Client Alert

China Update, July 2006

Chinese Real Estate


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New Policies Affecting Foreign Investment in Chinese Real Estate

On July 24, 2006, the Xinhua news agency published the Opinions on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market (关于规范房地产市场外资准入和管理的 意见) ("Opinions") which was promulgated jointly by the Ministry of Construction, the Ministry of Commerce ("MOFCOM"), the National Development and Reform Commission, The People’s Bank of China, the State Administration of Industry and Commerce and the State Administration of Foreign Exchange on July 12, 2006. The Opinions constitute a compilation of both old and new rules relating to the PRC real estate sector. We attach a full English translation of these regulations for your perusal. For your easy reference, we also highlight below some of the key changes pursuant to the Opinions and what they may mean for a foreign investor when evaluating an investment in the PRC real estate.

The Opinions include the following new rules:

Purchaser Qualifications

  • PRC branches and representative offices of foreign entities, as wellas foreign nationals, may purchase PRC real estate only for their own use.
  • In order to be qualified to purchase PRC real estate for his or her own use, a foreign national must have been resident in China for more than one year. Hong Kong, Macau and Taiwan residents and overseas Chinese are generally subject to foreign investment rules but the Opinions seem to suggest that this one-year residency requirement may not apply to Hong Kong, Macao or Taiwan residents or to overseas Chinese and that such individuals who are not resident in mainland China may buy units of "a certain size" for their own use. No guidance has yet been provided as to what that size is.  
  • Direct offshore ownership of PRC real estate is otherwise not permitted and foreign investors wishing to purchase PRC property in other circumstances must set up a foreign-invested real estate enterprise ("FIREE"), such as a cooperative or equity joint venture or a wholly-foreign-owned enterprise, in the PRC to do so.

Greater Restrictions on Debt Financing

Rules generally applicable to foreigninvested enterprises provide that a stipulated percentage of the total investment amount of an enterprise must be made up of "registered capital", which is the equity subscribed by the parties. The specific percentage depends on the size of the enterprise and ranges from 33.3% to 70%. The Opinions provide that an FIREE regardless of size must have registered capital of not less than 50% of its total investment amount, effectively tightening applicable debt-to-equity rules. An FIREE is also prohibited from obtaining loans if (a) its registered capital has not been fully paid up, (b) it has not yet obtained a "land use certificate" for the land (c) the paid-in capital of the development project is less than 35% of the total investment of the project. The net effect of these rules is to restrict the timing and extent of debt financing of foreign-invested real estate projects in China. Depending on the extent to which these rules govern shareholder as well as bank loans, a foreign investor’s return on investment will also be affected.

Requirement of Full Payment of Land Premium

FIREEs will not be issued formal approval certificates and the full term of their business licenses before the land grant premium for acquisition of land has been paid in full.

Greater Scrutiny of Acquisitions by Foreign Investors of Existing Projects

A foreign investor buying into an FIREE or a domestically-funded real estate project will be subject to greater scrutiny. Among other things, the foreign investor must provide to MOFCOM a letter of guarantee of performance of the land grant contract and of planning permits and approvals. When buying into a domesticallyfunded real estate project, the foreign investor will be required to pay the acquisition price in a lump sum. Payment in installments, as is otherwise permitted in cross-border M&A transactions, is not permitted.  Foreign investors with "bad records" are prohibited altogether from acquiring interests in domestic real estate companies.

Detailed Implementation Measures to Come

The Opinions indicate that relevant implementation measures will be made by the relevant authorities in the near future.

Please note that in addition to the New Rules, there will be more detailed implementing regulations promulgated in the future by various ministries which may impact on the precise operation of these New Rules.

English translation of the Six Ministry Opinions on Foreign Investment in Real Estate on July 12, 2006

Ministry of Construction
Ministry of Commerce
National Development and Reform Commission
People’s Bank of China
State Administration for Industry and Commerce
State Administration of Foreign Exchange
Jianzhufang [2006] No. 171

In view of the rapid growth of foreign investment and the active pace of purchases by overseas institutions and individuals in the Chinese real estate market from the beginning of this year, these Opinions are hereby circulated with the approval of the State Council to regulate the market access by, and administration of, foreign investment in the real estate market.

Article 1: Standardization of Market Access of Foreign Investment in the Area of Real Estate

Opinions on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market

(1) An overseas entity or individual investing in the purchase of real estate in China other than for self-use shall, subject to the principle of commercial existence, apply for the establishment of a foreign invested enterprise pursuant to the rules relevant to foreign investment in real estate and conduct relevant operations within the authorized business scope only after obtaining approval of the relevant government departments and the relevant registrations.

(2) The registered capital of a foreign invested real estate enterprise ("FIREE") with a total investment amount of USD 10 million or more shall not be less than 50% of the total investment amount of the FIREE. In respect of an FIREE with a total investment amount of less than USD 10 million, the current rules on registered capital shall apply.

(3) An equity transfer or a project transfer of an FIREE, as well as the acquisition of a local real estate enterprise by foreign investors, shall be approved by MOFCOM in strict compliance with relevant laws, regulations and policies. The investors shall submit a Letter of Guarantee pledging to abide by the "State-owned Land Use Right Grant Contract", the "License for the Planning of Lands for the Purpose of Construction", and the "License of the Planning of Construction Projects". In addition to the Guarantee letter, they shall also submit the "State-owned Land Use Certificate", a change of registration certificate issued by the relevant construction (real estate) administration department, and evidence of tax payment issued by the relevant taxation authority(ies).

(4) Foreign investors acquiring a domestic real estate enterprise through equity transfer or in other ways, or acquiring the Chinese investors’ equity in an equity joint venture, shall make proper arrangement for the real estate enterprise’s employees and for the enterprise’s bank loans. The foreign investors shall pay the transfer price in a lump sum and with their own capital. Foreign investors with bad records are prohibited from involvement in such activities in the PRC.

Article 2: Strengthening Administration of Real Estate Development and Management Operations by FIREEs

(5) An FIREE is prohibited from conducting the business of real estate development and operations without first obtaining an Approval Certificate and a Business License.

(6) If the registered capital of an FIREE is not fully paid up, if its "Land Use Certificate" has not been issued, or if the paid-in capital of the development project is less than 35% of the total investment amount of the project, the FIREE is prohibited from borrowing from domestic or foreign lenders and the Administration of Foreign Exchange shall not approve the settlement of the foreign exchange proceeds of such loans.

(7) Neither the Chinese nor the foreign investors in an FIREE shall in any manner stipulate a fixed return clause or its equivalent in the contract, articles of association, equity transfer agreement or other documents.

(8) An FIREE shall obey relevant laws, regulations and policies applicable to real estate and shall strictly comply with the stipulations of the land-use-right grant contract and the time limit and conditions in planning permits and approvals. The authorities shall strengthen the supervision of FIREEs’ development, sales and other business operations and the authorities shall investigate and punish, pursuant to Guo Ban Fa [2006] No. 37 and other relevant regulations those activities violating the laws or regulations such as hoarding land or real estate and engaging in manipulation to drive up the property prices.

Article 3: Tightening the Administration of the Purchase of Real Property by Foreign Institutions and Individuals

(9) A branch or representative office established by a foreign institution in China (other than an enterprise that has been approved to conduct real estate business), or a foreign individual who has been working or studying in China for more than one year, is permitted to purchase commodity premises only to the extent that the same are for self-use or self-residence purposes, based on its or his actual needs. A foreign institution that does not have a branch or representative office in China, and a foreign individual who has been working or studying in China for less than one year, is prohibited from purchasing commodity premises in the PRC. Residents of Hong Kong, Macau and Taiwan and overseas Chinese may, based on their living requirements, purchase commodity premises in China of a stipulated floor area for self-residence. 

(10) A qualified foreign institution or individual shall purchase self-use or self-residence commodity premises under its or his true name and shall register with the relevant department for the administration of land and real estate for the land use rights and the real estate ownership of the commodity premises, submitting valid supporting documents (a foreign institution shall submit evidence of governmental approval for the establishment of its local entity in China, and a foreign individual shall submit evidence of governmental approval for his residence in China for the purpose of working or studying). The department responsible for registration of real property ownership shall carry out registration in strict compliance with the self-use or self-residence principle mentioned above and shall reject nonconforming applications.

(11) The department for the administration of foreign exchange shall, in strict compliance with the relevant regulations and these Opinions, review and examine the remittance of funds into China for purchasing commodity premises and the settlement of such funds by foreign invested enterprises, foreign institutions and individuals. The remittance and settlement of such funds shall be permitted only if all the requirements are satisfied. Renminbi proceeds of the transfer of real property will be permitted to be converted into foreign currency and remitted abroad only after the completion of a compliance review and confirmation that tax and other formalities have been undertaken in accordance with relevant regulations.

Article 4: Further Strengthening and Performing Supervision Responsibilities

(12) Local people’s governments, especially in urban areas, shall firmly take responsibility for and vigilantly watch for potential problems that may result from the flow of foreign investment into the China real estate market and shall also strengthen their leadership role and fulfillment of their supervision responsibilities. Local governments shall not promulgate policies awarding preferential treatment to FIREEs without authorization. Any such policies issued before the effective date of these Opinions shall be reviewed and rectified accordingly. The Ministry of Construction, MOFCOM, the National Development and Reform Commission, the Ministry of Land and Resources, the People’s Bank of China, the State Administration of Taxation, SAIC, the China Banking Regulatory Commission, the State Administration of Foreign Exchange and other relevant authorities shall promptly enact implementing rules hereof. They shall also enhance the guidance, review and supervision of local governments’ enforcement of policies with respect to market access by and administration of foreign investors in the real estate market. In addition, they shall investigate and punish according to the law violations such as unauthorized lowering of the limits on the ratio between registered capital and project capital of an enterprise and other illegal activities due to insufficient administration. At the same time, more effort shall be exerted to strengthen investigation and punishment of illegal cross-border real estate transactions and the illegal remittance and conversion of foreign exchange.

(13) Measures shall be taken to perfect the market supervision and analysis mechanism. The Ministry of Construction, MOFCOM, the State Bureau of Statistics, the Ministry of Land and Resources, the People’s Bank of China, the State Administration of Taxation, SAIC, the State Administration of Foreign Exchange and other relevant governmental authorities shall establish and perfect an information supervisory mechanism monitoring access of foreign investment to the real estate market and shall perfect the information network for foreign investment in real estate. The relevant authorities shall strengthen coordination and cooperation to enhance supervision of cross-border capital flows and accomplish as soon as possible the sharing of statistical data on foreign investment in real estate.

Ministry of Construction
(Official Seal)
Ministry of Commerce
(Official Seal)
National Development and Reform Commission
(Official Seal)
People’s Bank of China
(Official Seal)
State Administration for Industry and Commerce
(Official Seal)
State Administration of Foreign Exchange
(Official Seal)

The information made available herein ("Summary") is for informational purposes only. While we hope and believe the Summary will be helpful as a background matter, please note that it is general in nature and does not purport to cover the many issues that can arise in each specific transaction, and may not apply to particular factual or legal circumstances. The Summary does not constitute legal advice and should not be relied on as such.




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