Beat the heat

3. The supervision and administration of the real estate market will be reinforced

4. The construction of large scale government subsidy housing will be promoted

Following the Guo Four Opinions, on January 7 2010, the State Council issued a Circular on Promoting the Steady and Healthy Development of the Real Property Market (国务院办公厅关于促进房地产市场平稳健康发展的通知) (Guo11 Provisions), further clarifying and implementing Guo Four Opinions by requiring the governments at all levels, especially those of the overheated cities, to:

1. Increase the supply of residential land use, the supply of government subsidised housing, and the medium-and-low priced commodity housing units

2. Use preferential lending, tax and other measures to support the needs of government-subsidised housing, and medium-and-low priced commodity housing units

3. Use differentiated lending, tax and other measures to oppress investing and speculative purchases

4. Correct the market-disrupting malpractices of developers such as hoarding and price manipulating

Following the Guo11 Provisions, the central government authorities promulgated several implementation measures, including these highlights:

1. The Ministry of Land and Resources (MLR) Circular on Issues Relevant to Strengthening the Supply and Regulation of Land Use for Real Property (国土资源部关于加强房地产用地供应和监管有关问题的通知) (MLR Circular) was promulgated on March 8 2010 with aims to increase an effective supply of residential land use for subsidised housing and level the efficiency of land supply and utilisation. The MLR Circular has taken the following measures:

i. The land use supply for subsidised and low price housing shall be no less than 70% of the total supply of residential land use. Land supply for villas will be prohibited

ii. The land grantee must sign the land grant contract within 10 working days from signing the land grant confirmation of public offering and pay 50% of the total land grant fees within one month after the execution of land grant contract. The total land grant fees have to be paid within one year from the execution of the land grant contract

iii. Certain measures such as comprehensive assessments on bids will be explored to control the rapid growth of housing price in certain cities

iv. Time requirements on the commencement of construction and completion by the developers will be strictly implemented

v. Land hoarding and delayed construction commencements will be enforced so as to press developers to realise effective and timely housing supplies

2. According to the press conference on March 9 2010 hosted by a minister of the Ministry of Housing and Urban-Rural Development (Mohurd), controlling high housing prices should be a three-fold approach:

i. To increase the supply of residential land use and supply of ordinary commodity housing, economic housing, and government subsidy housing

ii. To oppress irrational housing needs, especially speculative and investment needs

iii. To press developers to speed up their housing development projects and take administrative measures against those developers hoarding the land and sellable houses.

3. According to a recent briefing on controlling real estate-related lending risks (银监会：银行要做好四项房地产贷款风险防控工作) on March 26 2010, the China Banking Regulatory Commission (CBRC) has instructed banks to take the following measures to control real estate-related risks:

i. Stop new loans to those defaulted developers as determined by land and construction authorities

ii. Control mortgage ratio of the land and work-in-process

iii. Stop credit grants to those state-owned enterprises (SOEs) owned by the central government whose core business is not listed as real estate

iv. Pre-authorise direct payments to the payees of the developers to avoid loan misappropriation

Several red-hot cities such as Beijing, Shanghai and Shenzhen have also implemented detailed measures on controlling the overheated housing prices. For example, Beijing authorities have issued the Opinion on Implementing Guo11 Provisions and Enhancing the Stable and Healthy Development of Beijing Real Estate Market (关于贯彻国办发(2010)4号文件精神促进本市房地产市场平稳健康发展的实施意见) to provide that the supply of land use for government subsidy housing shall account for no less than 50% of the total residential land supply and that only a single pre-sale permit for the whole development project will be allowed, and that developers have to offer all available housing units for immediate sale. The opinion also reiterates that the measures of Circular 171 and related policies restricting property purchase by foreigners will still apply.

On April 13 2010, the Mohurd issued a Circular on Further Strengthening the Supervision on the Real Estate Market and Improving the Pre-sale System (住房城乡建设部关于进一步加强房地产市场监管完善商品住房预售制度有关问题的通知). According to this circular, any offering or sale by a developer before obtaining the pre-sale permit is prohibited, and all saleable units will have to be offered by the developers immediately after obtaining the pre-sale permit. The circular also requires that local authorities speed up the pre-sale permit issuance process, supervise the use of pre-sale proceeds to ensure sufficient funds for project completion, and closely monitor and strictly punish unlawful or irregular developer behaviour. The circular additionally requires the local authority to improve its quality control and warranty system of residential properties.

Despite the above-mentioned policies and measures, housing prices in certain cities continued to rise. This prompted the State Council to promulgate the Circular on Determined Suppression of the Exceedingly Rapid Rise of Certain Urban Housing Prices (国务院关于坚决遏制部分城市房价过快上涨的通知) (Guo Circular 10) on April 17 2010. In addition to reiterating the measures provided in the Guo 11 Provisions, the Guo Circular 10:

1. For the first time, stresses that the housing issue is not only an economic problem but also a matter of people's essential living and that the local governments will be held accountable on controlling housing prices and maintaining social stability related to the housing problem

2. Requires all local governments to adamantly depress speculative and investment housing purchases by implementing more rigorous differential housing loan policies, including the down payment for large size units (over 90 square metres) not to be less than 30%, and the down payment for a second unit not to be less than 50% and the interest rate to be 1.1 times of the base rate

3. Requires the banks stop loans for the third unit purchase in cities where housing prices have risen fast and housing is in short supply, and authorises the local governments to impose restrictions on purchase by non-local residents if necessary

4. Urges the central tax authority to make tax measures and policies as quickly as possible to discourage the unreasonable housing needs in the market

5. Provides specific tasks for local governments to fulfill in 2010, including providing three million units of government-subsidised units and 2.8 million redevelopment units.

1. Impact on real estate-related foreign investments

The Guo Circular 10 reiterates that that the property purchase by foreign entities and individuals will be strictly subject to the relevant policies. This implies that the policies under Circular 171 and related measures effective since July 2006 will remain applicable. There has been no further measure or policy against real estate-related foreign investment since Circular 171 and related measures.

It's evident that the recent control policies are targeting the rapidly increasing prices and speculative activities in the residential property sector because the problem mainly rests with the residential housing sector rather than the overall property market. Therefore, other property sectors such as retail, office and industrial properties are not the target of the recent policies.

The statistics from Mofcom's filing database indicate that during the first quarter of 2010 there were 230 foreign-invested real estate enterprises (Firees) nationwide that had filed and been approved by Mofcom.

Based on the above two tables, it can be extrapolated that during the first quarter of 2010:

i. There were 92 new Firees established, accounting for 40% of the total filings

ii. Capital increase projects accounted for approximately 39.56% of the total filings, indicating that Firees relied heavily on capital finance by their own shareholders

iii. Filings of tier one cities only accounted for approximately 11.74% of the total filings, with an average of 6.75 for each city. This is incompatible with the fact that these cities are the primary destinations for foreign investment

The approval process for Firees has sped up since Mofcom delegated examining powers to provincial authorities. In some cases, a Mofcom filing can be finished within two weeks. Local approvals can be obtained in as little time as seven working days.

In the wake of the Guo Four Opinions, Guo 11 Provisions and related measures, opportunities for foreign investors exist in the following areas:

i. Investment in non-residential projects or properties. As the prices of commercial (retail and hospitality), office and industrial properties are not the target of the central government, investment in such development projects or the purchase of such properties will face less restrictive measures.

ii. Equity investment in residential development projects. The speeding up of development will generate more housing supply that will help stabilise residential property prices. This is in line with the current policy of the central government. There is no reason for the government to restrict the developers from seeking financing from foreign investors.

iii. Investment in tier two and three cities. Foreign investment in second-tier and third-tier cities, either in the form of equities or assets, will face less restriction in obtaining government approval and a Mofcom filing.

iv. Local developers are facing difficulties in obtaining loans. Given the CBRC measures, some developers, in particular those defaulted developers, will face difficulties in obtaining bank loans. This will constitute greater investment opportunities for foreign investors.

After the Measure for the Administrative Measures on Establishing Partnership Enterprises within the PRC by Foreign Enterprises and Individuals (外国企业或者个人在中国境内设立合伙企业管理办法) went into effect on March 1, 2010 and the promulgation of related registration measures, foreign investors may now set up limited liabilities partnerships (LLPs) to carry out real estate-related equity investments. Mofcom and Safe have not given clear guidance on which specific rules will apply during their respective approval process in the case of a reinvestment by LLP. This is owed to the fact there are existing rules, like foreign direct investment rules or foreign-invested enterprise reinvestment rules that can be readily applicable. Despite the lack of clarity on which rules will apply, this issue will be resolved when the provincial counterparts report to Mofcom and Safe during their approval process of a specific project. As a result, a new investment model foreign investors should consider is the LLP.

Given the recent macro control policies and bearing in mind Circular 171 and related measures, traditional direct equity investment remains the most practical and efficient way for foreign investors to carry out real estate-related foreign investments.

Li Haiqing, Zhong Lun Law Firm, Beijing