China Explains Rules to Temper Foreign Investment in Property

By James T. Areddy
From

Two major Chinese government organizations have published details of rules aimed at slowing foreign investment in the nation's property market, even as one of the largest real-estate transactions yet in China was announced.

The State Administration of Foreign Exchange and China's Ministry of Construction, in a joint statement yesterday, said the aim of the rules is "to promote the healthy development of the property market."

The 12 points in the document flesh out some elements of plans issued by various government arms in late July and are "mostly technical," according to Kenny Ho, an associate director at Jones Lang LaSalle in Shanghai.

The rules issued in July -- though seemingly tough -- aren't aimed at cutting off foreign investment. "Foreign investors in the real-estate sector must deal with additional regulatory hurdles," according to Freshfields Bruckhaus Deringer, a law firm.

Property prices in 70 of China's largest cities were up 5.7% in July from a year earlier, compared with 5.8% in June, according to the country's economic planning agency, the National Development and Reform Commission. Ma Kai, director of the agency, has repeatedly warned that controls on the property sector could be stepped up.

Chinese leaders remain concerned that high property prices are a threat to the economic success the country has achieved in recent years, putting pressure on the currency and inflation rates.

While few people see signs that the government is promoting lower property prices, analysts say Beijing is loath to encourage foreigners to speculate aggressively and push the country's $954.5 billion in foreign-exchange reserves much higher. Growing reserves are an important indicator of foreign-currency inflows.

The July rules, which established residency requirements and borrowing limits for certain transactions, will have their biggest impact on the margins of the market, partly because foreign investment is such a small portion of the property business.

The details unveiled yesterday apply to foreign corporate, institutional and individual buyers. SAFE, China's agency for enforcing capital-control rules, said it will more carefully scrutinize inflows of dollars aimed at property investment. Individuals, for instance, will be required to show one year of residency. Foreign companies will need to provide at least 35% of the development capital of a project before they can borrow, according to the SAFE rules.

The requirement for companies and individuals to have a physical presence in China adds a hurdle for investors. The body of rules "definitely makes it more expensive to structure an onshore transaction," said Matthew Brailsford, director of investment in Shanghai for Savills PLC.

Even so, Savills, based in the United Kingdom, announced yesterday the completion of a deal it brokered, a $300 million purchase of a 33-story building being developed close to the Shanghai riverfront. Hopson International Tower, due for completion in early 2008, was purchased by a Hong Kong company from its Chinese developer. Savills said it is among the largest property transactions to date in China's commercial capital.

The July rules were considered an effort to shake away marginal investors but could be followed up later if authorities feel their impact isn't sustained.

"Those regulations are more of a warning sign, which in fact already cooled off the market," said Frank Jiang, head of advisory services at Shanghai Urban Real Estate Appraisal/Surveyors Co.

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