Big property developers on the Chinese mainland won't suffer credit problems from the government's decision to collect land-appreciation taxes.
China's top tax authority said it planned to enforce a land tax - 30 percent to 60 percent of developers' net gains from property deals depending on the size of their profit - starting on February 1.The move was the latest in a string of measures by the central government to deflate a potential bubble in the real estate market.
Though the initiative is an immediate negative factor for developers, its impact is mitigated by positive macroeconomic conditions. Urbanization, availability of mortgage finance and strong (gross domestic product) growth will continue to provide strong support to demand for housing units.
The mainland's larger developers, which typically have lower indirect costs and greater flexibility in prioritizing projects due to their economies of scale, will be less affected by the new taxes. It is expected that property companies will likely have their gross margins slashed by as much as 10 percent to a range between 20 percent and 25 percent.
Citigroup believe companies with high gross margins and a large percentage of their net asset value in development properties will be most affected by the tax. Several mainland-listed developers, including top player China Vanke Co, said yesterday their earnings would be little affected by the tax enforcement after jitters over profit erosion sent their shares down sharply.
Vanke said it had already prepaid some of the land-appreciation tax and made provisions for it in its on-going projects. The company would not change an estimate that net profit rose between 50 and 65 percent last year.
Fitch said some developers may reallocate their resources, increasing their focus on middle- to low-end properties, which typically generate lower gross margins and therefore are subject to lower land-appreciation tax rates.
The agency also said the tax is targeted at developers instead of buyers, so its effect on demand should be limited.