Lawyers say: Credit tightening will change investment patterns in China in real estate

Foreign investors must prepare to take a long-term view if they are interested in investing in the PRC real estate market, due to the central government's credit tightening, said Ashley Howlett, partner at Jones Day.

“Several measures and regulations are actually targeting foreign business investors, because the portion of that is relatively small in the market, so it is an easy part to control,” Howlett said.

Foreign clients who used to look for quick returns from their real estate investments might now need to consider changing their plans, he said. Although rapid currency appreciation makes the market favourable, the credit policy in the country has raised barriers for investors to get funding within a short period of time.

Credit tightening is one of the many measures and regulations that the Chinese government has stipulated in the past 18 months in an attempt to cool down the property market, in which prices of residential and commercial buildings are exceeding the limits of affordability for Chinese citizens. Such a measure causes a significant impact for real estate developers, who used to be able to obtain 70% to 80% in funding for project costs, but are now struggling to find ways to get cash. Howlett expected that consolidation among real estate developers will eventually take place. “Small developers will be the ones who struggle the most under the credit tightening measure, because the funding issue may force them to cut back their costs and lower the quality of their projects,” he said. “I think we are going to see some weaker players fail and be bought out and acquired by stronger players,” he said.

Meanwhile, a new phenomenon that has recently emerged is that developers have started to turn to new ways of raising money – private equity funds. State-owned conglomerate China Resources Holdings, for example, formed a unit called Harvest Capital Partners, a creating a new way for the developer to draw upon international funding.

Concerns were raised of whether this new kind of unit would generate competition between investment banks and private equity funds. Yet Howlett said that the investment banks themselves are actually often involved in setting up the private equity funds.

“I haven't seen any [competition] yet, but there should not be any direct competition. The private equity fund is just another way for the developers and investment banks to become involved in the real estate development in China,” he said.