so-why do they take these risks? The penalties of the Chinese government are not light, but it seems that they do not deter profit-hungry Chinese nationals who see property in Hong Kong and other places not only as a great investment but also as gateway to the outside world.

One of the main reasons for this is that although the law is clear on the limits of taking ‘The Peoples Currency’ out of China it is rather slack in it’s true application of the laws, even for the average Chinese person there are numerous ‘under the table’ approaches to getting cash out of the country via offshore banking or something as simple as carrying a suitcase full of cash across the border or contacting family members to group cash together. Hong Kong also seems to encourage this influx of cash stating that a suitable investor can become a resident by investing 6.5 million Hong Kong dollars.

But this is not all good. Especially for the locals of Hong Kong. There exists potential for the property markets to experience runaway price inflation where property bubbles vastly outstrip local wages and living costs, the problem is a tricky one as there is no shortage of mainland Chinese with money to fuel the bubble.

Foreign investors fade out of Chinese market

[ Posted September 24th, 2009 ]

Between 2005 and 2007, foreign investors purchased almost 60% of prime real estate assets in China. Now, however, that may be all over. In addition to the expected drop in purchases because of the global real-estate downturn, the Chinese government has also implemented new, tighter regulations on prospective buyers.

The research firm Jones Lang LaSalle concludes that state firms, insurers, national and provincial pension funds, the country’s sovereign wealth fund and the State Administration of Foreign Exchange will take up the slack from the loss of foreign investors by making purchases themselves.

The Jones Lang LaSalle report shows that the domestic share of total property investment grew to 70% in the first half of 2009, up from 36% in 2008.

China is deregulatibg its insurance industry. A new law will allow insurers to invest in the real estate market. It’s expected that this could pour 236 billion yuan ($35 billion) into the real estate market.

Recently, China Investment Corporation, the country’s $300 billion sovereign wealth fund, has indicated its intention to increase its investment in real estate.

The Corporation has already put money into Morgan Stanley’s new global property fund which will invest in China.

In addition, this report concludes that the global commercial real estate market will recover in about nine months.

 
 
 
 
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