Hong Kong developers to capitalise on Guangdong redevelopment

China province’s real estate investment surged 32.2% to HK$131.36bln amid the hosting of Asian Games.

The urban-rural redevelopment plan promoted by the Guangdong Provincial Government is expected to attract interest from Hong Kong developers, which however should take into account the relevant rules and regulations and determine the proper investment structure, according to a report by business advisory firm Deloitte Touche Tohmatsu.

Against the backdrop of the Asian Game this year, the urban-rural redevelopment plan in Guangdong covers the renewal of old cities and towns, manufacturing plants and villages to facilitate better use of land resources and economic transformation in the province.

"Real estate investment has also grown steadily in Guangdong this year, with property developers staying positive about the investment potential in the province. Hong Kong developers, especially those mid-sized, can take the opportunities to gain experience of investing in real estate projects in China, paving way for their future investment in other China regions," said Mr. Richard Ho, National Real Estate Industry Leader, Deloitte China, citing that real estate investment surged 32.2 percent year-on-year to RMB 114.757 billion (HK$ 131.36 billion) in Guangdong Province for the first five months in 2010 and real estate developers spent RMB 10.397 billion (HK$11.9 billion) on land purchasing from January to May, up 172.1 percent from the same period last year.

The redevelopment plan is expected to boost property investment in Guangdong. In Guangzhou, for instance, the local authorities are seeking to complete the redevelopment project in 10 years. It is estimated to demolish and redevelop properties of around 10 million sq ft, driving investment of RMB 100 billion (HK$ 114.47 billion). To capture the ample opportunities, however, real estate developers should pay attention to the specific rules associated with the redevelopment plan.

"For example, land lots associated with old cities and towns, manufacturing plants and villages cannot be redeveloped without prior registration. There is also restriction over the scope for redevelopment and property developers are required to provide detailed plans and proposals. Application procedures related to the use of land with historical values should be completed before 2012 and land lots cannot be redeveloped into commodity housing," said Mr. Ho.

From accounting point of view, the structure adopted to acquire the property interests under such a redevelopment plan will affect how the transaction is measured, recognised and presented in the financial statements. If it is an outright acquisition of property interest, the consideration paid by the acquirer would represent the initial cost. Such cost is to be separated into the land lease portion and building cost, which is accounted for under property, plant and equipment when it is for self-use.

For rental and capital appreciation purposes, the cost will be accounted for as an investment property. The property interest will be accounted for as property under development and classified under current assets in the case it is for sale. A detailed analysis of various facts and circumstances is necessary to ensure the transaction is properly accounted for in the financial statements.

"On the other hand, if different parties would like to maintain both their interests and controls over the structure, a jointly controlled entity can be established for the transaction, under which the original property owner will become one of the venture stakeholders. The fair value of the property interest being injected will be determined with reference to the consideration paid by the other joint venture partner, based on the respective percentage of their equity interests. If the equity method is adopted, only the respective share of results, assets and liabilities in the entity attributable to the venture stakeholders will be presented in the financial statements. Whereas if proportionate consolidation method is used, the venture stakeholder could consolidate its share of the respective revenue, costs, expenses, assets and liabilities, etc. on a line-by-line basis," said Mr. Matthew Sze, Audit Partner, Deloitte China.

Mr. Anthony Tam, Tax Partner, Deloitte China said property developers should also consider the tax costs from different ways they take part in the urban-rural redevelopment plan. Most commonly, property developers can purchase the land use rights from the government, participate in a project for turning a piece of raw land into land lots ready for further development and cooperate with the existing land owners for development.