Changing Legal Requirements and Practices in Real Estate

I. High-end Real Estate Projects

High-end real estate projects are categorized as “restricted” in 2004 version of Investment Catalogue and subject to the approval of higher levels of authorities. Although there is no legal definition for “high-end”, a notice issued by the State Counsel in 1995 provides some guidance:

i. High-end residences and resorts of villa type;

ii. Apartments and office buildings with certain construction and design cost;

iii. Hotel buildings intended for a four-star or above hotel.

For the above projects, US $50 million is the threshold determining whether the project needs to be approved by the central government, or whether an approval is only required from the local provincial government. Presently, New Rules do not stated how strict the control for such high-end real estate projects should be, thus the discretion of authorities plays a significant role in the approval process.

II. Project Company

A PRC legal entity is required in order to invest in real estate. The investor must first obtain the land use rights or property or have pre-sale agreements. An existing real estate company should first obtain governmental approval for any new real estate projects.

III. No Foreign Loans

State Administration of Foreign Exchange (SAFE) will not permit the foreign exchange registration for companies set up after June 1 2007 if a loan is to be borrowed from overseas. This also applies to any company intending to increase its registered capital.

IV. Strict Controls on Return Investment

Investment by PRC nationals to acquire or invest in domestic companies through an overseas special purpose entity is strictly controlled. International companies are not allowed to circumvent governmental approval by changing their ownership to that of a domestic company.

V. Central Filing of Approved Companies

Foreign companies having obtained approval through the local government are required to file this record with the Ministry of Commerce (MOC). Otherwise SAFE would not accept the registration of such companies disallowing the conversion of the capital fund into Rmb.

Local Implementations of New Rules

For companies which have completed their filings with the MOC, the following types of companies would be classified as being real estate companies if they are engaged in the business of: property development, property management, management of real estate investment, construction, or engineering, real estate brokerage, and property consulting. An investor would not be allowed to use above types of companies as a vehicle to circumvent New Rules.

SAFE closely monitors capital fund conversion from other currencies into Rmb as well as strictly enforce its previous existing rules. For companies that do not have “real estate investment” in their approved business scope, some local SAFE authorities would not allow conversion of the companies' capital fund into Rmb for use in acquiring the equity of a real estate company. Furthermore, SAFE may also require an official letter from the company confirming that none of its shareholders or investors are PRC nationals. Based on recent discussions with relevant government officials, companies that have been set up before June 1 2007 may also be required to comply with the central filing requirement.

Presently, some local MOC authorities require that the articles of association should specifically state that land lots the investor has acquired should conform to the above project company principle. The State Administration of Industry and Commerce (SAIC) has similar requirements. Additionally, whether an approval from National Development and Reform Commission (NDRC) or its local authority is required for acquiring a domestic company, different local authorities hold different views. In some cities, the local MOC has internal arrangements with the local NDRC so no separate local NDRC approval is required, and the acquisition can be completed within a short period of time. In cities where such arrangements do not exist, investors have experienced more difficulties and delays in going through the process.

Yet with all such New Rules laying out new key principles, the local authorities of NDRC, MOC, SAFE or SAIC may have even more detailed implementation requirements which could directly impact the merger & acquisition in real estate industry. It is therefore imperative that investors should become knowledgeable of the changing real estate rules and regulations to allow them to conform to such complex requirements and form an appropriate company structure so as to be able to ensure a smooth operation of the company in the future.