Real estate entrepreneurship and social responsibility in China's real estate market

1. 麻省理工学院STL地 业实 室

2. Real Estate Entrepreneurship and Social Responsibility
Yu-Hung Hong
Founding Director
MISTI-STL China Summer Camp Program
InformaCon Session 3

3. Outline
• InnovaCon and Sustainability
• China’s Development Model
• Reason Behind the Model
• OpportuniCes and Challenges

4. InnovaCon & Sustainability
Social Responsibility

5. China’s Development Model
Local
govern-
ments
Public or
private
developers
Central
government
AKempt to achieve the
policy goals
mandates

6. The New Normal

7. The New Normal

11. Tianducheng, Hangzhou, Zhejiang
source: hKp://desertedplaces.blogspot.com/2013/08/a-parisian-
ghost-town-in-middle-of-china.htmlanoramio)

12. Housing Oversupply

13. Housing Oversupply

14. Central
18%
Local
82%
Investment in Public Utilities and
Infrastructure: 2011
Total: 5,906.7 Billions RMB

15. Budget
12%
Bank loans
27%
Others
61%
Funding sources for Public Utilities and Infrastructure
2011

16. Government Debt Audit
• 31 provinces
• 291 ciCes
• 2,778 counCes
• 33,091 townships
• 2,454,635 loans

17. Government Debt Audit
• Debts need to be repaid by NaConal and SubnaConal
governments.
• Debts that governments guarantee repayments if they go
into default.
• Debts that governments have to rescue (repayment
obligaCons?) if these loans go into default.

18. Government Debts in China
(In$trillion$Yuen)
Year$ Level$of$Government
Central$ 9.4$$$ 50% 2.8$$$$$ 53% 2.2$$$ 36% 14.4$$$ 48%
2012 Subnational 9.6$$$ 50% 2.5$$$$$ 47% 3.8$$$ 64% 15.9$$$ 52%
Total 19.1$ 100% 5.3$$$$$ 100% 5.9$$$ 100% 30.3$$$ 100%
Central$ 9.8$$$ 47% 0.3$$$$$ 9% 2.3$$$ 35% 12.4$$$ 41%
2013 Sunational 10.9$ 53% 2.7$$$$$ 91% 4.3$$$ 65% 17.9$$$ 59%
Total 20.7$ 100% 2.9$$$$$ 100% 6.7$$$ 100% 30.3$$$ 100%
Sources:$China's$National$Audit$office$(2013)
Need$to$repay
Guarantee$
obligations
Rescue$
obligations
Chinese$Government$Debts:$2012$and$2013
Total

19. SubnaConal Government Debts in China
(In$trillion$Yuen)
Level$of$Subnational$
Government
Province 1.8 17% 1.6 59% 1.9 43% 5.2 29%
City 4.8 46% 0.7 28% 1.7 39% 7.3 41%
County 4.0 37% 0.3 13% 0.7 17% 5.0 29%
Township 0.03 0% 0.01 0.4% 0.05 1% 0.1 1%
Total 10.6 100% 2.7 100% 4.3 100% 17.6 100%
Sources:$China's$National$Audit$office$(2013)
Subnational$$Government$Debts$as$of$June$2013
Need$to$repay
Guarantee$
obligations
Rescue$
obligations
Total

20. Who borrowed?
(In$trillion$Yuen)
Type$of$Entity
Joint$Venture 4.1 37% 0.9 33% 2.0 46% 7.0 39%
Gov't$Agencies 3.1 28% 1.0 36% 0.0 0% 4.1 23%
Subsidized$Companies 1.8 16% 0.1 4% 0.5 12% 2.4 13%
StateOowned 1.2 11% 0.6 22% 1.4 32% 3.1 18%
SelfOfinanced 0.3 3% 0.04 1% 0.2 5% 0.6 3%
Public$Utilities 0.3 3% 0.01 1% 0.2 4% 0.5 3%
Others 0.1 1% 0.08 3% 0.0 0% 0.2 1%
Total 10.9 100% 2.7 100% 4.3 100% 17.9 100%
Sources:$China's$National$Audit$office$(2013)
Entities$involved$in$Sbnational$Government$Debts$as$of$June$2013
Need$to$repay
Guarantee$
obligations
Rescue$
obligations
Total

21. For What Purposes?
(In$trillion$Yuen)
Purposes
City$development 3.8 37% 0.5 21% 1.5 36% 5.8 35%
Land$banking 1.7 17% 0.1 4% 0.1 2% 1.9 11%
Transportation 1.4 14% 1.3 51% 1.4 34% 4.1 24%
Social$housing 0.7 7% 0.1 6% 0.3 7% 1.1 7%
Education 0.5 5% 0.08 3% 0.4 10% 1.0 6%
Irrigation 0.4 4% 0.06 2% 0.1 2% 0.5 3%
Environmental 0.3 3% 0.04 2% 0.1 2% 0.5 3%
Industrial$&$Energy 0.1 1% 0.08 3% 0.0 1% 0.2 1%
Others 1.2 12% 0.21 8% 0.3 6% 1.7 10%
Total 10.1 100% 2.6 100% 4.1 100% 16.8 100%
Sources:$China's$National$Audit$office$(2013)
Purposes$of$Debt$Financing
Need$to$repay
Guarantee$
obligations
Rescue$
obligations
Total

22. Risks
• Local governments depend on land
leasing revenue to repay their debts. (By
the end of 2012, 11 province, 216 ciCes,
and 1,396 counCes have used future
land revenues as collateral to borrow 3.5
trillion RMB, about 37% of all
subnaConal debts.)

23. Risks

24. OpportuniCes
• Re-use under-uClized land and
buildings for:
o innovaCve startups;
o co-working spaces; and
o co-living spaces.
• new branding strategy—
environment conservaCon and
cultural preservaCon.

25. Challenges
• Key stakeholders refuse to work
together.
• Real estate developers may not pay
enough aKenCon to the types of
services demanded by customers.
• New educaCon programs on real
estate management may be
unavailable.

26. Local public
finances !
Proposed Land Tenure Reform Strategy !
1! 2!
Ecology and
farmland
preservation and
food security!
3!
Rural land
tenure!
4!
Integration of
urban and rural
land markets!
Land value
sharing!
Rural !
leasehold
system!
Public land
acquisition
system!
Land use !
planning!
Agricultural
modernization!
New town
development!
Transport
ation!
Incomplete
property rights
houses!
Clearly
defined and
secure
leasehold
rights !
Gradual legal reforms and policies to stabilize real estate prices!
Banking and !
real estate
investment
reforms!
Land quota
trading system!
Alternative !
local revenue
sources!