Foreign Investment in Real Estate in China

Policies Regulating Foreign Investment in the Real Estate Market

In accordance with Opinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market promulgated on November 27 2006 (Decree No.171), foreign investors cannot develop and operate real estate businesses before obtaining the Foreign Investment Enterprise Approval Certificate and Business License. Moreover, the registered capital of the foreign investment enterprises in the real estate industry cannot be lower than 50% of total investment which shall amount to or surpass US $10 million. Decree No.171 is an important regulation which stipulates the entrance requirements for foreign investors in the Chinese real estate market. This decree is the first clear signal which ended the era where overseas special purpose vehicles [SPVs] can directly hold real estate property in China.

Following Decree 171, more regulations issued by Ministry of Commerce and State Administration of Foreign Exchanges are in place for 2007 to further strengthen the government's dedication in restriction of foreign investment in this over-heated field. Under the Guidance Opinions of the General Office of the Ministry of Commerce on Absorbing Foreign Investment in 2007, issued on March 6 2007 (Decree No.25), the competent departments shall take effective measures to restrict foreign investment in the real estate field, which explicitly expresses the government's opinion to restrict the investment by foreign investors in the real estate market. Notice of the Ministry of Commerce and the State Administration of Foreign Exchange on Further Strengthening and Regulating the Examination, Approval and Supervision of Foreign Direct Investment in Real Estate Industry, issued on May 23 2007, (Decree No.50) requires local governments to improve their supervision and examination of foreign investment in the real estate market, especially in the high-end sector and to prevent foreign investors from controlling local real estate companies by changing the actual controlling person without legal procedures or approval. Decree No.50 makes strictly supplementary amendments to Decree No.171 on foreign investors' application for establishment of real estate companies.

Circular on the Issuance of the List of the First Group of Foreign-funded Real Estate Projects Approved by Ministry of Commerce for Record By the General Affairs Department of State Administration of Foreign Exchange (Decree No.130) issued on July 10 2007 restricts foreign-funded real estate developers in China from financing from external debts, i.e., either shareholders' loans or non-shareholders' loans coming from abroad. This circular will force the foreign-funded real estate company to increase the amount of paid-in capital and blocked the in-flow of short term foreign capital into the real estate field.

This series of policies indicate that the examination, approval, recording and supervision of foreign investors in the real estate market have been further strengthened in China. It is said that Decree No.130 may increase the cost of foreign capital funds investing in domestic real estate by 10% or more. However, under current circumstances, it may be difficult to forecast the effects of the policies because of the rent return, long-term appreciation of real estate, and expectation of Rmb appreciation.

Methods of Foreign Investment Entry

Upon the promulgation of relevant restrictive policies by relevant governments from last year, it seems that foreign investors are excluded from investing in real estate in China. However, some foreign investors have successfully entered the Chinese real estate market by applying effective strategies, including:

(1) Directly establishing foreign-funded real estate companies or purchasing equity from domestic real estate development enterprises;

(2) Purchasing H-shares of domestic real estate companies listed in the Hong Kong stock market;

(3) Establishing a property management company engaged in renting and management service instead of developing; and

(4) Other indirect investment, for instance, First American Title Insurance Company, which successfully entered into the Chinese real estate market by establishing the first domestic company engaging in providing guarantees for the real estate business.