Rising anxieties for China's property developers

"When will the property tax come out and how will it impact the market?", "Are we going to see the economy and real estate market crash?", "What are the prospects for developing elderly care properties?"

Puzzled Chinese property developers have a string of questions.

No specific control or fine-tuning policies were mentioned in the government work report, which outlined this year's reform priorities at the just-concluded annual parliamentary session. But the sweeping agenda touched upon financial, taxation and land reforms, all of which are set to impact the real estate market.

"No doubt China's property developers are facing challenges. They have to adjust themselves for expansive reform, seek renewed growth while surviving cut-throat competition," said Chi Fulin, director of the China (Hainan) Institute for Reform and Development.

"The road ahead will be bumpy, prepare for it," Chi said at a forum where over 200 real estate developers gathered last week.

FUTURE GROWTH: GOOD, BUT NOT HOT

"In the past decade, you just invested, built houses and the money would pour into your pocket. But now I feel pressure, not sure of the prospects," a property developer from southwest China's Chongqing Municipality said.

The picture is indeed not rosy.

Housing prices lost steam in February. New home prices in China's 70 major cities rose 8.7 percent year on year, down from the 9.6 percent growth in January. ' Meanwhile, regional divergence was marked between first and second-tier cities. Property price discounts in some of China's eastern cities last month caused jitters in the market and worries of an imminent crash.

"A sudden hard landing is unlikely now, as development of the real estate sector with the ongoing urbanization push will still be a major driver for overall economic growth," said Chen Huai, a senior researcher of housing and urban-rural development at the Chinese Academy of Social Sciences.

China revealed a blueprint of a new-type of urbanization in mid-March to prop up the economy amid flagging growth, with massive building projects of transportation networks, infrastructure and real estate expected from now to 2020.

"The market potential is there as long as China's urbanization continues," said Chen, adding that the hype about oversupply is just a result of a transition from short-term to long-term market equilibrium.

TAX REFORM: WAIT AND SEE

Chinese properties now face at least two swords of Damocles: the gradual replacement of business tax with value-added tax (VAT) and property tax.

With the aim to reduce the tax burden on Chinese companies, VAT will replace business tax nationwide by the end of 2015.

At the moment financial, property and some other sectors have been left unchanged due to complex conditions.

"The construction sector is complicated with multiple transaction links and it would be difficult to conduct the reform," said Ni Hongri, a researcher with the Development Research Center of the State Council (DRC), a think tank.

It might be better to leave the real estate sector unchanged, Ni said, adding a drop in the business tax rate may also reduce the tax burden.

"If the reform is to be expanded to the real estate sector, a sound package should be in place to reasonably link two different taxation systems as most property projects have long cycles," said Liu Shangxi, a senior researcher with the Ministry of Finance.

A joint report released last week by the DRC and the World Bank pointed out that VAT reform may dent local governments' fiscal incomes and proposed the introduction of a property tax to supplement the loss.

The first step has already been taken. China plans to establish a national real estate registration system in about three years, according to a Ministry of Land and Resources statement on Thursday.

It will help tame speculative housing purchases, not only residential but also commercial properties, Ni said.

"The property tax is unlikely to come out in the next two to three years as it has to go through complicated research and law-making," Liu added.

TRANSITION: LESS HYPE, MORE FOCUS

Property developers seem to have no patience. They rush to roll out new projects in tourism, elderly care and cultural real estate. But they are more about hype and lack quality.

The past year has seen a boom of elderly care housing projects. Over eighty property developers including Vanke, China's largest real estate developer, rolled out projects to cater to the growing demand in a rapidly aging society.

"Diversified products are important for market transition as China is updating its consumption pattern, but overall operation capability is key," said Chen Huai, who believes that many themed property projects are just pretenses to cover intentions of land grabbing.

Competition not only comes from within, but also outside. Chen reminded property developers to keep an eye on the Internet.

House.sina.com.cn, an online real estate service platform under Internet company Sina, has rolled out a micro-blogging platform to sell properties, challenging traditional real estate marketing approaches.

"Compared with policy changes, technological challenges may pose to be a tougher rival," Chen said.