China further relaxes foreign investment in its real estate sector

To aid the development of the real estate market in the current economic downturn and continue the general policy of relaxation of foreign ownership restrictions in the real estate sector (see our earlier alert), six Chinese ministries jointly implemented, on 19 August 2015, certain policy relaxations on foreign investment in China’s real estate market. The new policies were made public on 27 August 2015.

Lower equity requirement: Under the previous rules, a foreign invested real estate enterprise was required to have a registered capital of not less than 50 per cent. of its total investment amount (70 per cent. if the total investment amount is US$3 million or less).

This ratio is now brought in line with the rules that apply to foreign invested enterprises in general, so that the ratio can be between one-third (if the total investment amount is US$30 million or more) and 70 per cent. (if the total investment amount is US$3 million or less), thus enabling certain foreign invested enterprises in the real estate sector to have a lower level of equity than before, and to have a higher level of leverage (though there remains some uncertainty with regard to the obtaining of overseas loans – see below).

Financing flexibility: A foreign invested real estate enterprise is no longer required to have its registered capital paid in full before it becomes eligible to obtain domestic or overseas loans, or convert the proceeds of overseas loans. However:

the requirements to have a valid State-owned land use certificate, and for the real estate project to have equity funds of at least 35 per cent. of the project’s total investment, still apply in order for the enterprise to be eligible to obtain loans; and

the relaxation does not expressly alter the current SAFE rules, under which SAFE will not register foreign debt for a foreign-invested real estate enterprise approved by the Ministry of Commerce on or after 1 June 2007. In practice, therefore, the impact of the changes in facilitating the obtaining of financing by such enterprises may be limited to domestic financing, pending further clarification from SAFE.

Purchase of residential property by individual: Overseas individuals are no longer required to have worked or studied in the PRC for more than one year before becoming eligible to purchase residential property in the PRC. However, it should be noted that such purchases continue to be limited to owner-occupation, and the relaxation does not affect the application of city-level restrictions on property purchases.

The general view is that the changes appear incremental in nature and by themselves, are unlikely to trigger a new wave of investment in China’s real estate sector. However, they may facilitate selective investments by foreign investors seeking to take advantage of the additional flexibility.

Reference

Notice Adjusting the Policies on the Entry and Administration of Foreign Investment in the Real Property Market, Ministry of Housing and Urban-Rural Development, Ministry of Commerce, National Development and Reform Commission, People’s Bank of China, State Administration for Industry and Commerce and State Administration of Foreign Exchange ("SAFE")