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Tax collection on land appreciation began on February 1, but it hasn't diminished Chinese property developers' determination to raise money from the Hong Kong stock exchange, although their financing plans were delayed a bit.

As the Hong Kong exchange took time to understand the tax's impact on the real estate sector, the hearing of Shenzhen-based Hong Long Real Estate Co was delayed for a week, but finally given the go-ahead.

The developer plans to raise as much as HK$515 million by selling 250 million shares, with a range set between HK$1.43 and HK$2.06.

"Two of our clients' initial public offering (IPO) plans on the Hong Kong bourse were also postponed," Hung Tao, director of Savills Property Services (Beijing) Company, said.

"But the shock is temporary," Hung added, saying the tax will not stop mainland property developers' entry into Hong Kong's capital market.

The State Administration of Taxation decided to resume collection of value-added tax (VAT) on land on January 16. According to the notice, property developers will have to pay 30 to 60 percent of their net gains as VAT on land.

"The land appreciation tax may squeeze 20 percent out of property developers' margins," said Cai De'an, president of Zhong Guang Xin Real Estate Consultation.

As the tax lowered investor expectations for property profit, most mainland property shares saw a drop ranging from 5 percent to 8.5 percent on January 17.

According to Zhao Qiang, an analyst with Everbright Securities, property developers have to adjust their IPO timetables since the tax will make them revalue both their profit expectations and assets.

Due to spiraling property prices across the country, the government has taken a range of measures to restrain the runaway sector, including a more stringent policy on bank financing. Measures include increasing the capital threshold for developing new projects and prohibiting the granting of mortgages before completion of a project's main building.

So raising money from the Hong Kong exchange has been the New Year plan for quite a number of property developers who are eager for capital to fuel their expansion.

Sino-Ocean Real Estate Development Co (SORED), incorporated by two multinational shipping companies China Ocean Shipping (Group) Company (COSCO) and Sinochem Corporation is expected to make its debut on the Hong Kong exchange in the first half of this year, raising HK$3 billion to HK$4 billion, sources said. Underwriters for the IPO are Morgan Stanley and Goldman Sachs.

On January 10, Standard Chartered Investment Co announced an investment of $35 million into SORED.

"We, together with Morgan Stanley and Merrill Lynch, have just finished a capital injection into SORED," said Chen Fan, president of Standard Chartered Investment Co (Greater China Region), during the 2006 China Property Investment and Financing Forum in Hong Kong.

SORED declined to comment, but its moves reveal the listing ambition.

Insiders said SORED is reshuffling its business portfolio by improving the proportion of management-oriented property and reducing that of development-oriented property thus enhancing its capacity to handle risk.

Meanwhile, the company is also actively expanding its land reserves. It just bought 310,000 square kilometers of land at cost of 1.78 billion yuan, beating other bidders like Beijing Capital Land and China Resources Land.

SORED's land reserves also include a 150-square-kilometer project in Guanzhuang, a villa project with 131 hectares and a business center that covers 257,000 square meters.

For property developers, land reserves are a major indicator of their strengths. SORED's rich land supply partly paved the way for its future development.

As SORED appears to be speeding up its IPO plan, other property developers are also itching to catch up.

SOHO China, one of the leading real estate companies in Beijing, is also mulling a listing plan.

SOHO China is expected to float its shares on the Hong Kong exchange in the first half of the year, raising around HK$3.2 billion.

Pan Shiyi, president of SOHO China, declined to comment. But insiders say the company has selected Goldman Sachs and HSBC Holdings as its underwriter.

Glory Real Estate and Fangheng Real Estate were also reported to launch their IPOs on schedule.

"We plan to make our Hong Kong IPO in the second half of the year," Wu Bin, head of the marketing division of Glory Property, said.

(China Daily March 1, 2007)