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Mitigating real estate presale problems in China

Author: Peng, Chen
Author affiliations: University of Calgary (Canada)
Publication date: 2007
Subject terms: real estate, presale, fraud, property developer, legislation, financing, construction loan, China, Shenzhen, Hong Kong
Abstract: Rapid economic growth in China has fueled its real estate market since 1987. Because development has grown quickly over a short period, the real estate sector and supporting legislation and regulations are still in the developing stages. As a result, many problems have been generated by the presale system. Given the underdeveloped financing market, developers rely heavily on presale to collect funds for construction. However, this practice places buyers at risk of fraud by developers and many problems have been generated by the presale system. Buyers have limited recourse in the event of fraud, because protective legislation is in the developing stages and legal enforcement is weak. This Masters Degree Project uses Shenzhen as the study area in order to explore various mechanisms for strengthening the real estate presale system and reducing the incidence of fraud by property developers in China. This project is based on learning from case studies of Hong Kong and Calgary, which represent two different presale models. Analysis of the Hong Kong and Calgary case studies reveals that the four following factors appear to support a successful presale system: a fair distribution of risk on buyers, developers and lenders; the private sector structure as a determinative factor; the financial and legal infrastructures as the basis of the system; and the involvement of experienced real estate professionals. On the basis of these key findings, a more appropriate presale model for China is developed. Supporting strategies include developing an effective credit rating system and public record, supporting and accelerating the development of real estate financing sources, training and certifying real estate professionals, and increasing the role of those professionals in the presale and loan processes. In addition, some short-term recommendations are made with the aim of improving the existing model while the longer-term strategies are progressing and maturing
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