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A survey by the consultancy Deloitte indicates that Hong Kong-listed real estate developers are bullish on the mainland real estate market despite challenges posed by macro-economic control policies and tax measures aimed at slowing down the property market, which was believed to be overheating. The current level of mainland investments of Hong Kong-listed developers is expected to remain unchanged or even increase in 2007.
The Deloitte Real Estate Survey was conducted in November 2006 among 26 of the 118 companies listed on the Hong Kong Stock Exchange that have operations in property investment, property development or in the hotel business. All respondents are decision-makers with a financial management role and nearly half (46%) of the companies they manage are with turnover in excess of HK$1 billion. More than half of them (62%) manage companies with net assets of over HK$2.5 billion.
Mr. Richard Ho, National Leader of Real Estate Industry Practice of Deloitte China, said, "The Deloitte Real Estate Survey provides a snapshot of Hong Kong real estate developers' sentiment towards China investment and strategy, taking into consideration the impact of the introduction of new China accounting standards, austerity measures and tax law. It underlines Deloitte's commitment to the real estate sector which is a significant contributor to the growth of Hong Kong's capital market, and is one of the largest contributing sectors to fixed asset investment in the Mainland."
"In view of the ongoing changes in the real estate sector, it is important for us to regularly check the pulse of Hong Kong developers through an annual survey. The Deloitte Real Estate Survey aims to provide comparative information for developers so that they can benchmark against their peers and validate their own viewpoints and strategies," said Mr. Ho.
Plans to increase investment
Findings of the Deloitte Real Estate Survey show that most respondents remain confident in the potential of the Mainland real estate market with one-third of them indicating a growing appetite for Mainland real estate investments with plans to increase their investment by more than RMB100 million.
Although over 60% of respondents have already invested in first-tier cities, they are planning to further penetrate the Shanghai, Beijing and Shenzhen markets which are perceived to continue performing well. However, it is worth noting that Southern China is perceived as the best performing region by nearly half of the respondents (44%). This can be explained by the region's close proximity to Hong Kong as well as its relatively under-performing property prices.
In terms of investment portfolio of companies that plan to increase their investment, half of them said they plan to focus on residential sub-sector while one-quarter of them will target the commercial sub-sector and another one-quarter of them plan to invest in the retail, hotel and service apartments sub-sectors.
Mr. Andrew Chan, Real Estate Advisory Director of Deloitte, said, "Mergers and acquisitions in the Mainland real estate sector will be more active in 2007 as Hong Kong developers prefer partnerships with local developers. Similarly, domestic developers are also keen on mergers and acquisition opportunities with both foreign and domestic companies to expand their businesses."
No significant impact from accounting standards
The Deloitte Real Estate Survey indicates that Hong Kong developers do not expect China's new accounting standards to have any significant impact on their financial reporting. This is likely because Hong Kong-listed companies have already consolidated their Mainland entities under their Hong Kong holding group and therefore are already in compliance with Hong Kong accounting standards for group reporting. However, it is worth noting that almost half of the respondents are not yet ready for China's new accounting standards.
The implementation of Land Appreciation Tax (LAT) is by far the biggest tax item affecting the bottom lines of real estate companies. However, a large majority of respondents (88%) said that their level of Mainland real estate investments will not be affected by LAT.
Mr. Anthony Tam, Deputy Tax Managing Partner of Southern China, said, "The new regulation has not addressed all operational details and it presents real estate developers great uncertainties in tax reporting. I encourage real estate developers to closely monitor its future clarification as the changing laws are likely to impact their cash flow and profit."
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