Foreign Participation in China's Real Estate Market

Land Ownership

China has moved from a strictly socialist land-ownership system to a more liberal regulatory regime in the past couple of decades. The basic land use system applies equally to domestic and foreign investors. The state owns all urban land and some non-urban land, while collectives own much of the country's non-urban land. The state may: (i) grant land use rights to any entity or individual; or (ii) allocate land use rights for specified public uses, such as military, schools, hospitals and public housing. Granted land use rights are obtained upon payment of a land premium to the state and exist for a fixed period of time depending on use. The period is 40 years for non-industrial commercial, tourism and entertainment uses, 70 years for residential use, and 50 years for all other uses (including mixed use and industrial). For practical purposes such rights are tantamount to common law fee-simple rights with a right of reversion by the state, and may be sold or purchased with relatively few restrictions.

Allocated land use rights are a throwback to the socialist land system created in post-1949 China, and still represent the vast majority of all available urban land. The state allocates land (usually to state-owned companies) without a premium being paid, although in recent years periodic land use fees may be charged by the state. The holder of allocated land use rights has no security of tenure (the state may confiscate the land without compensation), and is also subject to restrictions on use and development.

Development Approvals

Real estate development approvals generally must be conducted sequentially and often take longer than expected. In a typical case investors first negotiate with local government authorities with respect to the plan for land use and land price. The local government also serves as a coordinator of project review and approvals from the following (as well as other) relevant government agencies: the Urban Planning Bureau (determines planning details); the Real Estate Bureau (grants land use rights to the investor); the Commission of Foreign Trade and Economic Cooperation (approves project entity formation); the Administration of Industry and Commerce (registers the project entity); and the Construction Commission (approves design and supervises construction).

Over the past few years the government has been reforming the process by which it grants land use rights for land (other than industrial use) by requiring one of three different forms of competitive government sponsored auctions (not all of which are determined by the highest price). The transition from the old system of private negotiation with the government to the newer system of competitive bidding is still not complete and both systems are operating concurrently.

Market Participation

Foreign investors can participate in China's real estate market in a variety of ways. Perhaps the most common foreign participation in real estate in China thus far is as end users, by which is meant the construction or purchase of real estate to conduct the investor's own business activities. Another method is as residential developers. An example is Rockefeller's anticipated development of a massive mixed-use facility (including residential) in the Waitanyuan area of Shanghai. As commercial developers, foreign investors have developed a number of upscale hotels and office buildings, such as the Hilton, Four Seasons and Shangri-La hotels in Shanghai. Infrastructure and public utilities development is another avenue. An example is the Asian Development Bank's development of a water plant in Sichuan province. Foreign players are also participating as equity investors. In one example, Singapore-based CapitaLand, Ltd. purchased 62% of the equity interest of a Beijing-based real estate development company. Portfolio transactions are also possible. Morgan Stanley, GE Capital and Deutsche Bank, among others, are involved in the management, operation and sale of distressed real estate in China following the acquisition of such assets on a portfolio basis from Chinese asset management companies. International banks, such as HSBC and Bank of East Asia, as lenders, have financed many real estate projects in China. Finally, foreign players have gotten involved as suppliers and contractors. Building material suppliers such as Butler Buildings have found success in China, as have some foreign contractors.

Conclusion

Investors unfamiliar with China should tread cautiously when entering the market in order to avoid regulatory and cultural missteps. While some local governments strive to streamline the complicated approval process necessary for foreign investment in real estate (such as the first-tier cities where the real estate boom has been centred), others still impose a bureaucratic tangle where guanxi is as important, if not more so, than published rules. China is changing, however, and the Chinese government recognizes the importance of creating a transparent and efficient legal system necessary to keep the engines of growth running.