Real estate rules prove effective in Hainan

“There's a range of tools they can use,” said Joel Rothstein, the China head of real estate at Paul Hastings Janofsky & Walker. “It's necessary for authorities to use a multi-pronged approach incorporating a series of measures in order to have measureable effect.”

Apart from tightening bank financing activity, he pointed out that there are two sets of regulations that could be used by local governments as “arsenal”: one governing land access and another affecting the end user.

These include increasing minimum down payment requirements, restricting the amount of purchases, and implementing tax policies to “discourage short-term speculative ownership of property.”

Examples of how governmental policies could target the removal of speculative players by way of the land grant auction process are listed by Rothstein: “Tailoring the rules for qualified bidders in the auction process to certain types of parties, requiring large deposits to bid for land grants and by accelerating the time frame for making payments if a purchaser is successful in winning a land grant auction.”

Another measure could have governments enforcing restrictions. For example, foreign investors may fall prey to ramped up policing of regulations limiting ownership.

At the end of 2009, Beijing eliminated its stimulus policies for housing and said it would begin to enforce Circular 171, a multi-regulator real estate opinion issued in 2006 and updated in 2007 that stated foreigners could only own one apartment for their self-use.

In Hainan, property prices shot up at the beginning of 2010, after the State Council released a paper at the end of last year announcing its intent to develop the island into a world-class tourist destination. This lured many investors from outside the province to surge into its property market.

In response to the sudden inflation of real estate prices, the local government halted land grant and new project approvals to curb speculative home buying on January 15.

The dilemma for central and local government is not to cool the real estate market too quickly, notes Rothstein. “The ideal situation they would want to create is to prick the bubble so that it slowly deflates rather than burst the bubble and create massive instability in the market.”

On March 19, after a frenzied bidding war over three land plots in Beijing that pushed prices to record highs, the State-owned Assets Supervision and Administration Commission told 78 state-owned enterprises whose core business was not real estate to quit the market. CM