Market Access Report: Real Estate

As a result of revisions to the Catalogue in 2002 that reflect China's commitments set forth in its Protocol of Accession to the WTO (Protocol), development and construction projects of ordinary residential housing are now "encouraged" and foreign investors may freely participate in such projects in the form of WFOEs or joint ventures (JVs). However, the new Catalogue does not provide any guidance on the distinction between ordinary residential housing projects and other residential housing projects.

Although China reserved its right in the Protocol to prohibit foreign companies from establishing WFOEs to engage in high-level real estate projects (except for luxury hotels), i.e., those with unit construction costs exceeding double the average for the same city, the new Catalogue merely categorizes construction and operation projects of deluxe hotels, villas, office buildings and international conference centres as "restricted". In practice, officials of the Ministry of Commerce have stated that notwithstanding China's reservation of rights in the Protocol, such high-level real estate projects may be carried out by foreign companies in the form of WFOEs. Nevertheless, it should be noted that China would not contravene its WTO commitments if it later prohibits foreign companies from establishing WFOEs to carry out such projects.

China did not make any commitment in the Protocol in respect of tract land development. Under the new Catalogue, tract land development is categorized as "restricted" and foreign investors are only permitted to participate in such projects in the form of equity or cooperative JVs. Although there is no PRC law or regulation that explicitly limits foreign equity participation in tract land development JVs, in practice, officials of the Ministry of Commerce have stated that they generally discourage foreign investors from holding equity interests of more than 75% in tract land development JVs.

In respect of companies engaging in real estate services on a fee or contract basis (such as real estate brokerage services), the Protocol provides that foreign companies are permitted to participate in this sector only in the form of equity JVs, with foreign companies allowed to hold majority shareholding percentage in such enterprises. Nevertheless, there is no such restriction under the new Catalogue and it is well known in the industry that there are a number of real estate agencies or brokers already operating in China in the form of WFOEs.

Domestic Regulatory Issues

China's WTO commitments do not preclude the issuance of restrictive laws, regulations and circulars that apply equally to domestic and foreign-invested enterprises. A typical example can be found in the control of construction and operation of villas. Despite the fact that foreign companies are permitted to participate in villa projects under the new Catalogue, a recent notice issued by the Ministry of State Land and Resources on February 28 2003 specifically requires land authorities at various levels to cease the supply of land for villas, which effectively blocks both foreign investors and domestic enterprises from investing in new villa projects.

In recent years China has issued a number of regulations in the real estate sector, ostensibly to manage various sub-sectors of the industry, particularly in cases where the government believes that a sector is being overbuilt, but also to regulate the industry as a whole. For example, the Ministry of Construction promulgated a regulation in 2000 implementing a four-tier system for real estate development enterprises that applies equally to domestic enterprises and foreign- invested enterprises. Other examples from the past include State Council rulings that temporarily halted new construction of hotels, apartments and office buildings in several large cities.

Conclusion

Notwithstanding China's reservation of rights in the Protocol to restrict foreign investment in certain real estate sectors, current PRC laws and practice give more leniency to foreign investors than China's Protocol commitments require. China reportedly already has more than 5,000 foreign-invested real estate enterprises, which constitute an astonishing 20% of all real estate development enterprises in the country. While China's WTO accession has created greater opportunities for foreign investors in the market, who in general find themselves on a more equal footing with domestic players, the country is certainly not immune to the cyclical nature of the global real estate market and China's government is not yet beyond attempts to micro-manage sub-sectors of the industry.