The People’s Republic of China rings in the new year—the Year of the Rat—today with festive traditions for good luck and fortune in the coming year. Indeed, it appears that the global superpower has much to look forward to: after an impressive year with GDP growth of 11.4 percent in 2007, increasing economic prosperity almost seems inevitable. However, what goes up usually comes down in a rapidly growing economy, and the rate of growth in the Chinese real estate market poses no exception.
China’s property sector took off in 1998, when Chinese citizens were granted the right to buy their own homes. Since then, China’s property sector has seen an average rate of growth of 22 percent per year, fueled substantially by a large amount of investments flowing into the market, according to an online market overview published by Property Frontiers.
The phenomenon has sparked fears that a property bubble is being created in China. Consequently, the Chinese government placed restrictions on foreign investment in July 2006 as part of an overall effort to control the massive appreciation seen in recent years.
In order for foreign investors to acquire non self-use property in China, they must incorporate and capitalize an onshore entity in China, or foreign-invested real estate enterprise (FIREE), to acquire and hold investment properties, Michelle Gon, senior partner at the international law firm Baker & McKenzie, said in an e-mail interview.
Additional restrictions have been placed on specific segments of the real estate industry, such as development of whole tracts of land, construction and operation of luxury hotels, resorts, office-buildings and exhibition centers and second level-real estate market transactions, Gon said. Such efforts are not prohibited by law, but investors must obtain approval from authorities on a case-by-case basis.
The debt to equity ratio for FIREEs with a total investment of $10 million has also been reduced to 50/50, Gon said. Foreign individuals who work or study in China for more than one year can purchase self-use property, or property for their own use or residence, Gon said. Foreign entities with branches or representative offices in China in operation for more than one year may also purchase self-use property.
Although restrictions have made it more difficult for foreign non-resident private individuals to invest in China’s real estate market, large institutional investors are working within the rules of the system to provide a steady flow of foreign capital to China’s property sector.
“Various institutional investors…such as Morgan Stanley, JP Morgan and Goldman Sachs are actively investing in China’s real estate market via their local vehicles or taking stakes in renowned Chinese development companies through pre-IPO investment,” Marsha Lu, legal consul for Property Frontiers, said in an e-mail interview.
Lagging demand and tighter regulations on the property market may have already started to take effect. The shutdown or downsizing of major real estate agencies and concurrent drop in urban housing sales could be indications of an overall slowdown in the real estate market, according to a press release from the Associated Press last month.
Until China’s real estate market sufficiently “cools down,” it is unlikely that the Chinese government will lift restrictions on foreign property investment, Lu said.
China’s Special Administrative Regions (SARs), Hong Kong and Macau, exercise a high degree of autonomy and are not subject to the restrictions placed on real estate in mainland China. For more information on real estate investment in Macau, please see our article on Macau real estate investments.