Real estate law in China

By Hao Han, Zhong Lun Law Firm
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As the central government changes its attitude toward foreign investment in real estate, new policies are providing new opportunities to enter the market

For more than a decade, while making a profound impact on the economy of the country, China’s real estate market has always been the object of macro control. Starting with the Opinion on the Standardisation of Access to and Administration of Inbound Investment in the Real Estate Market, issued by six government departments including the Ministry of Construction and the Ministry of Commerce, China’s policy on inbound investment in real estate has shifted from an open and welcoming position to strict restriction.

Thereafter, the government released a series of policies to restrict foreign investment in real estate, which were collectively known to the industry as “inbound investment restriction policies”, and blocked foreign capital from pouring into China’s real estate markets by setting up barricades in governmental approvals, foreign exchange settlement, outbound investments and other aspects.

Hao Han Equity Partner at Zhong Lun Law Firm in Beijing  Tel: +86 10 5957 2010 Email: haohan@zhonglun.com
Hao Han
Equity Partner at Zhong Lun
Law Firm in Beijing
Tel: +86 10 5957 2010
Email: haohan@zhonglun.com

However, as China’s economic growth slows down, with the Chinese currency experiencing accelerated internationalization, the expectation for the renminbi to appreciate has eased and the currency is under pressure to depreciate, while foreign exchange reserves are shrinking substantially. Against this backdrop, the Chinese authorities have drastically changed their attitude towards foreign investment in real estate and loosened the restrictive policies they issued.

On 6 November 2015, the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE) jointly issued the Circular of the Ministry of Commerce and the State Administration of Foreign Exchange on Further Improving the Filing of Foreign Investments in Real Estate to repeal the filing regime that has been in place since the “inbound investment restriction policies” took effect, signifying the bowing out, though not in their entirety, of the “inbound investment restriction policies” from China’s regulation of real estate sector.

As policies for inbound investment in PRC properties have gone back to where they were nearly a decade ago, foreign investors have regained some of the favourable treatment their predecessors enjoyed in China. According to the up-to-date Catalogue for the Guidance of Foreign Investment Industries (revised in 2017) and the revised Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises, effective from 30 July 2017, except that the principle of “commercial existence” still applies and there is still some difficulties at the practical level to borrow foreign debts, foreign investors generally enjoy “national treatment” the same as domestic investors.

However, the fact that the grip on foreign investment in PRC real estate markets is somewhat relaxed doesn’t mean overseas investors will face no obstacles when injecting funds to China’s property sector. Facing sky-rocketing real estate prices in first-tier cities, the abnormally large amount of housing inventories, the gear-shifting in strategic planning of urban development, and the unbalanced development between eastern, central and western regions, as well as between megacities and lower-tier cities (second-tier, third-tier and fourth-tier), the central government and local governments have implemented the most stringent measures ever to regulate the real estate sector.

Seen from the regulatory documents promulgated by different local governments, the policies before 2016 featured buy-side restrictions and mortgage restrictions (the “double restriction”). In 2017, many local governments in China upgraded the double restriction to the “fourfold restriction”, namely, sell-side restrictions, purchase restrictions, mortgage restrictions and pricing restrictions.

Some regional governments have gone as far as to issue policies to restrict dealings on commercial residential building. A typical fourfold restrictions policy would be the Circular on Fine-tuning the Policies of the Sales of and Differentiated Credit Extension to Commodity Housing (317 new policy) that came out on 17 March 2017, jointly issued by several governing bodies including the Beijing Municipal Commission of Housing and Urban-Rural Development. The 317 new policy specifies that “in case any individual whose family has no housing and no record of commercial or housing accumulation fund loan intends to purchase ordinary residential property for self-use, the downpayment for such individual must be no less than 30% of the whole purchase price, and in case of non-ordinary residential property for self-use, the downpayment must be no less than 40%; provided that any individual has a residential property in the city under the name of his or her family, or that any individual has no property but record of commercial or housing accumulation fund loan, and such individual intends to purchase locally an ordinary residential property for self-use, the downpayments in this case must be no less than 60%, and the downpayment for such individual to purchase non-ordinary residential property for self-use must be no less than 80%. In addition, the residential properties purchased by business entities are forbidden to be traded on the market within three years from their respective purchase dates.”

According to a brief survey, as of October 2017 at least 58 cities have issued regulatory documents on real estate buy-side restrictions; at least 61 cities have home-mortgage restrictions in place; and at least 39 cities have stipulated restrictions on the sell side. Apart from these cities, the entire Hainan province has promulgated policies on the above-mentioned restrictions. Many local governments have already introduced more rigorous regulations on the record-filing of commercial properties to control housing prices.

It is obvious that deleveraging and divestiture have become a norm. Local governments are issuing regulatory policies to continue to eliminate the possibility of real estate speculation. Admittedly, the golden decade for China’s real estate enterprises has come to an end. For enterprises operating in this sector, there is a pressing urgency to find other ways to revive their stock of resources (tangible assets such as land reserves and capital; and intangible assets such as expertise in property development).

Along this line, “the development of emerging small- and medium-sized cities as well as small towns with unique features” was adopted as a national development strategy and was included in “the Outline of the 13th Five-Year Plan” in March 2016. On 1 July 2016, three ministries including the Ministry of Housing and Urban-Rural Development (MOHURD) issued the Circular on Development of Emerging Small- and Medium-Sized Cities as well as Small Towns with Unique Features, which evidences the nationwide focus on such township development and sets a goal to establish approximately 1,000 small towns with unique features by 2020. The development of China’s unique township is set on a fast track. According to the list of the first and second batches of small towns with unique features published by the MOHURD, a total of 403 towns have been identified as small towns with unique features as of August 8, 2017, while the number of such towns not identified in the list are several times more.

The vigorous expansion of small towns with unique features is not only a response to the call to upgrade the nation’s industries, but is also in line with the demands of current developments. Through the development of small towns with unique features, the populations of both large cities and rural areas can be distributed more evenly, which will facilitate the process of urbanization. Through the redistribution and decentralization of the population, the rapid growth of real estate prices in large cities can be cooled, which will contribute to stabilizing real estate prices on the whole.

Meanwhile, since the real estate industry works as the reservoir for the sedimentary capital of bank loans, the stabilization of real estate prices will reduce the financial systemic risks markedly. It can be predicted that in the near future, with a large number of small towns with unique features built, especially those within one-hour commuting distance of large cities, there will be more and more people who choose to live in such small towns that are fit for living in and that have easy commutes to big cities. Assume that on average there will be one small town with unique features for more than 2,000 towns and cities nationwide, and the investment for each town amounts to RMB3-5 billion, the development of such towns will generate investment opportunities worth trillions of yuan, propelling sustainable development of the economy.

Although expertise to develop and operate these unique townships still needs to be improved and diversified, under the current economy, the unique township programme facilitates the real estate enterprises’ sorely needed transformation and upgrading. The wave of the emerging unique township provides real estate enterprises with not only an opportunity to utilize their stock of resources, but also the possibility of a new golden decade. However, the current law, regulations and policies for unique townships still have gaps to be filled, and improvement of the legislation must be at the top of the agenda for government and legislators.

Regulatory basics

Governing law/ordinance
Land Administration Law of PRC and its implementing regulations, Urban and Rural Planning Law of PRC, Urban Real Estate Administration Law of PRC, Administrative Measures for the Pre-Sale of Urban Commodity Housing, Administrative Measures for the Sale of Commodity Houses, Administrative Measures for Commodity Housing Tenancy, Provisions on the Administration of Qualifications of Real Estate Development Enterprises, Construction Law of PRC, Bid Invitation and Bidding Law of PRC, Property Law of PRC, Contract Law of PRC and other laws, regulations and rules issued by competent authorities.
Regulator/s
Planning Bureau, Land and Resources Bureau, Housing Management Bureau, Commission of Housing and Urban-rural Development, Real Estate Registration Centre, etc.
What are the requirements for registration or recording ownership or leasehold?
Within 30 days upon signing a lease agreement, the related parties must file for record-keeping regarding such agreement with the competent local authority.
What are the requirements for foreign investor on own or lease?
Under the principle of commercial existence, the foreign investors who intend to purchase non-self-use property within the PRC must form a foreign-invested enterprise before conducting business as approved by the authority.
What is the investment mode of choice for foreign investors? Why?
Foreign investors may purchase assets or shares based on factors including tax and whether there is any offshore structure.
Can owners protect themselves from liability? What types of insurance are available?
Owners can protect themselves from liabilities through purchasing relevant insurance such as Contractor’s All Risks Insurance.
Which courts have jurisdiction over real estate disputes?
Real estate disputes must be governed by the competent courts at the real property’s location.
How are remedies against a debtor in default enforced?
The related parties may submit the dispute to court or arbitration. After a binding judgement/rule is obtained, the parties may apply for enforcement to the governing courts.
What are the typical avenues for due diligence?
The disclosure from the party being investigated; (2) The research on the title, mortgage, or the existence of seizure of real property by third party at the competent real estate registration authority with the cooperation of the obligee; (3) The registration information of the company at the competent administration for industry and commerce; and (4) The relevant information on the websites of courts, administrations for industry and commerce.
Are there remedies for breach of contract to sell or finance a deal?
The related parties are entitled to the remedy as specified in the contract. If there is no agreement on liquidated liability, the parties are entitled to the remedy as stated under the Contract Law.

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