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Focus: Foreign investment restrictions in the People's Republic of China real estate market

8 August 2006

In brief: On 11 July 2006, a notice outlining new foreign investment restrictions in the People's Republic of China real estate market was jointly issued by six People's Republic of China government authorities. Partner Nigel Papi(view CV) and Senior Associates Stuart Mengler and Maggie Ma report on the key aspects of the notice.

Notice

The Opinions Concerning Regulating the Administration and Entry of Foreign Investment to the Real-Estate Market (Jian Zhu Fang [2006] No.171) was jointly issued by the Ministry of Construction, 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) on 11 July 2006.

The notice provides for new restrictions on entry into, and operating in, the People's Republic of China (the PRC) real estate market, including prohibitions on certain foreign individuals purchasing property, and requirements for foreign companies to establish a commercial presence in the PRC for such purposes.

Permitted involvement in PRC real estate market

Purchasing, operating and developing real estate for investment purposes (ie non-self use)

Any foreign institution or individual investing in real estate within the PRC that is not used by such institution or individual must establish a foreign-invested enterprise.

Once established, that enterprise may purchase, operate and develop real estate in accordance with that enterprise's approved business scope. The requirements and process for establishing a foreign-invested real estate enterprise are outlined below.

Own use

Branches or representative offices of foreign entities (except foreign-invested real estate enterprises), and foreign individuals that have worked or studied within the PRC for more than one year may acquire real estate in the PRC for their own use (ie as office space or for residential use). 

Prohibited from involvement in the PRC real estate market

The notice provides that:

  • foreign companies without branches or representative offices in the PRC; and
  • foreign individuals that have worked or studied in the PRC for less than one year,
    are prohibited from purchasing real estate in the PRC.

(An exception to this prohibition is that there is some scope for individuals from Hong Kong, Macau and Taiwan to purchase individual residential properties, although the extent of that exception is not clear from the notice).

Foreign-invested real estate enterprises

Establishment process

The notice provides for an interim, and then formal, establishment process for foreign-invested real estate enterprises as follows:

  • the granting of an interim Foreign-invested Enterprise Approval Certificate and Business Licence, with a duration of one year;
  • following the payment of the land use rights grant fee in respect of the relevant land, a State-owned Land Use Certificate is obtained; and
  • a replacement Foreign-invested Enterprise Approval Certificate and Business Licence are issued.

Presumably for foreign companies or individuals who are only purchasing (and not developing) property, the process would not involve the interim certificate/licence.

Investment requirements

If the total investment for a foreign-invested real estate enterprise is US$10 million or more, the registered capital may not be less than 50 per cent of the total investment.

For those enterprises whose total investment is less than US$10 million, the proportion of registered capital is to be in accordance with current regulations. In this regard, if the total investment for a foreign-invested real estate enterprise is less than or equal to US$3 million, the registered capital may not be less than 70 per cent of the total investment. If the total investment is between US$3 million and US$10 million, the registered capital may not be less than 50 per cent.

Operational restrictions

A foreign-invested real-estate enterprise must satisfy the following criteria in order to obtain domestic or overseas loans, and SAFE may not approve the settlement of foreign-exchange for such loans if these criteria are not met.

  • It has obtained a State-Owned Land Use Certificate.
  • The registered capital has been fully contributed.
  • The capital for a development project is equal to or above 35 per cent.

In addition, parties to a joint venture foreign-invested real estate enterprise are prohibited from agreeing to provisions in which any party is guaranteed fixed returns.

This will prevent developers borrowing to establish working capital for the purchase of a land use right.

Transfer of equity

An acquisition of equity in a foreign-invested real estate enterprise must be made in a lump sum. Accordingly, this may not be paid over the course of a year, as is the case with other foreign-invested enterprises.

While not free from uncertainty, it appears that this would not be triggered by an offshore change in control of the direct holding company owner of the foreign-invested real estate enterprise.

Other

The notice also contains a wide-ranging obligation on the PRC Government to focus on issues created by foreign investment in the real estate market. In particular, regional governments are prohibited from independently providing preferential policies for foreign real estate investment, and such current policies must be removed or remedied.

Questions

The notice does contain some ambiguities that raise questions regarding its implementation.

  • If existing foreign-invested enterprises apply for an increase in capital, will the new registered capital ratio apply?
  • Is the notice intended to operate retrospectively? We note that it would appear that current ownership by foreign companies or individuals is not affected.
  • To what extent do the foreign-invested enterprises requirements and processes focus on developers rather than purchasers?

The departments involved in issuing the notice are currently drafting implementing rules, which may provide clarity to some of these issues, but which may also provide further restrictions. At this stage, the expected timing for release of the implementing rules is not known.

For further information, please contact:

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