Understanding the China Real Estate Market
Mitigating Regulatory Risks and Capitalise on Growth

The real estate market in China has been regarded as extremely attractive by potential foreign investors. Strong economic growth, needless to say, formed a strong drive to the property market in major cities like Shanghai and Beijing, while second-tier cities are also capturing much attention of foreign investors. But the question is: What are the risks involved behind the high-growth and high-yield investment opportunities?

To help us take a closer look at the market, HKU SPACE organised a professional seminar – “Investment in real estate in China” and invited Miss Bolivia Cheung to share her expertise in the subject matter. Miss Bolivia Cheung is a Partner with KPMG China in Shanghai. She provides advisory service for multinational clients on taxation, customs duty and business regulations in respect of the investment structure and supply chain management.

Spotting Cities with Highest Potentials

As an experienced finance professional, Bolivia advises clients on cross border transactions, tax due diligence and the remittance of funds from China in a tax efficient manner. Moreover, her expertise also lies on mergers, acquisitions and IPO projects. Last but not least, she has written a number of articles on taxation and customs issues for various journals.

Choosing the right location is the foremost concern for all kinds of business activities. It is certainly also the biggest challenge for enterprises to identify cities with highest potential growth when investing in the China real estate market. Given the strong overall economic growth in China, population and per-capita income are the two most important indicators to help us spot cities with potentials.

According to Bolivia, the construction of high-speed rail network is definitely contributing to investors’ interest in buying properties in second-tier cities. However, Bolivia reminded us that understanding the rules of the game may be even more important than just analysing the economic data.

The Impact of Regulatory Changes

Talking about doing business in China, many of us will think of the “Guanxi” protocol. However, according to Bolivia, the situation of the real estate market may be even more complicated. “There are quite a lot of tricks and difference in practices, as a matter of fact. And it may be necessary for investors to take alternate paths when investing in China.” Bolivia said.

Among other things, setting up a legal entity is the first thing to do before making any investments. But the rules and regulations in China is changeable. Bolivia explained, “In the old days, it may be possible for any individual to set up a company here in Hong Kong and hold properties in China. In the year of 2006, the PRC Government introduced a series of new measures in respect of the size of units, the level of registered capital of a real estate foreign investment enterprise and the borrowing of domestic or foreign loans.”

From then onwards, the Government rolled out new restrictions to limit the number of properties each individual can own in order to minimize the risks of excessive speculation. Interesting enough, Bolivia pointed out that one of the unique traits of Chinese is our “flexibility” and in many cases complicated problems are solved in that manner. She revealed, “The PRC Government regards each individual as a number, so as to differentiate among people with same names. Hong Kong citizens are lucky to own more than one identity numbers. Some may use their Hong Kong Identity Card and Entry Permit numbers to register and own properties separately.”

Capital Requirements and Restrictions on Financing

“Apart from the considerations on how things are done, capital financing should also be seen as a factor determining win or lose.” Bolivia remarked that restrictions on investment had been tightened further since the release of Circular 171, which imposed new minimum capital requirements and debt-to-equity ratio for foreign investment enterprises engaging in the real estate business. In addition to that, the new requirements also imposed other restrictions on borrowings.

Bolivia also talked about different kinds of tax levied depending on the types of transactions and how accounting standards in China affect tax. She said, “The standards are following IFRS but the practice is not.” In all, there may be infinite opportunities in the China real estate market, but foreign investors should keep themselves up-to-date on newest developments and changes in policy at all times.