Investing in Chinese Real Estate Gets Tougher for Foreigners

It is now even tougher for foreigners to get a foot on China’s property ladder.

A raft of new regulations, many aimed at foreign investors, are designed to ease pressure on the renminbi and reduce commercial property inflation that is running at twice the pace of China’s double-digit economic growth rate. Some efforts have been modestly successful. But while foreigners get much of the blame for rising prices, they account for only a small fraction of total real estate investment. Regulatory efforts must reach further into China’s domestic economy to cool the market effectively.

The latest rules require foreign investors in property to register in China, gain frequent government approvals, finance at least half of each project with equity, and use renminbi-denominated debt. The rules have doubled the amount of time it can take to close a deal, frustrating some speculators. But for well-capitalised investors who have been navigating China’s complex waters for years, the rules are actually creating barriers for new competitors.

Returns for foreign investors will be harder-earned - particularly in Shanghai, Beijing and other cities where regional officials are stricter at enforcing the new laws. Some foreign investors are weighing pre-IPO stakes in Chinese developers, or trying to re-characterise their businesses to avoid real estate classification. In addition, foreigners continue to team up with Chinese nationals to help smooth transactions.

It is understandable that the Chinese government wants to secure the foundations of its still nascent private property market and limit speculative investing. But interest in real estate there remains as high as ever. In a highly regionalised country where tens of millions of workers are migrating to cities each year, patient investors should find plenty of opportunities.

The Financial Times Ltd