Foreign Exchange

"Governments at various levels should realize the potential problems relating to excessive overseas investment in real-estate development.” That statement from the Chinese government, as it imposed new conditions on real estate investment, may sound a lot like putting out the unwelcome mat.

But by the time the measures were announced on July 24, Western investors had long anticipated the move. Indeed, experts on the ground in Shanghai said that the Chinese are more concerned about speculation in single-family homes, which has been rampant in coastal cities such as Shanghai and Guangzho, than about the activities of major U.S. and European investors and developers.

Under the new rules, anybody acquiring a home in China must be a resident for two years. But there are still exceptions for non-resident foreign buyers from Taiwan, Hong Kong and Macau.

On the commercial side, China is upping investment requirements on project valued at $10 million and up. Formerly, a foreign investor could put up as little as 35 percent of the equity in a new venture. Now they must put up 50 percent and will be required to set up a Wholly Owned Foreign Enterprise (WOFE) to own the project.

The changes will have little practical effect on serious long-term investors, says Michael Hart, head of research at Jones Lang LaSalle’s Shanghai office. JLL estimates that in 2005, foreigners placed $5.52 billion in U.S. currency in prime, investment-grade properties in China, representing about 3% of the overall Chinese real estate market. Below-investment-grade properties were almost exclusively purchased by Chinese funds, the company says.

The Chinese commercial market, which only opened to foreign direct investment a few years ago, is still in its infancy. And for all the hype about China’s economic growth rates, Western real estate investors have proceeded with caution. “The challenges of foreign investors will be more about getting comfortable with a lower level of market transparency and finding the right products to purchase,” says Hart.

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