Even More Real Estate Regulations in the Pipeline

Thursday, August 9, 2007 5:37
Posted in category Invest in China

Loan Growth

Further to my post last week More Real Estate Hurdles Coming Soon for Investor in China, comes the even more ominous China Daily story China tightens rules on foreign property investors.

According to the article:

China is tightening its grip once more on foreign investors in Chinese real estate, banning them from borrowing offshore in the latest effort to tame property prices and cool the economy.

The new rule, set out in a circular from the State Administration of Foreign Exchange , could squeeze foreign investors who take advantage of lower interest rates outside China.

18 months ago, I actually was working on a case that had offshore structure and financing through low interest loans in the States. With the appreciating RMB, the client was looking at not only a RMB appreciation that would offset the interest payments, their leveraged return was significantly higher (double digit difference) than if they had leveraged in China. This was a result of interest rates in the U.S. being lower than in China, and the down payment also being significantly lower (China has been 40-50% down for a while now). In short, leveraging in the U.S. was going to add significant return to the investor.

Were this law to pass, it would make this type of impossible (theoretically)…….

The article, more reaction and commentary than analysis, has little for readers who want to know exactly how this would be enforced, and given the fact that regulators are already having a tough enough time monitoring their own banks, I have a hard time believing that this law will be enforced. After all, who is to stop a REIT or private investor who has raised offshore and is willing to put down 100% in cash?

However, if implemented … and if enforced.. the recent announcement by Ascendas could not have come at a worse time.

but, as Robert Lie of ING stated in the article “We are not too worried about it. Cooling measures won’t stay forever”..

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3 Responses to “Even More Real Estate Regulations in the Pipeline”

  1. Romain Guerel (French working in Beijing) says:

    August 10th, 2007 at 11:28 pm

    If confirmed it doesn’t come as a surprise! But I am not sure it will be enough to stop the real estate steam from foreigners mainly from Hong Kong, Taiwan and some expats. It will only increase the flow of foreign currencies in Chinese banks where there are already plenty of them. It will put even more pressure on the Chinese currency for a reevaluation.
    The only real way to calm down the real estate market would to diversify the possibilites of Chinese citizens to invest and also to improve the social security system & pension system. Except that, Chinese people will continue to invest in Real Estate as a safe investment.

  2. Rich says:

    August 11th, 2007 at 12:17 am

    Romain,

    Per the above, what are your thoughts on the following loophole

    1) American investor seeks to buy 10 properties at 1 M USD each
    2) American investor leverage American Bank to the tune of 90% and puts in 10% equity
    3) American Investor place the 10 million in a HK account under a HK umbrella
    4) HK corporation funds a Chinese WOFE
    5) Chinese WOFE buys 10 properties in cash

    The actual investor in the Chinese properties is the China WOFE, and they did not use offshore banks to loan. Should the Chinese regulators look further, they would see that the HK organization was funded 100% by the American firm.

    Not saying this would be viable at 1 billion USD, but at 10 M I am not sure the law creates a hurdle higher than the previous regulations… it just requires a few more lawyers to make it happen.

    R

  3. Romain Guerel (French working in Beijing) says:

    August 11th, 2007 at 5:08 am

    Actually, I have said exactly the same than you but….in other words!