Limiting Foreign Investment in Real Estate(2)

By Jiang Hongqiao & Cheng Zhiyun
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Published: 2007-11-13
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.

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