Operator Aer Rianta won a major consultancy contract in February 1996 with Beijing International Airport Commercial and Trade Corp., covering retail management and redevelopment at Beijing Capital airport. This was the first operational contract of its kind in China.
A US$143m loan package for the new Pudong airport is still under discussion between the Shanghai government and the Japanese Finance Ministry. The new Nanjing airport opened in June was built and equipped with British aid, supported by Luton Airport of the UK. A joint venture between local authorities and Cathay Pacific Airlines will develop the airport at Xiamen. Under the agreement, Cathay Pacific will provide one-third of planned aviation infrastructure investment being made in the airport.
Imperative of reform
China offers many opportunities for air-port development and management. International funding is available and yet there are obstacles, headed by the government's desire not to cede control of infrastructure projects to the private sec-tor. This reluctance is being gradually outweighed by government unwillingness to continue pumping funds into areas where there is interest from international investors.
Another drawback is the lack of an adequate regulatory framework to govern privately financed projects. This complicates negotiations for each concession deal, slowing the pace of foreign investment in transportation infrastructure projects.
As the Chinese authorities move away from centralised CAAC funding, the in-creased involvement of local governments will create opportunities. Beijing still discourages foreign currency spending on imported -aviation systems and consultancy, although airports them-selves may regard foreign equipment and expertise as an essential route to efficiency.
The acceleration of China's airport development and new sources of finance are certain to promote economic development, especially tourism. Despite rapid investment in airports and air traffic management, airport investment is running behind projected passenger growth. China shares this problem with many other Asian countries but this does not negate the economic imperative of Government-backed initiatives to boost home ownership, including easier access to mortgages, would appear to be having the desired effect. According to Business News, home purchases in Shanghai climbed 92 per cent in the first half of 1997 compared with the same period last year.
The shift in ownership is particularly evident in Shanghai. According to official statistics, between 1990 and 1995, individual buyers accounted for 26 per cent of residential purchases. In the first half of 1997, they accounted for 80 per cent. Moreover, since the late 1980s the pro-portion of individual buyers purchasing 'ordinary residential property' at a discounted price has been cut to almost nothing.
Despite this trend total purchases by individuals are still relatively small and are being held back by high prices and the slow emergence of legal and professional help for individual buyers. The number of such sales is certainly not enough to compensate for falling institutional demand by enterprises providing housing as part of their commitment to employee welfare. As a result, the city is struggling to reduce the welfare bur-den of state enterprises while trying to maintain stability in the residential property market.
Housing as welfare
Low wages mean that most of Shanghai's 13m residents have had to rely on employers to provide and improve their living conditions. Even today, employers buy properties for staff either as a reward for their services or as part of their welfare. State-owned and non-state-owned institutions, ranging from factories and trading companies to universities and government departments, have been the main source of demand in the fledgling residential property market.
The system started to creak under the nationwide credit squeeze, started in June 1993 as part of wide-ranging economic reforms. The squeeze is still taking its toll on the ability of institutions to provide for their employees.tainly impaired our sales in recent years," says Mr Wu Dehua, financial controller of Shanghai Diesel Engine, listed on the Shanghai stock exchange. "As a result, our discretionary provision for the staff welfare fund is limited at the moment."
In good times, the management could allocate of up to 10 per cent of annual sales to the fund, used to increase staff salaries and provide staff housing and other welfare. When profits are on the slide, he says, the company only makes five per cent provision. "We cannot provide as much [staff housing] as we want to," he says. " But there are employers in much worse positions who simply cannot afford buying staff housing any more."
In the early 1990s, a government-run housing fund was set up to stimulate investment in low-end housing and to help individuals become home-owners, instead of relying on their employers. As part of this policy, employees are obliged to deposit five per cent of their salaries into the fund and employers to match the deposits.
From the perspective of the employer, the commitment is much smaller than providing actual housing, according to Mr Wu. Staff salaries comprise only about five per cent of the total cost of production in the case of Shanghai Diesel Engine. "The requirement for employers to provide staff housing is minimal and will decrease even further," he says, adding that individuals will eventually be expected to shoulder the responsibility on their own.
The Shanghai residential property market contains a contradiction. On the one hand, the municipal government continues to woo foreign investors by guaranteeing a 15 per cent return on low-end housing projects. On the other hand, al-most 2.5m sq metres of residential property lies vacant in the city and many more blocks are due to come on stream over the next two years ?adding to the problem of over-supply.
While renowned Hong Kong property developers such as Henderson
Whampoa are reluctant to talk about the financial losses sustained by their Shanghai projects, other developers continue to pour in money and bid aggressively for potentially lucrative projects.
Of all the foreign developers involved in domestic projects in Shanghai, DBS Land of Singapore and Shui On Properties of Hong Kong are among the most aggressive. DBS announced in January that it would build a housing estate on a 15,000 sq metre site in downtown Luwan district. Meanwhile, Shui On is investing US$500m in eastern Hongkou district to build 1.7m sq metres of housing, providing about 20,000 flats.
Towards the end of July, Guangzhou Investment, the commercial arm of the Guangzhou government listed on the Hong Kong stock exchange, signed an agreement with the Shanghai municipal government to invest US$71m in three low-end housing projects, generating a gross floor area of 233,270 sq metres in exchange for a net fixed return of 15 per cent a year.
While mass-market residential projects represent a new possibility for overseas developers, it is not nearly so attractive in terms of profit. Referring to the guaranteed return offered by the government, James Hawkey manager of Jones Lang Wootton in Shanghai says it's insufficient. "Very few developers take on projects where they get 15 per cent return ?it's not enough." By contrast luxury developments can offer re-turns of as much as 50 per cent.
In constructing relatively basic apartment blocks, it is also less clear what a foreign developer can offer which a Chinese developer cannot except perhaps capital. The conclusion, says Hawkey, is that they find it hard to compete in the lower end of the market.
"It's not that there is no demand in the market there is. But the average man in the street still cannot afford a property," says Mr Ernest Zheng, a local in-vestment banker. Although incomes have been rising, the official figures show that the average annual salary for an employee is only US$750. Consequently, an average apartment on the outskirts of Shanghai costing about US$35,000 is still way beyond reach.
The increasing buying power lies in the emerging elite the young and well-educated professionals who work for Sino-foreign joint ventures. In the financial sector a junior bilingual clerk could easily take home an annual salary of about US$4,500. Mr Zheng himself, first employed by the British bank Barclays as its Shanghai representative and then poached by the Spanish National Bank as its chief representative in China, earns roughly US$20,000 a year ?equivalent to the life savings of some-one from his parents' generation.
Residential demand is coming from the growing number of Chinese young professionals who are eager to move from their parents' homes and buy a property for their own families. How-ever, their desire to buy is tempered by high perceived risks.
Sense of powerlessness
Mr Zheng, whose wife works for a Japanese trading company in Shanghai, bought a two-bedroom flat in the south-western suburbs of the city close to an underground station two years ago. The cost exceeded Yn400,000 (about US$48,200) but they were still able to pay cash. But he wasn't happy about the terms. "A cash buyer like us in a sluggish property market would be sought-after in other parts of the world, but not in China," he says, complaining that there is insufficient le-gal protection. "No solicitors are involved in drafting the contracts. The terms are imposed on us very much in the seller's [developer's] favour." Zheng tried to change some wording of the contract with the help of his solicitor friend, but was told either to accept the terms or forget about the purchase.
"I feel completely powerless and unprotected. Why do I want to spend more money on a bigger flat if I am not allowed to negotiate the terms?" he says. He adds that the lack of a national property law and professional estate agents to offer in-formation and advice are preventing his counterparts from buying for fear of being ripped off. "You have to be either naive or aggressive to believe you can strike a bargain in such a chaotic market."
Everything seems to be stacked against the purchaser. For example, the developer which built the Zheng's flat delayed the completion of construction by one year but it was never penalised because of the biased contract.
Ideally Zheng wanted to own a four-bedroom flat ?one for himself and his wife, one for his only son, one for guests and the other to be used as a study. Heis not short of the necessary cash, but the family decided to scale down their ambitions to minimise the risk.
The experience of Mr Zheng may not be typical, according to Hawkey. He believes that there is less concern among buyers than perhaps there should be about the limited legal infrastructure. "The major issue is the cost and avail-ability of mortgages," he says.
In a market where traditional buyers in the form of enterprises and institutions are fast pulling out of the property market while individual buyers are reluctant or unable to take the place, overseas developers are aware of the challenge they face ?how to create a friendlier market place for individuals?
"Unlike institutional buyers, individuals are less prepared to take risks. They need security and fairness in such a major purchase of their life," says Zheng.
Mr Peter Kok, director of development and marketing for Hutchison Whampoa of Hong Kong, reckons that the ultimate demand for housing will come from local individuals, even though foreign developers are busy building housing for expatriates where returns canoe as high as 50 per cent.
Challenge to developers
The mortgage system is one area ripe for reform. In China, mortgages tend to be arranged between a property developer and a bank. The relationship between the two parties is normally made during construction, with the bank agreeing to lend money on properties within a block. This mortgage is then passed on to the purchaser ?albeit on onerous terms.
"It's in the property developers' interests to make mortgages more readily available," says Hawkey. Some companies have recognised the need to act. Shui On, the Hong Kong developer, is co-operating with local banks to offer individuals 70 per cent mortgages over a 20-year period, compared with the previous limits of 50 per cent and 15 years.
Developers must play their part in helping to produce a property market in Shanghai that provides affordable accommodation to the majority of its citizens. But progress can only be made by a joint effort by all participants ?including employers, the legal and finance professions, and the city government. "Every sector of society has to work and change together to smooth the transition in the property market," says Zheng.
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