China: New Restrictions On Foreign Investment In Real Estate In China

Last Updated: 9 October 2006


On 11 July 2006, the Ministry of Construction, Ministry of Commerce, State Economic Development and Reform Commission, People’s Bank of China, State Administration of Industry and Commerce and State Administration of Foreign Exchange ("SAFE") jointly announced the "Opinions on Regulating Market Access and Administration of Foreign Investment in the Real Estate Market" (the "Opinions"). The Opinions set out new rules regulating foreign investments in the real estate market in China. The key purpose of the Opinions is to cool down the "over-heated" real estate market and they have a significant effect on foreigners wanting to invest in the lucrative PRC real property market. Both individuals and institutional investors, including REITs are affected.

The main issues raised in the Opinions are outlined as follows :-

Purchasers’ Requirements

Acquisitions of real estate by foreign individuals and institutions not for their own use and without a presence in China are now restricted.

A. For own use

Only the following individuals or entities may buy property in China for their own use in accordance with their actual needs :-

(i). foreign entities with approved branches or representative offices in PRC;

(ii). foreign individuals who have worked or studied in China for more than 1 year; and

(iii). overseas Chinese and Hong Kong, Macao and Taiwan residents who buy units of a "certain size" but there is no guideline on what that "certain size" means.

The above individuals or entities now have to submit an application in their own names to the relevant land and real estate administration authorities for approval of the purchase. It is no longer possible to hold Chinese property through offshore companies and thereby avoid Chinese tax when selling the property by selling shares of the offshore company instead of the property itself.

B. Not for own use

For purchase of real estate by foreign individuals and entities not for their own use, the Opinions now require such foreign individuals or entities to establish a "commercial presence" in the PRC. In other words, they have to set up an onshore PRC foreign investment real estate company in the form of a wholly owned foreign enterprise or Sino-foreign equity or co-operative joint venture ("FIE Real Estate Company") to hold their property in the PRC.

Onshore Entity Requirements

The Opinions further provide that if the total investment of the FIE Real Estate Company is equal to or more than US$10 million, its registered capital must not be less than 50% of its total investment. This new requirement significantly increases the registered capital requirement for setting up a real estate investment company as opposed to other types of investment company. Under the present regulation for normal Foreign Invested Enterprises, the registered capital must be a minimum of 2/5th of its total investment (between US$10 million to US$30 million) and a minimum of 1/3rd or less of its total investment (above US$30 million).

Greater Borrowing Restrictions

Based on the above, a foreign investor will only be able to borrow up to 50% (the difference between total investment and registered capital) of the total investment to finance its real estate projects in the PRC. There can also be no local and overseas borrowings until (a) its registered capital has been fully paid up; (b) the FIE Real Estate Company has obtained the relevant land use right certificate (after payment of the land premium); and (c) in the case of a project development company, the total capitalisation has reached 35% of its project total investment. Until the above 3 conditions are met, SAFE will not give any foreign exchange clearance for borrowings.

These changes will effect the timing and extent of debt financing of foreign-invested real estate projects in China. Foreign investors may now have to find alternative means of borrowing offshore to fund their real estate projects in China.

Payment Of Land Premiums

Under the Opinions, the relevant authorities will issue a temporary 1 year certificate of approval and business licence to the FIE Real Estate Company. After the FIE Real Estate Company has paid the relevant land premium and obtained the land use right certificate, it can convert the certificate of approval and business licence into permanent ones.

Acquisitions Of Existing Projects

If a foreign investor acquires a real estate company by way of share transfer or other means or acquires the company from a Chinese party, he will need to pay the transfer price in 1 lump sum and must not have any unfavourable record. Payment by instalments over several months, permitted under other cross border acquisitions, is no longer allowed.

Prohibition On Local Incentives

Local governments are prohibited from making new incentives to encourage foreign real estate investments and current incentives are to be rectified in accordance with the Opinions. Details implementing rules will be made by each city.

Lawyers in our China Practice Group regularly advise on corporate finance and merger and acquisition matters in China including acquisition of commercial buildings and vacant land for property development. If you wish to have a copy of the Opinions or have any questions regarding the above matters, please let us know.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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