Investing in Jamaica

Francisco A. Laguna & Rolanzo White

After rebounding form the financial crisis of 2008, Jamaica is now welcoming foreign investors. The government has turned its attention to bolstering the economy and continuing impressive performance in tourism, logistics, and manufacturing.

The Jamaican Government, led by the Jamaica Promotions Corporation (JAMPRO), is creating an environment conducive to foreign direct investment. JAMPRO is an Agency of the Ministry of Industry, Investment and Commerce that promotes business opportunities in export and investment to the local and international private sector. With the debt to GDP ratio declining as a result of debt restructuring and fiscal contraction (estimated 140% at the end of fiscal year 2014/15), Jamaica is ripe with opportunity.

"Karibik Jamaika Position" by Raymond de - Raimond Spekking - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons

“Karibik Jamaika Position” by Raymond de – Raimond Spekking – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons

The Jamaican economy is driven by foreign direct investment (FDI). Jamaica received an estimated US$ 551 million in FDI inflows for 2014. The country has a strong relationship with the United States and the United Kingdom, and the levels of FDI can be partly attributed to these relationships. The World Bank has also been extending credit and development assistance to Jamaica through several projects in various sectors.

In May 2013, the Jamaican Government implemented the Growth Agenda Reform Program, supported by a four-year loan arrangement under the International Monetary Fund’s Extended Fund Facility (EFF), which provided Jamaica with Special Drawing Rights (SDR) of US$ 932.3 million. The program’s goal is to improve the business environment and facilitate strategic investments.

The Jamaican Government has made a point to create a legal atmosphere that supports private enterprise. Jamaica has an independent judicial system that is based in English Common Law which upholds the sanctity of contracts. Jamaica gives “National Treatment” to the profits foreign investors make on the island, and they do not put limits on the foreign control of companies nor do they restrict non-residents from buying real estate. Under the Omnibus Tax Incentive Framework, all investors benefit from a non-discriminatory and consistent tax incentive regime that seeks to catalyze foreign direct investment. As a result, Jamaica has jumped 27 places to achieve an overall ranking of 58 out of 189 economies, according to the 2015 Doing Business Report: the highest ranking in the Caribbean.

The most dynamic sectors in Jamaica have been tourism, logistics, and manufacturing.

TOURISM

"Doctors Cave Beach" Licensed under Public Domain via Commons

“Doctors Cave Beach” Licensed under Public Domain via Commons

Jamaica received just over 2.08 million stay-over tourist arrivals in 2014, according to newly-released data from the Ministry of Tourism. That represented a 3.6 % increase over 2013, when the country topped 2 million visitors for the first time and added US$ 2 billion to the local economy. Potential investors are invited to explore the opportunities that exist for the development of boutique, large scale and city hotels. The government is also working to complete Casino Gaming and Timeshare legislation, which will add new dimensions to Jamaica’s dynamic tourism industry.

LOGISTICS

"Kingston Harbour (cmakin) 2004-09-19" by Carey Akin (cmakin) from Manvel, Texas, USA Licensed under CC BY-SA 2.0 via Wikimedia Commons

“Kingston Harbour (cmakin) 2004-09-19” by Carey Akin (cmakin) from Manvel, Texas, USA Licensed under CC BY-SA 2.0 via Wikimedia Commons

Jamaica is home to the Kingston Harbor, the world’s seventh largest natural harbor. With the expansion of the Panama Canal, Jamaica is set to benefit from innovative and advanced commercial ventures in logistics. Jamaica will look to offer better logistic efficiencies to markets in the region by leveraging their existing infrastructure. The island enjoys a prime location in proximity to major East-West shipping lanes and direct connections to all regional ports, which has impressed other countries, including China. According to Prime Minister Portia Simpson Miller, China Harbor Engineering Company Limited and its parent company will invest between US$ 1.2 and 1.5 billion in the development of a transshipment port in Jamaica.

MANUFACTURING

Jamaica’s manufacturing sector is important to the national economy, accounting for 8.4 % of GDP and generating export earnings of US$ 772.5 million in 2013. The country boasts over 300 companies in the sector engaged in a varied range of manufacturing enterprise that include agro-processing, bedding, leather, stone and clay products.  Jamaica is also showing growth in mining, agriculture, and business process outsourcing (BPO).

Jamaica has shown resiliency and impressive growth to become an investor paradise. Investors may want to take a second look at the land of wood and water. They will be surprised by their economic growth.

With offices in Jamaica and throughout the Caribbean, contact TransLegal to learn more about FDI in Jamaica and the region.

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Ghana: A Successful Case Study on Real Property Rights

Francisco A. Laguna & Richard Shu

Property rights are recognized as a driver of economic development.  Today, we explore the evolution of property rights in the West African nation of Ghana, and how they have contributed to development.

Satellite picture of Ghana.  Incredible natural beauty! "Ghana sat". Licensed under Public Domain via Commons

Satellite picture of Ghana. Incredible natural beauty!
“Ghana sat”. Licensed under Public Domain via Commons

Traditionally, rural land rights in Ghana generally fell under “communal” land tenure systems. A customary authority, usually a local tribal leader, would approve or dictate all land transfers within a given region. That placed most land distribution responsibilities in a single authority.  In the late 1980s, the major agricultural regions of Ghana (the coffee growing region of Wassa in the west, and the shallot growing region of Anloga in the southeast) started moving away from these communal systems in favor of giving individuals greater control over the right to transfer their land.

The effects of Ghanaian land liberalization on farming investments resulted in more plants and better capital, and, in turn, farming output.  Findings suggest that, as individuals attained more control over their land, investment in that land increased and resulted in increased productivity and yield.  Ghana stands as a strong case for the role of legal protections in economic development—a stable government and a growing economy go hand in hand.

"2010 Farmers Day Ashanti Region Ghana 5262946799" by Trees ForTheFuture - Ghana-KITA Best Insitution Award-December-2010. Licensed under CC BY 2.0 via Commons

“2010 Farmers Day Ashanti Region Ghana 5262946799” by Trees ForTheFuture – Ghana-KITA Best Insitution Award-December-2010. Licensed under CC BY 2.0 via Commons

In theory, there should not be an inherent causal link between land transfer rights and greater production efficiency: the same investments could easily have been made under a communal land tenure system.  However, transfer rights make investments safer by protecting the investor from expropriation. If an agent is constantly worried about having her profits taken away, whether by a tribal authority or an autocratic government, she is much less willing to invest and develop that land simply because there is less chance that she will actually reap the benefits. By guaranteeing that profits go to the rightful owner, property rights can eliminate some of the uncertainty of investing, prompting agents to invest more.

Another important characteristic of property rights is that they allow for land to be used as collateral. For many underdeveloped nations, where resources are scarce and often inadequately tapped, land is often the most valuable asset that an ordinary person can have—and, more importantly, sell or mortgage. Land can be used as a good for trade, and it can also be used as collateral to establish lines of credit. Allowing people to control their parcels of land allows for the growth of finance, which, in turn, allows for investments in capital that increases production.

"Volta Lake from the Saint Barbara Church" by © Sandister Tei (sandistertei@gmail.com) / Wikimedia Commons. Licensed under CC BY 3.0 via Commons

“Volta Lake from the Saint Barbara Church” by © Sandister Tei (sandistertei@gmail.com) / Wikimedia Commons. Licensed under CC BY 3.0 via Commons

But none of this is possible without a functioning legal system in which those property rights are protected and enforced. A deed means nothing without a court to recognize that deed. And here is where most of the troubles lie. Ghana’s economic prospects began to improve only as the government started working more adequately for the people.  Ghana, and other underdeveloped regions, still have a long way to go in that regard. The governments of developing nations are beset with their own unique problems. Warfare, corruption and bureaucratic inefficiency all hamper a government’s ability to function, while some governments are more focused on maintaining power and military dominance than serving its people.

A properly enforced system of property rights depends on a stable foundation of governance, dedicated to protecting individual rights. The construction of a stable legal foundation, then, cannot be ignored when discussing economic development. In nations without prudent governance and well-protected property rights, the law plays an essential role in protecting profits, incentivizing investments and cultivating growth.

Ghana has made great strides in both areas, and it should be applauded.

TransLegal has offices in Accra, and we are available to answer questions related to agricultural and other investments in Ghana.

Future Business Opportunities in Iran

Francisco A. Laguna & Wojciech Kornacki

Under normal conditions, a country with a well-educated population, a large middle-class, 9% of proven world oil reserves, 18% of proven global gas reserves and an abundance of strategic minerals would be an excellent place to invest.  Unless, the country is Iran, which is currently subject, rightly, to complex and multi-faceted international financial and other sanctions that have reduced its economy by about 15 to 20%.  This may change soon, however, as Iran attempts to end its economic isolation.

According to a 2007 Goldman Sachs report, Iran’s energy sector, technology, and human capital could make it particularly attractive for foreign direct investment.  Now that there is a possibility that sanctions may be lifted, many national and private investors want to position themselves to benefit from the new and very attractive market when (and if) it opens.  Countries such as China, Russia, Turkey and various European countries are already preparing for the sanctions to be lifted.

Currently, the United States and Iran are engaged in extensive negotiations over Iran’s nuclear program.  Depending on the outcome, certain sanctions could be lifted against Iran.  This would open its oil, gas, technology, human resources, natural resources, automotive, airline, hospitality and tourism, and many other industries to foreign direct investment, and it would create billions of dollars’ worth of business opportunities in Iran and the world.   Courtesy of http:// http://en.wikipedia.org

Currently, the United States and Iran are engaged in extensive negotiations over Iran’s nuclear program. Depending on the outcome, certain sanctions could be lifted against Iran. This would open its oil, gas, technology, human resources, natural resources, automotive, airline, hospitality and tourism, and many other industries to foreign direct investment, and it would create billions of dollars’ worth of business opportunities in Iran and the world. Courtesy of http:// http://en.wikipedia.org

The expectation is that once sanctions are removed, new opportunities will create billions of dollars’ worth of business for local and international companies.  Essentially, Iran could be the “next big thing” (once the sanctions are lifted) after the opening of the markets in Central and Eastern Europe.  Some of its regional trading partners expect that their economies will also grow once the sanctions are removed.

Investors are already holding discussing Iran’s oil industry and auto industry.  Indeed, many international energy companies are very interested in Iran, including Royal Dutch Shell Plc, British Petroleum and Total SA.

Not all sanctions will be lifted overnight, and some sanctions may continue for years to come.  In addition to keeping an eye on the international sanction regime, a prudent investor should also consider the following Iranian industries, once the sanctions are removed.

Banking: New businesses and residents will require both domestic and international banking services.  The international banking community has started looking at the country’s potential.  It will be interesting to see which banks move in first.  Will the Swiss join?

Iran’s domestically developed drone capable of traveling almost 2,500 miles.  Due to sanctions, Iran has been forced to develop its own technologies.  Collaboration between international and domestic businesses partners is estimated to create millions of dollars’ worth of business, once the sanctions are lifted.  Courtesy of http:// http://en.wikipedia.org

Iran’s domestically developed drone capable of traveling almost 2,500 miles. Due to sanctions, Iran has been forced to develop its own technologies. Collaboration between international and domestic businesses partners is estimated to create millions of dollars’ worth of business, once the sanctions are lifted. Courtesy of http:// http://en.wikipedia.org

Construction / Real Estate:  Many Middle Eastern businesses are interested in Iran’s real estate market.  The lifting of sanctions is likely to result in the return of some of the Iranian diaspora as well as representatives of multinationals and other companies that will invest in the country.  This will create the need for housing and, as the economy progresses, more luxury condominiums and residences with Western amenities.

Consulting Services: International businesses are likely to begin working to pre-position themselves in a post-sanctions Iran.  To be successful in the country, businesses will need reliable consultants to assist them navigate cultural nuances, language barriers and business practices, including the practice of gift-giving.

Natural Resources and Minerals: After years of sanctions, Iran desperately needs billions of dollars to make its oil industry profitable again.  In 1974, Iran pumped 6 million barrels per day; today, it only pumps 2.8 million.

Cube of Zoroaster.  Iran’s rich culture spans over thousands of years.   This tower-like construction was in the 5th Century BC.  Iran’s tourism and industry are likely to grow fast once the sanctions are removed.  Courtesy of http:// http://en.wikipedia.org

: Cube of Zoroaster. Iran’s rich culture spans over thousands of years.
This tower-like construction was in the 5th Century BC. Iran’s tourism and industry are likely to grow fast once the sanctions are removed. Courtesy of http:// http://en.wikipedia.org

Tourism and Hospitality: Before the Iranian Revolution, Tehran was touted as one of the most cosmopolitan cities in the region.  Years of isolation and religious extremism have crippled Iran’s tourism and hospitality sectors.  As Iran seeks to re-open itself to the world, it will have to modernize these sectors, and FDI is the perfect means of accomplishing this goal.  There is much work to be done, however, for these sectors to be viable contributors to the Iranian economy.  Currently, tourism in Iran accounts only for 2% of the entire GDP; in most countries, it is typically around 5%.

It will be interesting to see how the government will approach FDI in strategic sectors such as banking, minerals, natural gas and oil, as well as non-strategic sectors.  How will it allow such investments to be structured?  What ownership percentage will be permitted?  What about repatriation of capital / profits or termination of investments?  How will corruption manifest itself? Equally important, how will it treat different religious views and cultural morés?

If sanctions are lifted, Iran will be an emerging economy.  It will not have the bargaining power of economies such as China that can exact concessions from investors.  The manner in which the government treats international investors will largely determine the success of a post-sanctions Iran.  Given the political and religious turmoil plaguing the larger region and the very real threat of terrorism, corporations will be cautious of investing financial and human resources for a deal that is overly burdensome with uncertain financial returns.

If you are interested in learning more about future business opportunities in Iran and how to increase your chances of harnessing them, contact TransLegal or call 703-566-9427.

India: Legislative Updates

Francisco A. Laguna

 This week, TransLegal begins a series on recent legislative changes in India. In the following posts, we will analyze some of the more significant ones for foreign investors.

 Capital Markets

 The Securities Exchange Board of India (“SEBI”) has revised insider trading regulations. The new rules, contained in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, enter into force 16 May 2015. One major change introduced by the new rules is that people not in the brokerage sector cannot obtain from an insider, directly or indirectly, any unpublished, price-sensitive information related to a company listed, or proposed to be listed, on an exchange. Insiders are defined as people who have been associated for the prior 6 months with a company that is listed, or proposed to be listed, on an exchange, and who are is in possession of the company’s unpublished, price-sensitive information.

Citizenship Law

The Parliament issued the Citizenship (Amendment) Bill, 2015, which purports to grant the same rights and privileges to persons of Indian Origin as well as Indian citizens living abroad.

Coal Mines Bill

Parliament of India Photo credit: Wikimedia Commons

Parliament of India
Photo credit: Wikimedia Commons

The Lower House of Parliament, the Lok Sabha, approved the Coal Mines (Special Provisions) Bill, 2015. The law seeks to make the process of granting coal mine leases more transparent. The Upper House, the Rajya Sabha, has yet to pass the law. The leasing process has been criticized for lack of transparency and corruption.

Foreign Direct Investment – Generally

The Department of Industrial Policy and Promotion (“DIPP”) is proposing to raise the FDI threshold from 12,000 million rupees to 30,000 million rupees. The Government may increase the threshold at which Cabinet approval for foreign investments becomes necessary, making India a more attractive venue for FDI. The goal is to attract foreign investments, particularly in infrastructure and manufacturing sectors. Currently, investments exceeding the 12,000 million limit require the approval of the Cabinet Committee on Economic Affairs.

TransLegal has advised clients on foreign direct investment regulations in the food & beverage as well as the hospitality sectors.

Foreign Direct Investment – Housing Sector

The Government has relaxed the rules related to repatriating FDI in the housing sector. In December 2014, the Government implemented these new rules by decreasing the required built-up area and capital needs. In March 2015, the DIPP clarified that the existing three-year lock-in will no longer apply, and under normal circumstances, an investor can exit on an automatic basis upon completion of the project or after the construction of basic infrastructure, such as roads, water supply and drainage. The Foreign Investment Promotion Board (“FIPB”) can approve earlier exits on a case by case basis.

The minimum built-up area requirement for development projects has been reduced from 50,000 square meters to 20,000 square meters, and minimum capital investment by foreign companies has been decreased substantially from US$ 10 million to US$ 5 million. In addition, the government has introduced an exemption to the minimum floor area and the capital requirements when an investor / joint venture company commits at least 30 % of the total project cost to low-cost housing.

 Foreign Direct Investment – Insurance and Pension Sectors

 In March 2015, the Indian Parliament passed the Insurance Laws (Amendment) Bill, 2015. The bill raises the foreign direct investment (“FDI”) cap in insurance companies from 26% to 49%. This increased FDI cap directly increases the allowable FDI in the pension sector: the Pension Fund Regulatory and Development Authority Act ties FDI limits in the pension sector to those in the insurance sector. This increase presents important opportunities for foreign companies in both sectors.

National Stock Exchange of India Photo credit: Wikimedia Commons

National Stock Exchange of India
Photo credit: Wikimedia Commons

Import / Export Documentary Requirements 

In March 2015, the Directorate General of Foreign Trade (“DGFT”) issued a notification drastically reduced the mandatory documents required for importing and exporting goods to three (3) documents. For imports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and bill of entry. For exports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and shipping bill / bill of export.

Intellectual Property

India’s IP Office now allows electronic filing for new applications for design & geographical indications. Previously, e-filing was only available for trademarks and patent applications.

Labor Law

 The 2015 Union Budget proposes the following amendments to applicable labor laws. First, the government seeks to provide increased flexibility for employee contributions to the Employee Provident Fund (“EPF”). Employees would be allowed to choose to participate in the EPF or a New Pension Scheme (to be developed). The proposal also provides that employees with incomes below certain monthly thresholds would have the option not to contribute to the EPF, without affecting or reducing the employer’s mandated contribution. In addition, the amendments would allow employers to offer employees participation in the Employee State Insurance (“ESI”) or a different health insurance product duly approved by the Insurance Regulatory Development Authority (“IRDA”).

Money Laundering

Presidential Standard of India Photo credit: Wikimedia Commons

Presidential Standard of India
Photo credit: Wikimedia Commons

Amendments to existing laws have been proposed to prevent money laundering. Two independent laws have been submitted to address unaccounted-for monies held offshore and dubious domestic transactions. Persons found to violate the law will be subject to prosecution and steep penalties. To implement these measures, amendments have been proposed to the Prevention of Money Laundering Act (“PMLA”), 2002 and the Foreign Exchange Management Act (“FEMA”). Under the proposed amendments, concealment of income and assets and evasion of tax related to foreign assets will be subject to prison sentences of up to 10 years. Each transaction in violation of the law will be treated separately, and offenders will not be allowed to reach an out-of-court resolution through the Settlement Commission. Those found guilty of tax evasion will be subject to penalties of 300% the tax that would have been paid on the concealed income and assets.

Call TransLegal with your questions concerning Indian laws and regulations and how they may impact your proposed FDI projects.

Victimized by a Slumlord

Francisco A. Laguna

 After college, my little cousin moved to New York City and rented her first apartment in young, hip Alphabet City. The place was a dump: the stove had a hole on the top of it; the windows were drafty and didn’t have brackets for the window A/C; the cabinet paint was peeling. But, at $ 1,650 / month for 165 sq ft, how could she resist?! The enchantment soon wore off.

 

Aerial View of New York City Photo Credit: Wikimedia Commons

Aerial View of New York City
Photo Credit: Wikimedia Commons

My cousin unfortunately rented from the classic, stereotypical slum lord – he was right out of central casting. When she asked him to replace the stove, he told her he would have to increase the rent. After 7 months of knowing that she had a cat, he threatened to evict her for having a pet. My cousin fought back on each count and eventually got the new stove and was able to stay in the apartment through the duration of her lease.

After the evident bad blood between them, my cousin assumed that the slum lord would find an excuse not to return her security deposit. She decided to apply her security deposit against her last month’s rent.

In consequence, the slum lord sued her in small claims court. Initially, the claim was for $ 1,750 (last month’s rent plus $ 100 late fee). Then, he raised it to the maximum $ 5,000, alleging that she caused such damage to the apartment that it had to be completely renovated.

Lower Manhattan Photo Credit: Wikimedia Commons

Lower Manhattan
Photo Credit: Wikimedia Commons

My cousin was scared and intimidated. The slum lord would not provide any evidence of the damages, always telling her that he would see her in court. I was concerned because one never knows what a judge will decide, and this was my cousin’s first experience with the justice system. I hoped that the experience would be positive for her, despite the psychological and emotional stress the lawsuit was causing.

At court, the parties were offered the option to arbitrate. He refused because the arbitral decision would be final and not subject to appeal. The slum lord, as plaintiff, presented his case first, proffering pictures of the damaged apartment and an invoice for the renovation. My cousin then presented her case, showing photographs of the apartment when she took possession and when she vacated.

Manhattan Photo Credit: Wikimedia Commons

Manhattan
Photo Credit: Wikimedia Commons

The judge asked the slum lord for proof of payment of the renovation invoice. Turns out the renovation was done by in-house people, so the invoice was not an invoice. The judge noted that the cabinet paint was peeling when my cousin moved in, and the fact that she re-painted the cabinets improved the condition of the apartment. Then the judge asked whether the slum lord had, indeed, changed the cabinets for the new tenant. Response: the new tenant moved in immediately, and he did not have time to change the cabinets prior to his moving in. Turns out that, 8 months later, the cabinets had still not been changed.

Last week, the judge dismissed the case.   The experience was difficult but invaluable for my cousin. She learned that the justice system can work and that dishonest people can be held responsible for their actions. She learned to prepare her arguments, practice and anticipate counter-arguments. She learned that she can be her best advocate. I am proud of her.

How many of you have similar stories?

Peru: Will New Military Draft Law Affect the Economy?

Francisco A. Laguna & Emily Schneider 

Photo Credit: Sen67howard via Wikimedia Commons

Photo Credit: Sen67howard via Wikimedia Commons

New legislation in Peru has sparked heated debate because it reinstates the military draft but allows persons to skip obligatory service by paying a fine of ~ US $700. The law has been attacked as discriminating against the poor, particularly against individuals from the Amazon and Andes. The minimum wage in Peru is 750 soles (~ US $290) per month.  The opt-out fine is 1,850 soles, making it nearly impossible for lower- and low-income individuals to take advantage of this option. While a similar law exists in Colombia (only applicable to students and priests), the ability to avoid the draft has been especially polarizing in Peru, where the majority of those who adversely affected are either Afro-Peruvians or of indigenous descent.

The mandatory draft could negatively impact the overall economy in Peru by forcing many minimum wage workers to forfeit their jobs to fulfill the service requirement. Since Peru’s main exports are gold, copper, silver, zinc and lead, the draft could slow production of many of Peru’s main commodities, but at this point, it is unclear whether the mandatory draft will affect Peru’s export numbers. Undoubtedly, however, the true impact will be on the local level: Conscripts will be paid approximately half of the current minimum wage and will be living away from home.  The absence of a contributing person will certainly affect the purchasing power of families and extended families, translating into negative impacts on small- and medium-sized businesses, all at the local level. Continue reading

Real Estate Market in India: Still Lucrative and Challenging

Francisco A. Laguna & Annapurna Nandyal 

Returns on investments in real estate in India have been impressive:  30 – 40% over the past several years; and expected future returns run between 12 – 20%.  Over the past 7 years, ~ US$ 18 billion has been invested in the sector. Commercial and residential projects, including planned communities with schools, hospitals, recreation and retail spaces, are being built in the areas surrounding all major Indian cities as businesses expand and people search for better quality of living in less congested and newly constructed areas.

Photo credit: Veera.sj via Wikimedia commons

Photo credit: Veera.sj via Wikimedia commons

Prior to 2005, foreign investors were only allowed to invest in the development of hotels, industrial parks, Special Economic Zones (SEZs) and integrated townships, either through wholly-owned subsidiaries or joint ventures.  In 2005, the Government allowed 100% FDI under the “automatic route” in townships, housing, built-up infrastructure and construction of development projects (e.g. commercial premises, educational institutions, recreational facilities, city and regional level infrastructure etc.), hotels, tourism and resorts. Consequently, foreign investors can now invest without seeking the prior permission of the Government of India, the Reserve Bank of India (RBI), the Foreign Investment Promotion Board (FIPB) or the Ministry of Finance, as applicable. FDI is not allowed in the real estate sales or brokerage sector (buying or selling of real estate or trading in Transferable Development Rights).

Many foreign real estate investment companies have come to India, including private equity funds, pension funds and development companies which were lured by big returns on investment. Companies such as CESMA International Pvt Ltd, Emmar Properties of Dubai and Donald Trump Organization have joined with local real estate developers to construct projects in India. Continue reading

China – Real Property, Social Divide & Economics

Francisco A. Laguna & James K. Bates

As a follow-up to our last China post, today, we focus on the real property sector. With relatively few opportunities for in-country investment, the Chinese have focused on real estate as a preferred private investment. Increasing personal prosperity, combined with government-allowed home ownership, has fueled real estate prices to surreal levels in cities across China.

800px-1_hongkong_panorama_victoria_peak_2011

Photo credit: chensiyuan

In 2010, the Chinese government took steps to deflate property values by imposing control measures, including increasing the minimum down payments required for mortgages and limiting access to loans. However, mid-2012, Beijing relaxed some of these restrictions, reversing course to bolster the economy. The government sought to stimulate the housing market by implementing measures that made loans available to first-time buyers and those who wanted to purchase better homes.

Polituburo policies succeeded in reigniting the Chinese real estate market:

  • In December 2012, 54 of 70 cities surveyed by the National Bureau of Statistics reported a rise in the price of newly-constructed homes
  • In 2012, investment in property development / construction rose by 16.2 to 7.18 trillion yuan (~ US$ 1.15 trillion)
  • In 2012, residential property sales rose 10.9%, and by increased floor area, sales went up 1.8%
  • 2013 sales are expected to exceed 1.2 billion square meters (12.9 billion square feet).
Shanghaiviewpic1

Photo credit: Dawvon

Developers were able to sell inventory, which required them to purchase new real estate for future projects.
The government is well aware of real estate’s important role in the Chinese economy. According to the International Monetary Fund, the sector makes up 12% of the economy. Adding in construction- and home-related spending on building materials, appliances and furnishings, that figure increases substantially. The other major sectors include the government’s own investment spending and manufacturing. As the population matures and the younger generation becomes better educated, manufacturing is likely to decline. This places pressure on the government to strengthen other segments, including retail, services and research & development to create a balanced economy, rather than one largely dependent on one branch.

File-Beijing_CBD_2008-6-996735

Photo credit: en:user:CobbleCC in English Wikipedia

As prices recover and then some, the Party is also mindful of potential civil unrest and criticism of the regime as values continue to increase and only certain echelons of society can afford to live in the luxury complexes popping up across China. The people’s awareness of, and reaction to, the economic divide is of concern to the Politburo. Again, they have something to worry about. Average urban income was 24,565 yuan (US$ 3,947) in 2012. In Beijing alone, average home prices were 20,700 yuan (US $ 3,326) per square meter. Pricier real estate fetches 160,000 yuan (US$ 25,706) per square meter – values that rival or surpass many major capital cities.

The pundits are divided on whether the Chinese real estate sector can sustain these levels. Bullish observers expect increased prices and stronger markets, provided government policies remain favorable. Others point to the fact that the upward trend was not felt across China and declining heavy construction equipment sales belie weakening of the sector. It will be interesting to see how Xi Jinping maneuvers the situation and how the people will react to the realization that home ownership may only be for the select few.