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About this book

China’s economy has been transforming rapidly over the last 25 years. As a result, Chinese conurbations have changed remarkably, with cities expanding both vertically and horizontally, and the physical environment acting as a medium for unprecedented urbanization. This has provided vast opportunities for investors, real estate developers, and service companies, but also presents huge challenges—as traditional city spaces have been reconfigured, environmental risks and the volatility of real estate markets increased. However, as engagement with China is becoming strategically important for many, forming a synthesized lens through which to read China across the vicissitudes of its real estate sector bears historic significance.

By offering an insightful framework and structure for understanding China’s variegated real estate dynamics, players, and markets, Understanding China’s Real Estate Markets codifies the principles and practices of real estate development, finance, and investment in China and builds foundations for future academic research and practical knowledge in shaping and engaging the urban environment within China and beyond.

Table of Contents


Understanding China’s Real Estate Markets: A Brief Introduction

This chapter serves as an introduction to the book. It highlights the unique context and original intentions for this book, which focuses on the transformation of China’s real estate markets. It presents the book’s organizational structure and briefly summarizes the content of each chapter. By looking closely at the conditions and characteristics of the various critical aspects of China’s real estate markets, this book aims to establish a connection between the disciplinary knowledge and the practice of real estate while situating real estate in the context of China’s overall economic outlook, its legal system, financing mechanisms, and asset-defined physical and social development patterns.
Bing Wang, Tobias Just

Structural and Macro Economic Aspects of Real Estate in China


The Evolving Real Estate Market Structure in China

In recent decades, the real estate sector has emerged as one of the key drivers of China’s economic growth engine. However, limited work has sought to illustrate the evolving market structure and key players within this sector, especially from a historic perspective. This chapter provides an overview of the formational trajectory of China’s real estate market structure over the past 40 years and characterizes two critical players of the industry: state-owned enterprises and publicly listed real estate companies. The chapter highlights the complexity of the real estate market’s institutional characteristics and introduces the intersection among China’s urbanization, the evolving structure of its real estate sector, and the potential trajectory of critical real estate players.
Bing Wang

Navigating the Property Data Landscape

China property data, especially in the housing markets, are surprisingly rich, are broadly available from both government and independent private sources, and yet are unstructured and highly nuanced to interpret correctly. The office, retail, industrial, and niche sectors have less transparent data, mainly served by the established brokerage firms and industry associations. The increasing competition between developers in a more mature market, availability of alternative data, and China’s big push for artificial intelligence all drive a growing interest in and supply of the data. This chapter provides a practical introduction to China’s property data landscape from an institutional (investor, fund manager, developer, and lender) perspective, focusing on the housing markets, in the context of decisions related to investments.
Robert Ciemniak

China’s Economy at the Crossroads

The Chinese economy has experienced impressive growth since the late 1970s, driven by ongoing market-based reforms as well as integration into the world economy. However, growth has been biased toward the industrial sector, investment, and exports. The recent buildup of private sector debt, rising inequality, and increasing environmental problems are casting shadows over the economic outlook. The chapter discusses the roots of the growth miracle as well as complications that have arisen in recent years as a result of a more challenging international environment, imbalanced growth in the domestic economy, and limited appetite to implement further liberalization.
Klaus-Jürgen Gern, Philipp Hauber

China’s Provinces: Addressing the Discrepancies at the Local Level

As China embarks on a path of economic rebalancing, regional differences in dealing with slowing growth, volatile property prices, and changing investment and consumption patterns have moved into focus. It is often local challengessuch as Zhengzhou’s coping with a fading housing boom or Hainan’s growing debt burden—that shape the perception of China’s economic health. In fact, while all 31 provinces are affected by China’s transition, regional differences remain substantial. Not only is there huge variation in the provinces’ ability to stem China’s planned shift from investment-driven growth toward more sustainable and consumption-led development. But provincial risks are often at the root of China’s current reform trends, also, notably with regard to fiscal reform and the recent push to establish a functioning local government bond market.
Hannah Levinger, Christian Braun

Hong Kong: A Review of Its Land System, Real Estate Market, and Related Matters

This chapter aims to review and help explain the land administration system and real estate market in Hong Kong, as well as what has changed and, just as importantly, what has not changed. The significant role that the Hong Kong Special Administrative Government (HKSARG) has on the local real estate business, together with its regulatory functions, is examined. Hong Kong’s inevitable convergence, and in some cases divergence, with its neighboring cities located in mainland China north of the border, are also discussed.
Roger Nissim

Legal and Regulatory Environment for China’s Real Estate Markets


Legal Framework for Real Estate Investment in China

While the past few years witnessed muted foreign investor activity in Chinese real estate due to governmental restrictions and fierce competition from domestic capital, a change is now underway. China’s enormous population and differing residential requirements clearly distinguish it from other countries. Before investors jump into the fray of the Chinese market, it is important to know the unique rules and regulations regarding the acquisition of Chinese property. In this chapter, the reader will learn about the legal framework for investors and the differences that characterize the Chinese real estate market. This chapter is based on the recent relaxation of restrictions on foreign investment in the Chinese real estate market.
Qian Ma

Real Estate Valuation in China

Property valuation has become increasingly important in China due to growing merger and acquisition (M&A) activities. Although the same internationally accepted valuation approaches are applied in real estate valuation in China, a number of local particularities need to be considered, including the special regulatory environment and the unique ownership structure, such as the so-called land use rights, as well as volatility in market developments.
Florian Hackelberg, Nova Chan

The Regulation of Leasing Activities

Chinese law provides a national-level regulatory framework for leasing. Variation, however, can occur among different localities in respect of local regulations. Moreover, different customs exist in different localities, which can affect matters such as the amount of the rental bond, frequency of rental payments, and whether subleasing is acceptable. In this chapter, we outline China’s national-level regulatory framework for leasing activities. Local regulations and practices are also discussed, though no attempt has been made to systematically address local regulations and practices.
The leases discussed in this chapter involve the periodic payments of rental for the occupation of real estate premises, similar to leasing arrangements made elsewhere in the world. This is to be distinguished from the granting land use rights in China, which can also be referred to as leasing from the government. As discussed below, all land in China is owned either by the government or rural collectives. Government-owned land may be transferred to an individual or company for a certain period of time (between 40 and 70 years, depending on the usage) in exchange for the payment of money. This arrangement is sometimes referred to as granting of the land use right or lease of land. For the purpose of this chapter, our discussion does not include the granting of land use rights, which is regulated under a different regulatory regime.
Karen Ip, Nanda Lau

Tax Framework for Accessing Real Estate Asset Classes

Real estate investment in China provides an enormous opportunity for significant capital appreciation and rewarding returns to foreign investors. Yet, the regulatory and tax regime governing foreign investment in China’s real estate sector is complicated. Respectable return on a successful real estate project could be easily wiped out by uncertain or unexpected taxation rules. Thus, in order to avoid pitfalls, robust tax considerations are essential throughout the life cycle of different types of real estate projects. The purpose of this chapter is to highlight the application of taxation frameworks for international investors, in particular key tax challenges when investing in the real estate sector in China.
Matthew Wong

Finance and Investment for Real Estate Development


The Leverage Game: From Offshore to Onshore

In the years after China’s housing reforms in 1998, demand for both residential and commercial properties soared, and developers responded by rushing into aggressive land bids and property construction to meet market demand. For most Chinese developers, residential developments are always preferred over commercial assets, as residentials have a broader customer base and it is easier to apply a strata-titled sales approach to increase asset turnover and improve profitability. However, during the recent consumption boom, Chinese developers have transformed to include office and retail development in their portfolios. Aggressive project launches translated to high leverages for the Chinese developers. While traditional bank loans remain the main source of funding, in recent years Chinese developers are also adapting a more flexible approach in securing their working capital and lowering their cost of funding. In this chapter, an overview of the main funding mechanisms for Chinese developers is discussed, which includes offshore corporate bonds, onshore corporate bonds, perpetual bonds, trust firms, peer-to-peer (P2P) lending, crowdfunding, commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS), real estate investment trusts (REITs), and joint ventures and strategic alliances.
Dave Chiou, Joe Zhou, Megan Walters

Housing Financing at the Crossroads: Access and Affordability in an Aging Society

The property sector plays an important role within China’s economy. The housing market accounts for about a quarter of Chinese GDP. Any swings in property prices have therefore a considerable impact on economic growth and stability in China. Despite having laid the foundations for a market-oriented housing and housing finance system, the government has retained a strong grip on the sector through administrative measures as well as a tight management of interest rates to influence the pricing of housing loans.
To date, despite rising house price inflation (HPI), the government has managed to avoid the building up of a property bubble, influencing banks’ lending through tight regulations (especially interest rate fixings and loan-to-value limits). According to the latest research, it appears that challenging issues are supply-demand imbalances between smaller and larger cities due to restricted provision of land for construction of residential properties. Between July 2016 and March 2019, mortgage lending grew from RMB 16 billion to RMB 29.7 billion. It accounts for about 60% of total household debt and 19% of all bank loans (compared to 30% in Korea and 23% in Japan). The increased demand for mortgage loans is expected to place continued pressure on the housing market. With house prices still rising, the government may be encouraged to rethink this approach as lower income groups may face rising challenges to afford a home.
Friedemann Roy

Listings and M&As of Chinese Real Estate Enterprises

Many domestic and foreign investors are paying great attention to the issues of real estate enterprises’ listings and M&As within China. The Chinese supervisory authorities have made an effort to regulate the capital markets relating to the real estate industry in order to improve transactional efficiencies and management of real estate development and investment activities. This chapter discusses the circumstances of the real estate industry’s initial public offerings (IPOs), both domestically and overseas, based on an analysis of related laws and regulations issued by competent authorities. Some critical M&A matters in the real estate industry are also presented in this chapter to help readers understand the scenarios and situations before making plans to invest in real estate in China.
Qingjun Jin

Scenarios of Real-Estate-Backed Securitization and Financing

With constant shifts in government policies, Chinese developers are finding it increasingly difficult to make projections on how future projects will be financed. As a result, in the past 4 years, asset securitization has become a relatively popular option for Chinese developers. This chapter provides details on China’s asset securitization policies and the regulatory hurdles that need to be addressed. Examples are also highlighted to reveal how commercial mortgage-backed securities (CMBS) products are packaged in China and why some developers are choosing CMBS over traditional bank loans. While China is still in the early stages of asset securitization and CMBS, the market potential for such products could grow substantially over time.
Dave Chiou

The Development of REIT Markets in Greater China

This chapter provides an overview of the development of real estate investment trusts (REITs) in Greater China. Prior to 2015, there was no established REIT market in mainland China. However, since the Chinese regulators approved the mainland’s first REIT investment structure in June 2015, it has been open to selected institutional investors. An alternative way for private individuals and other small-scale investors to gain exposure to specific Chinese real estate assets is through offshore RMB-REITs. This chapter considers the regulatory structure of REITs with a focus on Hong Kong and Taiwan. It also analyzes the current performance of offshore RMB-REITs, Hong Kong and Taiwan REITs, and summarizes the opportunities for and current obstacles to the development of REITs in China.
Bing Zhu

Real Estate Private Equity Investing in China: From a Practitioner’s Perspective

Being the second-largest economy in the world, China is a complicated assemblage of many different submarkets For investors, it is essential to be on the ground in China or have a team with similar capacity in order to fully comprehend the investment opportunities and be successful. This chapter highlights insights and observations by a private equity real estate fund management team in its 20-plus years of on-the-ground real estate investing experience. Some of these experiences include revitalizing neighborhoods and not just focusing on buildings, forming an in-house team from the ground up, and nimbly and creatively bringing together best practices from both West and East to make it work. These observations are informed by actual investment projects, three of which are presented as case studies. Based on experience and observations, seven “immutable” principles are suggested, from a practitioner’s perspective, for succeeding in China’s real estate industry.
Christina Gaw

Real Estate as a Physical and Social Asset Type


Sustainable Buildings and Practice in China

Sustainable buildings, or more commonly referred to as “green buildings” in China, are an integral part of the country’s path toward sustainability. There are both opportunities and challenges in China’s green building market. Opportunities lie in both architecture and building engineering, as well as planning and urban development domains. The recently appeared WELL building concepts may also be promising in China. On the other hand, the development of green buildings in China face challenges in awareness and regulatory standards. Moving forward, the certification-focused developers will introduce new technologies to increase the value of green building labels. For technology-focused developers, they will need to combine their advanced core technology with the existing ones to capture larger shares of the market, particularly in the residential area. The ideas and concepts that may bring about technological integration will be the main drivers in the market.
Sean Chiao, Nancy F. Lin

Thoughts on China’s Real Estate Policies

This article shares the author’s suggestions to the orientation of public policies regarding the real estate industry and market. Highlighting the importance of avoiding broad-brushed centralized policies for all without consideration of local specifications and providing a policy focusing on equality, the author advocates a legalized structure of effective tax mechanisms to curtail speculation and encourage location-based guidance to real estate industry operations.
Baoxing Qiu

Minding the Strategies: A Progressive Development Model

Based on its rapid economic growth of the past four decades, China has the largest real estate market in the world. However, given the sheer number of domestic and foreign real estate enterprises operating in China, it also boasts one of the fiercest industrial competitions worldwide. The real estate enterprise Evergrande has the largest scales of real estate development operation in the country, and its business strategies of the past 20 years have followed progressive stages—namely, choosing the right scale for residential units, expanding into second-tier cities, returning to first-tier cities, and promoting diversified business operations.
Haijun Xia

China’s Housing Markets

House price growth in Chinese metropolises for the last three decades has been impressive, to say the least. Long-term trends, most of which are still intact, have been fueling housing demand. Therefore, it is unlikely that the demand for urban residential units will weaken in the near future. Much of this momentum is backed by fundamental factors such as income growth, urban population growth, and access to capital. However, at the same time, affordability and rental yields have deteriorated over the last few decades. Thus, the risk of housing market bubbles is elevated, and this applies particularly to housing units built about 20 years ago and which do not fulfil the quality demands of the rising middle class today.
Tobias Just, Hannah Levinger

Hotel Markets and Development in China

Over the past ten years, the five-star hotel market in China has grown at a pace of 11.8% a year. While growth was predominantly driven from the Tier One cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, there is now a push to develop key resort destinations as well as Tier 2 cities. Key to this growth has been a focus on the high-net-worth Chinese consumers. According to the Global Wealth Report in 2019 by Credit Suisse, there were 100 million Chinese among the world’s top 10% of richest people, compared with 99 million in the United States. Together with a continually emerging middle class, this has prompted greater liquidity in the market, resulting in travel for both business and leisure increasing at the highest growth rate in the world. Developers have attempted to replicate the hotel market existing in other more developed economies throughout the world. In addition to this trend, the Chinese market itself has undergone a significant transformation. With the focus on eliminating corrupt government officials, the development market has been challenged with a reduction of luxury hotel use for government functions. An unstable regulatory environment creates difficulty in receiving timely approvals of development submissions. This chapter explores the importance of cultural differences in this market and how companies intending to enter the high-end hotel business must be prepared not only to develop and operate differently, but also to have patience in adapting to local policies and practices.
Michael A. Crawford

The Rise of Platform-Based Networks: Outlook for the Real Estate Brokerage Industry

The evolution of the real estate brokerage industry is characterized by the ever-emerging, expanding, and evolving network effect. Historically, the real estate brokerage industry developed in different countries around the world in three general forms of agent networks: the multiple listing service (MLS)-centered cooperation network among independent agents that is typical in the United States, through which a real estate listing service is created for and by real estate brokers to inform each other in selling their clients’ properties; the random stochastic informal cooperation network based on an Internet information platform, such as those utilized in Australia and the UK; and an internal closed cooperation network within individual brokerage firms, which is typical in Japan. Despite the differences, all three modes rely on the basic institutional guarantee of the exclusive listing agreement that is based on an “exclusive right to sell” contract where the listing broker receives a payment if the home is sold during the listing period regardless of who finds a buyer for the home. Meanwhile, due to the rapid penetration of the Internet, the boom in consumers’ demand for quality service, and the special backgrounds of open listing agreements, through which a broker has the nonexclusive right to sell the home and receive payment but other brokers or the seller may also sell the home without any payment to the listing broker, China is steering toward a completely different approach to brokerage, featuring a platform-based limited opening cooperation network.
Hui Zuo
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