FDI in Green Buildings in China – a Solution for its Affordable Housing Problems?

By Samuel Wrest

In July, China’s State Council released data showing that the country is aiming to construct 3,500 new urban areas by 2030, with a collective capacity of 3.4 billion residents – roughly half of the world’s population. Although criticized as unrealistic, the target underlines a major problem China faces.

As a result of China’s rapid urbanization – 56 percent by the close of 2015 – demand for affordable housing in the country’s sprawling metropolises has quickly outstripped supply. 60 percent of households in cities with a population of more than seven million are unable to afford basic housing at market rates, according to research from McKinsey. The will likely worsen in the future, with Chinese cities regularly topping global rankings for home price growth.

It is therefore no surprise that the Chinese government is looking to increase supply and decrease costs for urban housing; last year the government invested $236.9 billion in its affordable housing program. Alongside plans to boost the supply of housing overall are plans to increase the supply of green buildings, primarily to cut carbon gas emissions and help meet ambitious clean energy targets. The country’s New Type Urbanization Plan for 2014-2020 mandates the share of green buildings in new construction rise from two percent in 2012 to 50 percent by 2020.

The case for green affordable housing in China is clear. But because most Chinese domestic construction companies are still unfamiliar with green materials, there is a gap in the sector that foreign firms with the necessary expertise are well placed to bridge. And while some may worry that constructing housing that is both green and affordable may not yield returns on investment, China has a strong incentive framework in place– nationally and regionally– to  make investments worthwhile.

Defining ‘green’ buildings in China

China classifies green buildings using a rating system that measures a building’s effectiveness at conserving resources, protecting the environment, and reducing pollution. While there are a range of rating systems, the two most dominant are China’s own Green Building Evaluation Standard (GBES), and the United States’ Leadership in Energy and Environmental Design (LEED). Foreign companies entering the market are therefore advised to plan their housing using one of these two systems.

National incentive framework for green housing

China’s preferential policies for green housing are a primary driver behind their commercial viability. Buildings that are rated 2-Star in an applicable classification system will enjoy a subsidy of RMB 45 per square meter; 3-Star buildings qualify for RMB 80. The potential benefits of these subsidies shouldn’t be underestimated. According to statistics on the incremental cost of Chinese green buildings, subsidies given by the national government to 2-Star buildings covered up to 68 percent of the incremental cost for residential buildings and 44 percent of public buildings, respectively, while the subsidy for 3-Star buildings covered up to 66 percent and 50 percent.

Additionally, China’s corporate income tax (CIT) law stipulates that costs incurred while conducting R&D for green buildings in China can be deducted from a company’s CIT payment. This means that the cost of the R&D will be reduced from the firm’s declared profits, resulting in less being applicable for CIT.

Local incentives

Most local governments in China have separate preferential policies in addition to  the national incentives, expediting the investment process and increasing the investment returns for foreign companies. Western China, for example, offers a reduced CIT rate of 15 percent for companies that build green housing in the region, while Shanxi province provides a streamlined application process and additional subsidies of between RMB 10 and 20  per square meter, depending on the rating attained.

Similar incentives exist across a range of first to third-tier cities in the country. Many of these cities have separate green building targets and allocate funds to encourage investment. In Dongguan in Guangdong province, for instance, a$ 1.5 million special fund has been set up to support green building projects, while Heze in Shandong province mandates that 30,000 square meters of new construction in each of its counties be green and part should be used to provide affordable housing.

Viability of green affordable housing and future outlook

Green housing’s comparatively higher cost upfront is the chief concern when seeking to build affordable housing. Green buildings require high-tech applications that are typically more expensive than traditional building materials.However, research has shown that state-level fiscal measures and local level regulations can help make green affordable housing possible. China has both of these in place with its extensive incentive framework, making green housing construction comparable to, and potentially even cheaper than, conventional housing. Moreover, the costs associated with green construction are significantly less than in the past, with experienced constructors able to build housing at a roughly equivalent price to conventional homes.

Green affordable housing is not only possible in the Chinese market, but potentially profitable for foreign investors, and the need for this type of housing will continue to grow. In order for China to meet its ambitious green building and clean energy goals and effectively house its urbanizing population, green and affordable housing will have to be at the forefront of construction in the mid to long-term future.

About the Author

This story was originally published on Asia Briefing Ltd., a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.