Real estate investment has been a significant pillar of the national economy in China. According to Reuters, growth in China's real estate investment fell to 3.5% in the first eight months of this year from the same period last year. A cooling property market has weighed heavily on the economy.
In an effort to boost the real estate market, six Chinese ministries jointly issued the Notice of Adjusting Policies on the Access and Administration of Foreign Investment in Real Estate Market in August 2015 to relax certain controls they imposed in 2006.
Foreign companies or individuals who are interested in acquiring non-owner-occupied real estate in China, namely for investment purposes, must apply to establish a foreign-invested real estate enterprise (“FIREE”), whether it be a joint venture or a wholly owned entity. A FIREE has to meet similar requirements as for other foreign invested enterprises (“FIE”) in addition to real estate specific regulations.
The recent relaxation on foreign direct investment introduces the following changes:
1. Lower equity requirement
The ratio between the registered capital and total investment of a FIREE is now brought in line with FIEs in general – from previously 50% now to 1/3 - for any real estate investment of more than USD 10 million.
In the 1980s, China required a FIE to have a registered capital of not less than 1/3 of the total investment, if the total investment amount is more than USD 30 million, or not less than 2/5 if the total investment is between USD 10 million and USD 30 million (inclusive). The same requirement applied to FIREEs, which meant FIREEs could leverage their real estate investments up to 2/3 of the total investment amount, where the total investment of the project is more than USD 30 million, which is often the case for a real estate project.
In 2006, the central government tightened these rules by raising the equity ratio to 50% of the total investment for any real estate investment of more than USD 10 million, as part of the cooling measures to counteract the hot money inflow into the domestic real estate market.
2. Easier procurement of onshore loans
Previously, a FIREE had to satisfy the following requirements before it could borrow onshore and offshore loans and convert loans in foreign exchange into Chinese Yuan:
- its registered capital has been fully paid;
- it has obtained the land use right certificate (which means the land premium has fully paid); and
- funds injected in the real estate project are equal to 35% or more of the project’s total investment.
The latest changes have removed the first requirement so that a FIREE is no longer required to have its registered capital paid in full before it may obtain loans. While this is effective instantly for onshore loans, it remains uncertain whether this will apply to offshore loans in the same way, in light of existing restrictions on the registration of foreign debt by FIREEs under the State Administration of Foreign Exchange (“SAFE”) regime.
In addition, other existing restrictions on the availability of onshore loans to international developers still apply. For instance, onshore banks are not allowed to finance the payment of land premium for domestic or international developers.
3. Deregulated Purchase of Residential Units by Foreigners
Previously, only foreign individuals who had been studying or working in China for more than one year were allowed to purchase real estate for owner-occupation. The one-year restriction is now lifted to allow foreign individuals to buy properties for their own occupation before one year, subject to any local restrictive policies. For example, in Beijing resident families without an identification card issued by the Beijing municipal government to any of the family members (a Beijing Hukou) may not buy a second home.
According to the recent edition of Venture Capital Post, the buying activity of foreigners is still very low in the Chinese property market. Non-Chinese homebuyers accounted for a mere 0.5 percent of transactions in Shanghai in 2014, for example.
4. Simplified foreign exchange registration procedure
Under the new policies FIREEs no longer need to make foreign exchange registration of direct investment with SAFE. Instead, they may complete the required formalities directly with banks. Such change is in line with earlier reforms launched by SAFE which applies to all FIEs.
What does this mean for investors ?
Hong Kong’s South China Morning Post said the mainland drew 18.5 billion yuan (HK$22.3 billion) of foreign investment in the real estate sector in the first seven months of this year, down 24.5 per cent from last year, according to the National Bureau of Statistics. Foreign capital is reported to account for less than 1% of the total real estate investment in China this year. Yet recently, we have seen international investors like Blackstone Group and Blackrock announcing their renewed interest in China’s real estate market.
The Chinese government has taken action to relax its regulations on foreign investment and streamline the current fragmented regulatory framework. As part of the overall initiative, the Ministry of Commerce issued a drafted Foreign Investment Law for public consultation in January this year to replace and simplify the existing three laws governing wholly foreign owned enterprises, cooperative joint ventures and equity joint ventures, some of which were put in place almost 30 years ago. SAFE has been continuously easing its registration requirement to facilitate the settlement of foreign currencies for international investors. With all the effort the real estate sector could benefit from a “New Norm” which embraces a more open and transparent market in China for foreign investors. Only time will tell.