By Zhang Ruji, Zhang Yu and Lan Bing of King & Wood’s Corporate Group

1.Background of the "The Provisions on Selling Real Estate at Expressly Marked Prices";

Starting in April 2010, China’s central and local governments issued a series of policies to regulate and control the soaring prices of real estate and the overheated real estate market in China. Based on these policies, on March 16, 2011, the National Development and Reform Committee (“NDRC”) issued The Provisions on Selling Real Estate at Expressly Marked Prices (“Provision No.548”), which was implemented on May 1, 2011.

Before the promulgation of Provision No.548, the measures adopted by the Chinese government to regulate and control the real estate industry mainly focused on the restriction of real estate purchasing and loans, such measures aimed at controlling the increasing real estate prices or achieving rational price return by reducing demand in the real estate market. However, the regulatory results were far from satisfactory. Provision No.548 was issued to control the soaring prices by directly regulating the selling price of the real estate and to control the real estate developer’s arbitrary and artificial price increases.

2.The Current Status of Chengdu’s Real Estate Market and Chengdu’s Response to the Provision No.548

Before the promulgation of Provision No.548, the Chengdu government had already issued the Provisional Regulation on Selling Newly Built Real Estate at expressly Marked Prices (“Regulation No.183”), the Provisional Regulation on Online Contract Signing of Pre-sale Real Estate in Chengdu(“Regulation No.206”), and the Provisional Regulation of Pre-sale Real Estate Project Management in Chengdu (“Regulation No.207”). These regulations require developers to sell real estate at expressly marked prices and use a one-household-one-price strategy. Especially after the promulgation of Regulation No.206 and Regulation No.207[1], Chengdu has been walking in the forefront of the national real estate market. Therefore, some real estate industry insiders have argued that the effect of Provision No.548 on Chengdu’s real estate market would be modest, and even called Provision No.548“real estate market speculation”.

Whereas, the Circular on Strengthening the Supervision of Selling Price of Real Estate(“Circular No.30”) was jointly issued by Chengdu Urban and Rural Real Estate Administration and Chengdu Development and Reform Committee according to the Provision No.548, Circular No.30, for the first time ever, requires that the developer’s average declaration price not exceed the average transaction price for the same quality, in the same area and at the same period. Circular No.30 has greatly restricted the developer’s independent pricing power and eliminated the possibility to evade Provision No. 548 by increasing the declaration price.

Meanwhile, Provision No.548 requests that a real estate agency implement the provisions in the secondary real estate sale at expressly marked prices. This is the first time for the national and Chengdu governments to issue such a provision. However, Circular No. 30 has no specific detailed rules, and there are no thorough regulations for the supervision of the secondary real estate sales. Therefore, further market response for this must still be observed.

3. Our Understanding of Provision No.548

    (a)Provision No.548 regulates the issue of price marking in the real estate market, without involving price determination.

     The Chinese government adopts a market-regulated price approach in pricing mechanism[2], Provision No. 548 is not going to change this, but instead will regulate the price manipulation and reckless pricing increasing based on the respect to the original pricing. The implementation of Provision No.548 can partly change the information asymmetry between developers and purchasers, reduce developer’s price fraud or price increasing illusion by using marked real estate price tags and weaken the developer’s pricing power and pricing adjustment power indirectly.

    (b) How to re-declare after price increase is not specified in Provision No. 548 for developers.

    The officer of the NDRC pointed out that according to Provision No. 548, developers need to re-declare to the government price department for approval before increasing price, but clear details are not indicated in the provisions regarding price increase schedule, conditions, scales, numbers, each time intervals, and whether developers can suspend selling before approved by the authority.[3] These kinds of issues require local governments to issue detailed rules or relevant regulations to give more operability to Provision No.548.

4. Developer’s strategy

In regard to the pricing limitation of Provision No. 548, the pace of real estate development should be properly controlled. Developers may seek the declaration number for the most times when applying for the pre-sale permit[4] Thereby the aforementioned measures can help reduce the difficult pricing adjustment effect indirectly, and help developers to gain more pricing autonomy.

[1] Please see the author’s article in 2010 regarding the content of Regulation No.206 and Regulation No.207.

[2] According to the Price Law of People’s Republic of China, there are presently three different approaches in price determination of goods and services: market-regulated price, government guidance price and government-fixed price. Market -regulated price refers to prices fixed independently by business operators through market competition.

[3] According to the Article 18 of Regulation No. 207, real estate must be sold according to the original price during periods of price adjustment, and the real estate development enterprise shall not refuse to sell.

[4] According to the Circular Regarding Strengthening Real Estate Pre-sales Institution and market supervision issued by the Ministry of Housing and Urban-Rural Development, the minimum scale of the pre-sale permits and project schedule requirements for residential real estate need to be regulated according to the local reality. The minimum scale of the pre-sale permits shall not be less than one building, and pre-sale permits shall not be applied respectively by layers or units.