Wealthy developer offers sector views

As the government begins to outline its planned restrictions on urban renewal projects and real-estate financing, Chong Hong Construction Co chairman Lee Wen-tsao gives his insight and perspective as an industry-insider on the hotly-debated matter in an interview with “Taipei Times” staff reporter Crystal Hsu

Mon, Jun 25, 2012 - Page 14

Taipei Times: The government plans to tighten requirements for urban renewal projects to better protect the rights of land owners. What are your views on the move?

Lee Wen-tsao (李文造): Authorities concerned should figure out for themselves what they really want. Urban regeneration is already a very difficult undertaking within the existing rules. Successful cases are few and far between, given the amount of time and resources required. I suggest the government either take full responsibility for initiating urban renewal projects or simply wash its hands of it, which would allow construction companies and land owners to settle disputes among themselves.

The government cannot encourage urban regeneration while seeking to tie the hands of construction firms. Such a practice is contradictory and hurts all parties involved as demonstrated by the stymied case with the Wang family in Taipei’s Shihlin District (士林). At least 80 percent of existing houses in Taiwan could collapse if a massive earthquake (measuring 7.6 on the Richter Scale) were to hit, like the one in 1999. Safety concerns alone lend support to urban regeneration projects because houses built since then are more quake-resistant.

TT: What are your views on the central bank’s moves to tighten lending for luxury houses?

Lee: I don’t think it is fair or wise. Global central banks are easing monetary policies to stimulate economic growth and the central bank should bear that in mind.

While the construction sector is only part of the industry, it plays a critical role in driving the economy. If the sector goes into recession, then other businesses — such as suppliers of plastic, steel, furniture, hardware and home appliances — will suffer as well. The government is well aware of the potential fallout, but is unwilling to admit it for political reasons.

The central bank has already tightened real-estate financing and it asked state-run banks to raise interest rates to 2 percent on land and mortgage loans, whereas borrowing costs for companies in other sectors are lower than that threshold.

Nevertheless, the interest rates remain very low and will continue to shore up housing prices. Idle funds will keep flowing into real estate as they serve as a better defense against inflation and market volatility. The lack of alternative investment choices also lends a helping hand.

TT: How will the housing market fare for the rest of the year with economic downside risks increasingly evident?

Lee: Efforts to predict the performance of the local housing market based on past experience or on the global economy have proved futile. Personally, I don’t see a bubble on the horizon as some academics have been warning would happen for years.

The belief that “to own land is to own wealth” (有土斯有財) is deeply ingrained in Chinese culture and accounts for sustained demand for home ownership.

On average, housing prices in Greater Taipei doubled over the past decade, with nationwide figures only slightly lower. That translates into an increase of 10 percent a year, a healthy profit amid GDP growth of 5 percent, in my view.

Housing prices doubled in 1973 and 1979 and threefold in 1990. The government did not take action to check the property fever, but prices stabilized of their own accord. That is how the market economy works — regulated by an invisible hand.

Surely, the current boom cycle cannot last forever, but I don’t spot the need for a big correction in another 20 or 30 years when the low birth-rate may start to impact on the market.

TT: What are Chang Hong Construction Co’s (長虹建設) development plans for this year?

Lee: Since its creation in 1973, Chang Hong has focused its business in Greater Taipei, where most people live and work, and it has no intention of shifting this strategy.

New construction projects total NT$20 billion [US$668.89 million] this year, a big jump from last year’s NT$5 billion. Luxury housing projects in the districts of Nankang (南港) and Neihu (內湖) were sold out in April and May respectively. The two projects would generate about NT$10 billion. We also plan to auction an office building later this year that may contribute an extra NT$10 billion.

The planned launches of new housing projects in Linkou (林口) and Yingge (鶯歌) districts in New Taipei City (新北市) will likely have to wait until the fourth quarter or early next year. It takes a longer time than expected to obtain building permits. The delay has nothing to do with the business cycle.

TT: Some developers and construction firms have expanded into the hospitality and retail sectors to cash in on the influx in Chinese tourists, while others have turned to central and southern Taiwan. Is Chang Hong interested in southward expansion or cross-sector investment?

Lee: I don’t like to enter unfamiliar territory. Running tourist hotels is not my forte and nor is investment outside of Greater Taipei. The building industry is old, but still replete with innovation and opportunity. It is equally challenging and satisfying to reinvent for business sectors that I know well.

I’ve heard housing transactions are gaining momentum in central and southern Taiwan. I have no doubt housing prices are catching up there. However, I don’t think they can match Greater Taipei’s pace, which has outperformed both GDP growth and the rate of inflation.

I think, while real-estate investments in southern Taiwan are generating better returns, they will not be significant enough after factoring in transaction fees, interest expense, inflation and other overheads.

TT: What do you think of the government’s efforts to promote fairness and social justice through tax reforms?

Lee: The business sector is willing to make charitable donations, but it resists heavier tax burdens because taxes do not always benefit disadvantaged groups or enhance corporate image. The government is turning the issue into a war against the rich by proposing capital gains from securities transactions and is likely to do the same with real estate investments later on.

With 80 percent of Taiwanese owning houses, it is not surprising that some own more than one home and also perhaps an expensive home. There will be more resistance if the government seeks to tax properties based on their real prices rather than publicly designated values. The move would affect many people and entails revisions to the Constitution, where land taxes are enshrined.

Hon Hai Precision Industry Co (鴻海精密) chairman Terry Gou (郭台銘) aimed to humor the government when he suggested taxing the nation’s 300 richest people and sparing general stock investors. The government should concentrate on boosting the economy and take steps to allow all to benefit from the growth in GDP.