RAYYIN & PARTNERS P.R.C. LAWYERS

RayYin & Partners PRC Lawyers
1502, 15th Floor, Office Tower 15 Jianwai SOHO, No.39 Dongsanhuazhonglu, Chaoyang District, Beijing, 100022 P.R.C.
Tel: 86 10 58693072
Fax: 86 10 58693073
Website: www.rayyinlawyer.com

With the economic boom, the real estate market is developing at a fantastic speed within a few years in China. From 2005, the property price has been increasing in Shanghai, which soon spread the influence to other big cities, like Beijing, Guangzhou, Shenzhen and etc., and led to the overall rise in most big and middle size cities in China in 2007. For instances, in Shenzhen, property price has been raised up since early 2006, and especially in the first half of 2007, the average property price has already increased more than 50 per cent and the price in some areas are even doubled within the first six months of this year. There are a number of elements which jointly contributed to the jumping of property price in China, including increasing of foreign investment in real estate market, property purchase by foreign invested enterprises and individuals in big cities, the expectation of RMB appreciation and etc.

In order to control the increasing of property price, various regulations and policies have been applied by relevant governmental departments, especially in the areas of restriction of foreign investment in real estate sector in China. This article will focus on the relevant regulations and policies and the influence on foreign investment in real estate field in China.

Policies Regulating Foreign Investors in Real Estate Market
In accordance with Opinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market promulgated on Nov. 27,2006 (the “Decree No.171”), the foreign investors can not develop and operate real estate business before obtaining the Foreign Investment Enterprise Approval Certificate and Business License. Moreover, the registered capital of the foreign investment enterprises in real estate industry can not be lower than 50% of total investment which shall surpass US$ 10 million (including US$ 10 million). The Decree No.171 became one important regulation which stipulates the entrance requirements for foreign investors in Chinese real estate market. This decree is the first clear signal which ended the era where overseas SPV 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 in 2007 to further strength 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 Mar. 6, 2007 (the “Decree No.25”), the competent departments shall take effective measures to restrict foreign investment in real estate field, which explicitly expresses the government’s opinion to strict the investment by foreign investors in 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 23rd May 2007, (the “Decree No.50”) requires local governments to improve their supervision and examination of foreign investment in real estate market, especially in the high-end sector and to prevent foreign investors from controlling local real estate companies by change of 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 (the ”Decree No.130”) issued on July.10, 2007 restricts foreign funded real estate developers in China to finance from external debts, i.e., either shareholders’ loan or non-shareholders’ loan 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 to the real estate field.

The series of policies indicate the examination, approval, record and supervision of foreign investors in 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 the 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 Chinese real estate market by applying effective strategies, including (1) directly establishing foreign-funded real estate company or purchasing equity from domestic real estate development enterprises; (2) purchasing H shares of domestic real estate companies listed in Hong Kong stock market; (3) establishing property management company engaging renting and management service instead of developing; and (3) other indirect investment, for instance, First American Title Insurance Company has successfully entered into the Chinese real estate market by establishing the first domestic company engaging in providing guarantee for the real estate business.