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Taking the Heat Out of the Property Market (with Chinese Characteristics)

Over 60 percent (and up to 90 percent in some cities) of land acquisitions for construction projects since September 2004 are reported to have been illegal, according to a report in Business Week that references a warning from the Ministry of Land and Resources that many projects have not received its official approval. Provincial governments are now being required to report un-approved projects.

The move seems to be part of an attempt to cool property markets in China – the Times reports that urban prices rose by an average of 5.4 percent in April (and up to 10 percent in some cities), and that prices in Beijing and Shanghai have risen by 300 percent in three years, making it difficult for most people to buy a home, and creating risks of negative equity should the market turn.

Another recent attempt to cool the market was a ban on new luxury villa developments. But as the Times notes, quoting Pan Xiaofu, a local sales manager: “This policy change on villas is good for business. The more rare the property, the higher the price.” Well, this is a “socialist market economy” after all. But, to be fair, an added aim of the ban is to protect land (and the rural poor) from further illegal developments.

These latest attempts to cool the property market (down payments have already been raised to 30 percent, and a 5 percent sales tax was introduced to limit rapid “flipping” of properties) show how quickly policy can change – especially when economic or social order is threatened. It is also a reminder of the risks associated with operating in legal grey areas, even when your good friend the provincial governor, local mayor, or other worthy official, gives support to a project.

Due diligence, including policy risk analysis, is critical when doing business in China. Or when buying a property.

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