New Opportunities for Investing in PRC Real Estate Market

On July 1 2008, the Ministry of Commerce (MOFCOM) issued a circular in which it delegated its “powers of reviewing and verifying the recordal of foreign investment project proposals in the real estate sector” to provincial-level approval authorities. Did this mean that MOFCOM wants to permit provincial-level approval authorities more leeway in approving foreign investment projects in the real estate sector based on different local situations? The answer appears to be yes!

    MOFCOM's power delegation coincides with a number of complicated, mostly adverse, market conditions in the Chinese real estate market. Real estate prices in most first-tier and second-tier cities rocketed in the latter half of 2007. As a result, fewer consumers can afford to buy properties and the property prices began to stagnate and then started to drop (sharply in a few cities) in the past few months. On the other hand, Chinese foreign currency reserves climbed from US$1.6 trillion to US$1.8 trillion in the first half of 2008. The domestic stock market plummeted by more than half as of July 2008 after reaching a record high in October 2007, giving real estate development companies limited channels for obtaining equity financing from stock markets. At the macroeconomic level, the central government tried to control liquidity by increasing benchmark interest rates¹ and central bank deposit reserve rates² to historically high levels, which made it much harder for property developers to get debt financings from banks. As a result, many property developers are extremely short of cash that is needed for keeping their normal businesses going on in the recent few months.

    The adverse real estate market appears to be creating very good buying opportunities for investors. Real property prices have decreased in most first-tier cities. Property developers are more willing and eager to sell properties or shares in property development companies at lower or discounted prices in order to ease their cash flow pressure. At the policy level, local authorities are likely to be more willing to accommodate foreign investment in the real property sector in order to enhance the local real property market in which the local government has a significant stake (e.g. revenue generated from granting of land use rights).