Shanghai real estate- market trend, laws, amendments and statistic.

(Annual report for 2005- edited by Marble Leos)

This report covers the market changes in different types of property in Shanghai, china, following the new government policy intended to cool the real estate market and to prevent a bubble.The report focuses on the Shanghai area and trends seen here, and will follow statistics and legal changes and amendments instituted by the government.We will then give our opinions with regard to investment potential in the coming years.

The basic report was compiled by Tospur Real Estate, one of the biggest marketing and consulting companies in Shanghai.This company also has five other branch offices in the rest of China.

Statistics are collected weekly from the government web site of each project on sale in Shanghai.The report follows only the new development market and does not cover the second hand market.

In 2005 the Chinese central government took action to cool the property market in Shanghai following the previous four years’ rapid growth, which had reached 20-30% annually.This growth rate was having an effect throughout the market including low price property, and was causing social concern.More than this, the Shanghai real estate market was becoming a substitute for the undeveloped Chinese stock market.Investment in Shanghai real estate became the trend for short term investors and speculators, causing fears of a bubble to develop.

Today, almost a year after the government policy was implemented, it seems that the market has been cooling in terms of demand.The trend in Shanghai now is towards longer-term investment, creating more stability in the market.Supply is also dropping, more developments are targeting the lower-income population and the government is giving land incentives to developers to encourage them to lower prices.The average market price is on the decline, while high-end property prices continue at the same rate and some projects are even seeing increases of 5-10%.

It seems that the government’s policy has achieved its main targets, and development is continuing at a more sustainable pace.Short-term speculative investment is almost non-existent today in the Shanghai market.

Government policy during year 2005:

• 2005.1- China’s government decides to increase restrictions on land control policy.

• 2005.2- Implements online information of secondhand property transactions on the government website.

• 2005.3- Shanghai’s government announces intensified inspections for property transactions and procedures.

• 2005.3- Shanghai resumes collection of sales tax and an additional 5.55% tax on gross profits on residential property sold within 1 year of purchase.

• 2005.3- China’s Central Bank issues mortgage limitations and restrictions for buyers.

• 2005.3- China’s government announces its concerns about the overheating of the real estate market.

• 2005.4- All banks in Shanghai stop mortgage transfers from one owner to another (if the property transaction is completed within less than 1 year).

• 2005.4- Central government provides 8 new guidelines for the real estate market cooling plan.

• 2005.5- 7 Government bureaus update the 8 guidelines and require all regions to take more action to cool down the residential market.

• 2005.5- Shanghai’s local government confirms new regulations and criteria for “low grade housing” and issues new policy on deed tax and sales tax.

• 2005.6- Shanghai resumes collecting VAT on villa properties.

• 2005.7- China regulates the RMB exchange rate to USD and changes its policy with regard to currency control.

• 2005.8- People’s Bank of China delays its annual report on “China Real Estate Finance” and puts forward two proposals: a fixed interest rate policy and cancellation of the presale system.

• 2005.8- Shanghai’s government doubles the amount of loan from the social property funds for individuals buying new property.

• 2005.9- Land Resources Ministry announces its standards for the investigation of illegal actions.

• 2005.11- Shanghai’s city government announces that it will tighten its management of land use.

• 2005.12- Shanghai starts trial sales of medium/low price projects.

Prices of real estate in shanghai are still far below those of other major cities in East Asia such as H.K, Singapore, Taipei, Tokyo and more. We expect prices to continue rising and to gradually equal other major cities in the long run. The cost of living and personal income in Shanghai are also growing.As long as the cost of prime land in the city continues to increase, the prices of property will rise as well. Shanghai was, is, and will be, a major city in China attracting investment and property buyers from all over China. The major investors and buyers are local Chinese and the real estate market is, and will probably continue to be, strong.

The slowing in real estate growth is likely to extend investment plan periods as well as extending the window of opportunity for investors.

The following are some graphs showing the annual trends:

We can see that government policy introduced in April 2005 had the following effects:

1.Spending on real estate dropped.

2.Growth in government housing sales, leading to a drop in average property prices.

3.Sales trends in commercial property remained almost unchanged.

We can see from the information above that the sector most affected after the introduction of the new policy was the residential apartment sector.

We can see that the number of total units sold is dropping, mostly due to lower demand in the residential sector.

We can see that in most sectors the situation is stable except for the apartment sectors. Sales of government housing are rising at the beginning of 2006, which causes a quick drop in the average market price.

Spending in apartment sectors is dropping drastically.

1.We can see that prices in each sector stay at the same level, whilst prices in the villa and the commercial sectors rise.

2.In the commercial sector there is a big movement during September 2005. This can be related to a major deal that was concluded in the market.

3.Although the demand is dropping, the average pricing in each sector is the same.

1.We can see that demand in the residential sector is dropping.The new supply is following the market trend.

2.Every year the demand in January and February is low due to the Chinese New Year.

1.The market seems very stable. The size of the commercial market is about 1/10 of the residential sector and not as many buildings are available for sale - most being kept by developers or funds companies. High demand in December probably shows more purchasing by companies that wish to enjoy the end-of-year profits and lower tax payments. There is a little more supply than demand, which keeps the sector very stable and healthy for market development.

2.In this sector, since it is comparatively small in size, each big event such as a new building being opened for sale, or a building purchase, influences the chart dramatically.

Government 2005 policy timeline

Remarks:

• Apartment includes mid- and high-type property.

• Government housing - property on which government provides subsidies, low-price land and incentives for developers to reduce prices and construction costs.