The "priciest" luxury apartment complex in Shanghai, or even China, Tomson Riviera made its debut two years ago. Ever since, the apartment complex has been swept into a whirlwind of media probing and government investigations. The "bizarrely" high prices of Tomson Riviera raised suspicions of illicit land hoarding and market manipulation.

In mid-December of 2007, the Ministry of Construction of the People's Republic of China was reported to have released a notice on its website, saying that Shanghai Municipal Housing, Land and Resource Bureau (hereafter referred to as the Shanghai Land Bureau) was about to penalize the developer of Tomson Riviera. The developer would be ordered to "either cut the price or lease all the apartments," cancel the prices posted on its website and restructure its business. The developer's illegal land hoarding would be recorded in the enterprise credit report.

But, shortly after being reported in the media, the notice was removed from the website of the ministry. Later, during an interview, an executive of Tomson Riviera told a reporter that he had no idea of the pending penalty, nor did his company plan to lower the prices or lease all the apartments.

Hard pressed by the media, the Shanghai Land Bureau disclosed that it had not finalized the plan to penalize Tomson Riviera's developer and that administrative penalties must be approved by higher authorities. The Shanghai Land Bureau was working with the local judiciary and other administrative departments on their next move.

For billionaires and trillionaires

Tomson Riviera, located in the Lujiazui Finance and Trade Zone in Shanghai, was developed by Tomson Seaview Garden Co. Ltd., a subsidiary of Tomson Group Ltd., a Taiwanese company listed on the Hong Kong Stock Exchange. Tomson Riviera was opened for sale in October 2005, at an average sale price of 110,000-120,000 yuan ($15,000-$16,400) per square meter. Statistics from the Shanghai Land Bureau suggested that this price was 16 times the average price of residential property in Shanghai, and four times the average price of compatible buildings in the neighborhood.

With apartments ranging from 39 million to 190 million yuan ($5.3 million to $26 million), Tomson Riviera was designed for the city's super rich. Although consumerism prevails in China, such exorbitant property prices invited blame and probing rather than the extravagant profits that the developer had hankered for. Sales records show that the first unit was sold 250 days after being put on the market. A Chinese Southeast Asian businessman bought the 900-square-meter unit at a price of 130 million yuan ($17.8 million). In the past two years, only three apartments have been sold.

The unimpressive sales record is little surprise to many people, including Xu Bin, General Manager of Tomson Group Ltd. "One cannot understand Tomson Riviera if reading through the lens of a commoner," Xu emphasized. "The property is for billionaires and trillionaires, not only as a home, but also as art, an antique. It is one of a kind."

Public outcry

In recent years, housing prices have skyrocketed in Shanghai, and the municipality has become active in cracking down on land law violations. In June 2007, Tomson Riviera became a thorn in the regulators' side. Responding to public outcry against the firm's high prices, Shanghai Land Bureau suspected the developer of Tomson Riviera of hoarding land, falsifying sales records and hyping up the reputation of its property. The bureau is currently working with the tax and price regulators to examine the construction and sales records of Tomson Riviera.

The media accused the developer of Tomson Riviera of five sins, the biggest of which was hoarding land. Records from the agency regulating industrial and commercial activities show that the land that Tomson Riviera was built on was acquired by the developer in 1995, and was not developed until a decade later. Hoarding land for such a long period is forbidden by the government.

Another sin the company was accused of was "obscene profit." According to real estate experts, the total cost of building each square meter of Tomson Riviera is no more than 30,000 yuan ($4,000), including 10,000 yuan for land, 10,000 yuan for development, 2,000 yuan for fixtures and a little more for taxes and fees. However, the developer asks for an average price of 110,000 yuan ($15,000) per square meter, so its profit margin is significantly higher than the market average. Some people compared the budgets of Tomson Riviera with those of its neighbors, including Jin Mao Tower and Shanghai World Financial Center, and found that the profit from selling Tomson Riviera at the current asking price would generate a revenue of 15.6 billion yuan ($2.134 billion ), more than enough to build another Jin Mao Tower for 4.32 billion yuan ($590 million) and another Shanghai World Financial Center for 7.27 billion yuan ($990 million).

Interestingly, on the day the local government announced its decision to investigate the developer, Xu Feng, Chairman of Tomson Group Ltd. told the press in London that, "Tomson Group has always obeyed the law. We have nothing to fear from the investigation."

Xu also said that his group had barely recovered its investment in Shanghai Pudong District. "We have invested $2 billion in Pudong, and have not yet made a handsome profit," she said. Xu's words gave industry analysts the impression that Tomson Riviera was the major revenue source for its developer.

There are rumors that the developer plans to divide each large apartment into four or five smaller ones, and rent them out, but Tomson has dismissed this idea.

Other sources say that Tomson is talking to an overseas fund about buying it out. Tomson has confirmed a proposed deal, but there has been no further news about a buyout

Unsatisfactory sales records and high management costs may have upset Xu. She once suggested that after selling out one or two buildings, the rest would be for rent. She indicated that the property might be leased at half the rent of comparable buildings, but expressed that the "sales prices can not be slashed, even though the rent would be low."

Obscene profit

The overheated real estate market and skyrocketing housing price have become sores in the social economic development of China. Statistics shows that from 2000 to 2004, the sales price of residential housing rose from 3,326 to 6,385 yuan ($454.6 to $873.4) per square meter. As part of the national campaign in regulating the real estate market, Shanghai's regulatory initiatives are successful. As a result, the prices for new residential housing plummeted continuously for eight months in 2006, which is remarkable when compared to the housing market in other metropolitan cities such as Beijing.

But, this impressive result was not sustainable. Although new data indicate that real estate transaction volumes reached 7.38 million square meters, higher than that of the previous year, the volume has fallen significantly behind market demand, especially given that macro-economic policies in 2006 should have boosted housing sales. Li Zhanjun, Director of Shanghai Pudong Real Estate Economics Research Center, said that many factors could have turned real estate prices around into another growth period.

To curb soaring housing prices, Shanghai kicked off another real estate regulating campaign in June 2007. The focus of this campaign is to detect and address land hoarding, falsification of sales records and abnormal price rises. With its exorbitant prices, Tomson Riviera naturally entered the priority list of the regulating campaign.

To Shanghai Land Bureau, the extraordinarily high prices of Tomson Riviera are part of a land-hoarding strategy. In other words, the high price is being used to postpone sales. The next question for the bureau is what price is too high. Right now, there is no clear definition for that in China. On the contrary, the laws of China stipulate that in a market economy, enterprises have the power to set prices free from government intervention. Therefore, to Li the high prices of Tomson Riviera do not violate any Chinese laws.

Tomson Riviera's developer obviously understands that well. When asked about price cuts requested by government agencies, Xu said that, "The project does not violate any laws," and joked, "Isn't China a market economy? If we are required to lower the price, please show us the government document."

Lacking convincing legal support, the regulators of Shanghai Municipality cannot reach a verdict half a year into the investigation. It is believed that the heart of the problem is that the regulators have intervened in the market with simple administrative measures; instead they should have used market incentives to solve economic problems.

Profit is the fundamental root of Tomson Riviera's high prices. The government can impose a windfall profit tax to curb speculation. To administer a windfall profit tax, the tax administration should collect profit data on the industry. Real estate developers should disclose housing costs. Only when the cost is published can one assess whether the price is too high and how big the windfall profit is. Public demand for cost disclosure has been bluntly rejected by developers and has not been recognized by lawmakers, either. Conflicts of interests have made information disclosure a very complicated issue.

"Economic incentives are more important than command and control in regulating windfall profit," said Sheng Xiang, a Chartered Public Accountant in Zhejiang Province in east China. "If China has a strict windfall profit tax code, and the housing cost is transparent, no matter how high Tomson Riviera is priced, there should be nothing to fear."