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The Ministry of Construction yesterday warned investors against buying commercial properties from developers who sell the units prior to completion and promise high investment return from rentals, a practice it said poses high risk.

 

The questionable practices include developers who claim they will lease commercial properties such as offices, retail shops or serviced apartments from buyers after completion.

 

Some even promise to find tenants on behalf of buyers and pay a fixed annual investment return after their purchase. The number of these risky deals has been rising, Xinhua news agency reported yesterday, citing an unnamed spokesman at the Ministry of Construction.

 

Many buyers have lost their investment after the developer raised capital but failed to complete construction, the ministry said.

 

And even when projects were finished, some buyers lost out when developers failed to make good on their promise to provide tenants.

 

"These types of sales are disguised financing tools that allow developers to use buyers' money to fund their projects," the ministry spokesman said. "The promise of investment return is essentially made as a bluff to boost sales."

 

China has been tightening lending to real estate firms to reduce loan risks at domestic banks, making developers eager to explore alternative financing channels.

 

"In developed countries, commercial properties are usually held by the developer itself or fund firms after completion and operated to generate long-term rentals." said Gu Yunchang, secretary-general of the China Real Estate Association.

 

"But in China, most developers sell the properties to individual investors to generate immediate cash. So the properties are often poorly managed and fail to attract quality tenants."

 

Due to the lack of lucrative investment channels outside of real estate and mounting uncertainty over possible government policies to cool down the residential sector, more and more small investors are putting their cash onto commercial properties, analysts said.

 

The Ministry of Commerce estimated that commercial real estate development rose 20 percent to 200 billion yuan (US$25 billion) last year from the previous year.

 

(Shanghai Daily May 24, 2006)