Abstract
Presales have been used as a major financing mode for real estate development in China. However, there have been limited researches studying the roles of different real estate market players impacting on the efficiency of the property presales, in particular, on the issue of asymmetric information in the market. The paper adopted an institutional approach to study the problems latent in the presale property market. Semi-structured interviews with professionals and industry practitioners were conducted and the findings suggested that the lack of market information, pseudo policy objectives and confusing roles played by major market players are the root of the problems. Restructuring of the institutional arrangement in regard to the financial channels for capital, risk management on developers, custody of the presale proceeds and commitment of the regulatory authorities are necessary in enhancing the market efficiency.
Highlights
There have been dramatic institutional changes in the operation of residential property markets in recent years and the most notable change is the increasing use of property presales
The 3-level institutional hierarchy of major market players ures adapted from the regulations and policies promulgated by the central government, the China Commercial Real Estate Association (CCREA) and China Consumers’ Association (CCA) can on one hand protect the interest of property buyers, and on the other hand, avoid fettering the market operation
The problems generated from information asymmetry in the presale property market have caused public concern
Summary
There have been dramatic institutional changes in the operation of residential property markets in recent years and the most notable change is the increasing use of property presales. In Mainland China, more than 50% of newly constructed commercial residential properties were sold through presales and the ratio were even over 90% in some counties (Zhong, 2005), and problems generated from information asymmetry in the presale property market have caused public concerns. The problems were so severe that in the 2004 Real Estate Financial Report, the People’s Bank of China questioned whether the presale policy should be replaced by only sales of completed properties (Kalifa, 2005). According to the Real Estate Web Report, defaults of construction, poor built quality, unclear and exclusions of liabilities in the contracts were common risks that presale property buyers had to bear in Mainland China (Research in China, 2008). A comparison of the different practices of property presales has been made in Leung et al (2007a)
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