"THANK YOU, GOVERNMENT!"

"Many thanks to the government, for suspending the sale of state-owned land, allowing the price of T1 to skyrocket."

So read the half-page ad with the large attention-grabbing font taken out on March 25 in Taiwan's major newspapers. The advertisement, referring to the upscale housing project T1 on a 4,950 square-meter plot of land built by privately-held Lih Pao Construction, was quite embarrassing to ROC Premier Wu Den-yih, coming shortly after his announcement that the government would suspend the sale of state-owned land in such prime areas as downtown Taipei, with the stated purpose of suppressing real estate prices.

The chairman of Lih Pao Construction, which took out the advertisement, happens to be Wu Bao-tian, director of the Taipei Construction Association and a man with considerable capital and close government ties. Business conglomerates and construction companies are not exactly enthusiastic about the government's policy measures to cool off the real estate market.

High real estate prices are the top complaint of Taiwan's citizenry, yet the building industry keeps propping up the prices through land deals, even brazenly thanking the government for suspending the provision of state-held land for sale. Professor Chen-Jai Lee of the Department of Real Estate and Built Environment at National Taipei University, a longtime observer of land policy, pulls no punches in noting that this situation shows that the government's policy of suppressing real estate prices has been unable to achieve tangible results. Lacking teeth, it is not being taken seriously.

Moreover, it further shows that conglomerates and development firms sitting on many properties in choice areas have become emboldened. Reducing the supply of land actually runs counter to the intended goal, giving them more "room for imagination" in land speculation.

Developers Won't Sell, Prices Hit New Highs

Developers commonly take their time after acquiring land, waiting for the price to rise before engaging in development or directly selling the plot off for profit. This sort of conduct has not been news in Taiwan's real estate industry for a long time. In Taiwan's urban areas, Taipei chief among them, developers are currently snatching up land and sitting on acquisitions to such an egregious extent that the government seems to have lost control.

This past January the Executive Yuan announced a moratorium on sales of land exceeding 500 pings (1,650 square meters). In February, two properties in downtown Taipei were put up for auction by the National Property Administration on behalf of the Ministry of Defense. A 335 square meter plot of land in a military dependent settlement on the corner of Renai Road and Linyi Street, and the former residence of People First Party chairman James Soong, set new records for the highest unit price at an auction of state-held property at NT$6.92 and 6.02 million per ping (3.3 square meters), respectively, achieving new residential property records as well.

Right on the heels of a series of actions by the government and central bank, who swore to suppress real estate prices, the sale of the Holy Word Children's Home in Tianmu set a record for the highest unit price in recent history for a Category R3 residential property, at NT$4.097 million per ping. (R3 properties rank third out of four possible zoning categories, rated according to maximum allowed floor area ratio.) Mr. L.C. Chung, chairman of Huaku Development, the winning bidder for the property, publicly commented that the price was "very reasonable," adding that the firm was not in a hurry to develop the property during the forthcoming year.

According to statistics, the top 12 developers alone held over NT$220 billion in undeveloped land or surplus housing (including undeveloped land and residential properties either still in construction or awaiting sale) around Taiwan in 2009. The average holdings accounted for 75 percent of total assets, a five percent rise over three years prior. According to estimates by real estate industry sources, the undeveloped "virgin territory" in urban areas currently in the hands of publicly listed development corporations exceeds NT$150 billion in value.

As development firms continue to increase their holdings, their inclination to sit on land and their unwillingness to sell is becoming ever more apparent. The most direct impact on the average homebuyer is the runaway rise of real estate prices. Developers have taken the stance that even if they are unable to sell real estate, they are unwilling to lower prices. This is most apparent in the Taipei City area.

Ni Zi-ren, research director at My Housing magazine, notes that the average real estate unit price in the first quarter of this year in Taipei City was NT$600,000 per ping – higher than that recorded prior to the 2008 financial tsunami. Also in the first quarter of 2009, new housing in the Daan District of Taipei set an all-time high at an average of NT$1.033 million per ping, despite a considerably lower transaction volume compared to 2007.

According to normal market principles of supply and demand, high prices and a dearth of buyers should give consumers greater margin for negotiation over price. Yet this margin has slipped to a historically thin 10 percent in Taipei's new housing market. "This shows that developers are so sure housing prices cannot drop that they would rather sit on property than sell it at lower prices." Ni Zi-ren reckons that under the impact of this pervasive stance among developers, the price of new housing in Taipei City will continue to climb 3 to 10 percent annually over the next three years.

Low Interest, Low Property Taxes

Why is fighting for land and sitting on land holdings so acute at this time, prompting some scholars to describe it as having reached "crazy" proportions? Other than such market factors as the growing scarcity of large properties in urban areas and the higher gains from sitting on land and waiting, low tax rates and low mortgage interest rates in Taiwan are the main contributing factors.

Specifically, six revisions to related property laws and regulations over the past 45 years have resulted in a tax and tariff system that favors long-term holders of land. This is a major factor.

"Property tax rates in Taiwan are now so low that Ma Ying-jeou and government officials should look up at pictures of Sun Yat-sen (who stressed that increases in property prices should go to the public purse) and feel ashamed," says Taipei University's Professor Lee. According to current tax regulations, corporations are not required to pay business income taxes on land sales, and the maximum assessment on long-term land holdings is a progressive tax rate of just 5.5 percent per year. On top of this, public assessment rates far below market value only serve to give corporations and developers additional incentive to sit on their land holdings.

Looking at statistics related to the widely discussed sale of the former grounds of the Xinyi Joint Forces Club, a state-held property, for which public records may be verified, Shin Kong Life Insurance won the bid for the land in 2006 for NT$6.384 billion. It then turned around and sold it to Yuanlih Group chairman Lin Min-hsiung and Cathay Life Insurance vice chairman T.Y. Tsai for a profit of nearly NT$3.8 billion in two years.

Nevertheless, Shin Kong Life Insurance has had to bear less than NT$150 million in combined property and capital gains taxes. With a return on investment of 26.6 percent within two years, the actual tax rate for the sale was 3.67 percent, substantially lower than the current corporate income tax rate. (See Table)

The prevailing low interest rate environment in Taiwan in recent years has lowered the cost of financing, indirectly encouraging developers to sit on land holdings. According to the latest statistics from the central bank, the latest average interest rate on mortgage loans by the top five banks is 1.668 percent, the lowest in a decade. However, major bank executives reveal that due to intense competition among banks for the land and home financing markets, banks have slashed the actual interest rate on large loans to development firms to less than one percent.

As long as the low-interest environment persists, development firms are able to leverage and snatch more land. Looking at development projects by the top dozen construction firms over the first quarter of this year, the debt ratio is over 50 percent, exceeding the average rate for 2006. Some development firms are even running a debt/equity ratio of nearly 80 percent.

A Paradise for Hoarding Property

For many years now the major shareholders of development firms have expertly played low property transaction tax rates and high yield returns to incredible advantage. Thus Taiwan has become a paradise for investors to sit on land holdings.

Auctions of state-owned property have repeatedly set new highs recently, causing some people to wonder if developers can ever recoup their expenditures. Industry insiders have revealed that many major development firm shareholders have over the past few years been sitting on lots adjoining state-owned land they purchased under their own names. Then, when the property offerings are announced, they purchase the land under their company's name for astronomical sums, in one move raising the going rate for properties in the surrounding area like a torch setting off a prairie fire.

In an interview with CommonWealth Magazine, National Property Administration director Peizhi Chang commented on the exorbitant price paid this year for the property formerly resided on by PFP chairman James Soong. "Many lots in the adjoining area had already been purchased by developers. By purchasing the property for an astronomical figure, he (the developer) gives himself advertising for his own surrounding property. The costs have long been calculated in advance, and outside opinion blames the National Property Administration for selling off state-held property at bargain basement prices," Chang says with palpable frustration.

Ni Zi-ren offers that major development firm shareholders sitting on land in their own names or through reinvestment companies has long been a unique phenomenon in Taiwan. Consequently, the amount of land many publicly traded developers are actually sitting on is far greater than that indicated on financial reports, making it difficult for outsiders to get a clear view of the full picture. "The real numbers depend entirely on whether the big bosses (of the development firms) say anything, and how much they say," remarks Ni.

Thorough Reform Needed to Thwart Speculation

Many scholars opine frankly that the real estate price suppression policies have failed because the government has never touched the property tax structure that lies at the root of the issue.

When assessing property values for the tax base, local governments around Taiwan without exception undervalue announced land value compared to what the market can bear, making the cost of sitting on land low. "The complex tangle of relations between local governments and business interests makes reforms difficult to see through," admits Professor Lee. However, with sufficient commitment the central government can still use subsidies to encourage local municipalities and counties to make reassessments in closer alignment with the market.

Professor Lee called on the Taipei municipal government, with the highest population density and highest real estate prices, to raise property tax assessment benchmarks. He is confident that if Taipei City leads the way others will soon follow.

Rapid development and social equity are like two sides of a scale in Taiwan, always looking to strike a balance. For the time being, though, the scale is tipped strongly to one side when it comes to land. Only a reawakening of public consciousness and pressure on the government to reform can ease the pains of high real estate prices.

Translated from the Chinese by David Toman