CHAPTER 10 THE PROPERTY SECTOR
THE DEVELOPMENT
The real estate market in Macau is concentrated on residential properties, which normally account for about 80 percent of the unit supply and transactions in the market. Other types of properties include office and commercial buildings and industrial premises. In line with the continued decline in manufacturing activity, as is mentioned in Chapter 8, there have been very few supplies of industrial properties in the past few years.
Before the 1960s, there was no unit sale of property and facility of installment loans provided by financial institutions. Property transactions usually involved the whole building, and most Macau residents could only afford to pay a monthly rental of about 10 patacas for occupying a small room with no fixtures in some two-storey houses built in the nineteenth century. A real stimulus to the property development emerged in the early 1960s, when the massive influx of overseas Chinese immigrants bolstered strong demand for properties. Property developers started to construct some 4-storey, multiapartment residential buildings to cater to the increased demand. The Golden Building in Nam Van was the first residential property to practise per unit sales.
Over the past four decades, the property sector has been locked in the ebb and flow of market development as Table 10.1 outlines. The current downturn started in 1994 and until recently, an apparent recovery has not yet been observed. Official sources estimate that prices of residential properties have dropped by more than 60 percent in the current down-cycle.1 Like the property sector in Hong Kong, Macau's property sector appears to be rather sensitive to shocks, resulting in a large magnitude of market fluctuations. The high volatility of market prices may also indicate the active participation of speculators.
Based on a review of the past experience, we identify six factors, which should have significant impacts on the market development:
1. Business cycle. Quite naturally, Macau's property market has been closely associated with the ebb and flow of business cycle, though whether the former is a cause or effect is hard to confirm.
2. Population growth. Massive influxes of immigrants in the early 1960s,the late 1970s and the early 1990s stimulated a strong demand for local properties.
3. Hong Kong market development. It is observed that the local property market has been synonymous with Hong Kong's property market, probably due to the close economic relationship and free flows of capital between the cities.
4. Government policies. Government influences on the property market can be illustrated by a number of instances. In the late 1960s, the granting of direct credits served to kindle the property market recovery. In the middle of 1970s, the government requirement for a fixed office for registered business entities helped stimulate property transactions. In the early 1990s,the commencement of government-sponsored infrastructure projects greatly improved investment sentiment in the property market.
5. Interest rates. The property prices began to pursue a downward path when the local lending rate rose to over 20 percent in 1981. On the contrary, the near-zero real mortgage lending rate in the early 1990s powered the strong upward surge in property prices.
6. The China factor. Developments in China have had a considerable impact on Macau's investment environment in view of the Territory's political link to the Mainland. Meanwhile, China is the largest outside investor in Macau's property market. One leading property developer in Macau estimates that Chinese capital accounted for about 90 percent of investments in the last property upturn.2 It is argued that the property boom in the early 1990s was mainly caused by the inflow of billions of capital from Mainland China. Similarly, the repatriation of Chinese capital, following the introduction of the austerity programme in China, should be one of the major reasons for the sharp correction in 1994.
LAND FOR PROPERTY DEVELOPMENT
Over 95 percent of land in Macau belongs to the state, but can be leased to private agents for property development. Only a few pieces of land in Macau have been leased out without specifying a leasing time limit. The majority of land leases contains a specific leasing time period, normally not exceeding 25 years. The leases can be renewed when the original date of expiry has been reached. An extra 10 years would be granted for each renewal, until 19 De-cember 2049 according to the Sino-Portuguese Joint Declaration.
To obtain the entitlement to develop a specific piece of land, property developers are required to pay "land concession premiums"3 in private negotiations with the Government or highest bidding prices in government-initiated auctions. Private negotiations and secret bids were popular forms of land granting before 1991. Following the promulgation of new legislation in October 1991, public auction has been a major form of land granting.
Portaria No. 230/93/M sets out the method to calculate land concession premiums, which should be based on the estimated profit from the land development. The Government usually takes 40 percent of the estimated profit as land concession premiums. For the land granted by auction, the bottom price is normally set at the level of 20 percent of the estimated profit. Land concession premiums are not necessarily paid in cash. Developers could be allowed to pay the land concession premium in the form of obligations to construct social housing units or infrastructure projects for the Government. Property developers could pay land concession premiums by installments, with an annual interest charge of seven percent.4
Property developers or owners of the edifices on the leased land are also obligated to pay the annual land tax. The amount of land tax varies with the assigned "grade" of the leased land,5 as well as the utilization of the land.6
The granted land is restricted to be developed according to the leasing contract. Developers who intend to change the use of the land originally specified in the lease have to get the approval from the Government. The leasing contract will be changed accordingly, and the developers are required to pay extra land premiums. After the construction on the leased land has been completed, property owners are required to pay annual urban house tax on estimated collectable income at the rate of either 10 percent or 16 percent.7
According to the Sino-Portuguese Joint Declaration, the Macau Government could grant a maximum 20 hectares of land every year for property development between 1987 and 1999. Extra land granted should seek the approval of the Sino-Portuguese Land Group. During the last property boom in the early 1990s, however, the land supply largely exceeded the 20-hectare limit.
Due to historical reasons, there exist some pieces of land, mostly in the Taipa and Coloane Islands, with private ownership. Most private land has been occupied by native families for more than one century, but the ownership of the land has not been recognized by the Government. Before 1991, the ownership of some private land had been legalized by application to the Government for "land granting". The owners were usually required to pay land concession premiums for legal recognition of their land ownership. In this case, both the land and the buildings on the land would belong to the same or different private individuals. Land owners would have the complete autonomyover development of the private land and are exempt from the land tax. The majority of private land owners only possess some antique, handwritten Sa Chi documents to support their land entitlements. As a result, it created many frauds during the past property booms when the land price was rocketing.The Sa Chi issue still remains an unsettled problem of private land ownership.
HOW TO BRING ABOUT A RECOVERY?
The downturn in the local real estate market has already lasted for more than five years. There is still no apparent sign of recovery. Property prices have not seen any rebound, and the number of new construction projects continues to fall. Correspondingly, the mean salary of local construction workers has dropped by about 10 percent in real terms since 1995. Even though there is no new supply, Macau is still required to take at least five years to digest all the existing vacant residential units, assuming that Macau can maintain an annual absorption of first-hand properties of about 6,000 units. The situation for other types of properties is more worrisome. The market is estimated to take several decades to absorb all vacant commercial and office units, if the annual demand for new units remains at about 500-1,000. Meanwhile, some property developers have delayed paying land concession premiums. The delayed (if not defaulted) payment was estimated to be MOP1 billion in 1998,and was reported to rise to MOP2.5 billion by the end of 1999. There is certainly a pressing need for the Administration to step up its efforts to stabilize the property market.
Source: Estatísticas da Construção, various issues.
Local economists and business associations have suggested various proposals to revive the local property market.8 Major elements of such proposals are highlighted as follows:
To promote professionals, investors and retirees from Hong Kong and Mainland China to relocate in Macau.
To provide tax incentives such as a reduction in the property transfer tax.
To stop new land supply.
To speed up the price adjustment process with government assistance such as reducing or delaying the payment of land concession premiums and extending the interest subsidy programme for small to medium residential units.
To purchase some private residential buildings by the Government and turn them into economical houses.
To improve infrastructure and the living quality of new properties.
To simplify and improve the legal procedures of property transactions.
All these suggestions point to a more active participation of the Government, which, we believe, is appropriate under the current market situation.Some improvement is possible though there is certainly no quick-fix solution for this serious problem. Given the large amount of vacant units, a gradual recovery of the local property market inevitably relies on a surge in external demand engineered by effective government promotion measures.
NOTES
1 Indicadores da Construção em Macau, 1997 Quarter Four issue, p.32.
2 See Lau (1999).
3 The Government introduced this special term in 1978.
4 The Government once cut the interest payment by half in 1996 in response to the depressed market environment.
5 There are five grades from A to E in total.
6 It can be developed into residential areas, industrial areas or commercial areas.
7 There are various cases for exemption from urban house tax. See Chapter 5.
8 See, for example, Strategies for the Macao Economic Development, Guangdong Association for Hong Kong and Macao Economic Studies and Association of Economic Science of Macau, February 1997.
