Real Estate Reality… Why Investment is Going Up

Thursday, February 22, 2007 18:23

For the last 8 months, many have been looking for a downturn in real estate interest. There have been a LOT of regulations that have come out since June of 2005, but despite all this the numbers are only going north.

As alluded to in the post Another Wave of Real Estate Regulations… Who Cares! many foreign investors are not only not being affected by the new regulations, but are actually optimistic about the market as a whole

The regulations did not actually prevent foreign investment, and actually promoted investment on a larger scale

That’s right, the regulations are not actually meant to curb foreign investment per se. They are meant to force out the small foreign investors who show up in packs of 20 and buy 1-2 apartments each, and they are meant to make the more serious foreign investor properly structure (read pay tax on) the properties held.

The most obvious hurdle that foreign investors had to overcome was in leveraging onshore. for individuals that were going to a single bank (or 10 banks) to mortgage properties with little down, the new regulations made that much more difficult (not impossible, just more difficult).

Another hurdle was that foreign investors had to adjust their financial models 5 years to either predict the future, or run the various scenarios whereby they would just take the hit. For many, the taxes were not an issue. After all 60% is better than nothing, and at the time, many believe that with 20% gains year on year are possible in a number of markets here… so no brainer.

However, the biggest hurdle for many investors buying NEW properties was the new regulations stipulating that no more villa complexes could be built, and that at least 70% of new units must be under 97m2 (not necessarily an ideal luxury 3br condo size).

the reality is that there are workarounds for all of these, and anyone in the game will tell you that the laws were written in a way that left a lot of room for interpretations.

For those that have read CLB’s recent post on foreigners holding multiple properties being at risk, and the need to establish a WFOE, I agree.. but not 100% for the reasons stipulated in the post.

Anyone who was a serious investor was already structuring offshore anyway in HK or BVI as those shared can be transferred much easier than those of any business entity in China. In addition, setting up a WFOE at 8k USD per is not necessarily feasible if you are looking to hold several individual properties.

Imagine an individual/ company that wants to hold 2 properties in Beijing, 2 in Shanghai, and chengdu. You could transact all the deals, receive rent, and pay the relevant taxes under that WOFE. But what happens if you want to sell 2 of the properties to a REIT looking for Chengdu properties?

There are costs/ time involved, and depending on the real structure it could get messy.

As we showed in our previous posts (here, here, and here), the market is maturing on the regulatory side, but that has not taken the money (nor the interest) out of the market. If anything, it has only created more opportunities as developers in China are being supported by offshore funds ….

As noted on the CLBs post, many of the former practices are now coming under new regulations.  If you are looking to invest in real estate, you should speak to both tax and law professionals to understand all your options, what the current dynamics are, and what the future may bring.

If you have questions, feel free to post them in our comments section or send me an email.

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