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Limiting Foreign Investment in Real Estate

From News, page 6, issue no.341, November 12th 2007
Translated by Ren Jie
Original article

The Chinese government has said no to foreign-funded real estate agencies.

Foreign-invested firms are now restricted from participating in secondary property market transactions and real-estate agency activities, according to the newly issued Guidlines for Foreign-Invested Sectors 2007 Edition published on Nov 7.

The guide – which was jointly issued by the National Development and Reform Commission and the Ministry of Commerce - also discourages foreign investment in residential property and high-end hotel development.

It is consistent with the government's restricting policy on the real estate industry launched more than a year ago.

"The new ruling indicates that the government has identified the broker sector as a new channel, with which foreign investors enter the restricted real estate industry,"says Li Wenjie, general manager of Centaline Real Estate Consultancy Company. Li points out that in recent years, there has been a surge in real estate brokers sourcing external funding, which could be a grave concern for the government.

Loopholes in the Broker Sector
"Even if you give me one hundred million now, I'd have no idea what to do with it," says Li, explaining that real estate
brokers depend on smart strategizing for survival, while huge inflow of funding would only lead to asset buy-over.

Since 2005, a trend of real estate agencies seeking outside funding emerged. They include Shanghai Bobang Real Estate Investment Consultancy, which in its eagerness to be publicly listed had resorted to expansion with funding from a Singapore investor. The breakneck expansion eventually led to its downfall, and it has been taken over by 21st Century Real Estate.

In another case, Sunco Real Estate looked for funding to develop its internet-based property brokering concept and to realize its listing on the Nasdaq. The move has instead allowed Softbank Investment Fund (Asia) and the Carlyle Group to own 15 percent and 7.5 percent shares respectively in Sunco Real Estate. In addition, E-House China and 21th Century Real Estate have also expressed interest to pursue a market listing.

In order to attract external funding to support a public listing, many real estate agencies have resorted to large scale expansions that ended sourly. Take Sunco Real Estate for example, its chain store increases from 700 to 1,200 covering 40 cities in two years. It became one of the largest real estate agencies in the country, but later, due to market fluctuations and a contraction in business transactions, the company was forced to shut down some branches.

In general, rapid expansion is not a feasible business model for real estate agencies. It has taken Centaline China 15 years to reach out to 30 cities.

At present, the real estate broker sector in China has widely cast its net of business coverage to include intermediary services with commissions, property acquisitions, and investment in property development.

The nature of its diversified services has turned the broker sector into a channel for foreign investors to acquire fix assets and gain entry into the property development market. The new guide is aimed at fixing such loopholes.

Policy Adjustments
The new guide also removes residential property development from the list of "encouraged" items.
One official from China Banking Regulatory Commission reveals that the interest of foreign investors has extended from
developing commercial property like hotels to residential units, especially high-end ones.
The construction of too many high-end residential units has spurred imbalance in the real estate supply-demand
structure. Despite their exorbitant cost, high-end residential units are proliferating, yet the occupancy rate has remained low. On the other hand, the quantity of the in-demand low-cost houses are limited and usually located in inconveniently far districts.

By the end of 2006, vacant residential units built by major developers in the country had a combined area of 22.42 million square meters, 70% of which were high-end models measuring over 100 square meters.

The new guide indicates policy adjustments to channel foreign capital flow in a more "desirable" direction. 

In July of last year, the government issued a notice forbidding foreign institutions without a base in China from acquiring property or investing in the real estate market.

The notice also ruled that only foreigners working or studying for more than a year in the country are allowed to buy self-use property. The notice was drafted to prevent market manipulation and influxes of foreign funding.

This year alone, the government has issued various restricting policies, including one meant to enhance the management and scrutiny of direct foreign investment in real estate, and a list of approved foreign-funded property development projects. This latest guide highlights continuing concerns over supply and demand for residential units.

Zhang Zheng, from SEB Immobilien-Investment, believes that control measures imposed on the real estate industry in recent years have been effective, especially in limiting foreigners from acquiring assets. A series of control policies have forced foreign investors to retain funding operations for a longer period, thus, reducing the tendency of market manipulation.

However, Zhang also believes that such regulations are double edged; they can also limit the liquidity standing of developers and affect the quantity and variety of products in the market.

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