COMMENTS: Follow the wind

Those considering investment in China’s private real estate market should welcome a brace of polices that came into effect this month.  

Any seasoned private equity real estate investor in China will tell you the key to successful investing in the country is to pick strategies that chime with the will of Beijing.

“Cooperate with policy and you’ll do well,” Goodwin Gaw, founder of Chinese private equity real estate firm Gaw Capital Partners, told us in his Blueprint interview a few years ago. “I say never go against the government. If the wind blows east, you go east. If it blows west, you go west.” 

PERE has heard similar statements over the years from other respected investment managers focused on the country’s bricks and mortar. So, it is with that sentiment in mind that groups considering entering, or returning, to Chinese private real estate investment should note a couple of policies to have become effective from the start of this month: one of direct relevance to PERE readers and the other of indirect impact.

First, the direct policy. In June, Beijing’s Ministry of Commerce (MOFCOM) and its State Administration of Foreign Exchange (SAFE) jointly promulgated the Circular Concerning Improvement of Filing Process for Foreign Invested Real Estate Enterprises, known as Circular 340. In shorthand, Circular 340 simplifies the application process for foreign investors buying Chinese real estate by reducing a two-approval process to a one-approval process.

Previously, a foreign buyer typically would first have to seek an approval for its investment from its local Commission for Foreign Trade and Economic Cooperation (COFTEC). Once obtained, a filing for the investment would then need to be submitted to the MOFCOM. Unlike the local approval, the latter filing could drag on and sometimes mean greater advisory costs for the buyer. Further, and arguably most important, they were far less predictable in terms of outcome.

From August 1, however, the second approval effectively was removed from the process. It is early days in terms of the tangible results for foreign buyers, but PERE’s early canvassing for reaction revealed a predictable degree of positivity.

The second policy of note, also effectuated from August 1, was the State Council’s easing of eligibility controls for urban residency permits. Entry barriers will now be lowered for current rural dwellers seeking a new life within the country’s cities with populations of less than 1 million people. This one is aimed at fast-tracking the urbanization of the country’s copious populous. 

As CBRE pointed out in a note about the policy this week, purveyors of low- to medium-cost residential properties should benefit in the medium to long term from greater demand for their products as a result. Small industrial and office developments also should benefit. And, as the rural areas lose their people, more of their land will be sold off to realize revenues as they depart for the bright lights, CBRE predicted.

It should go without saying that tracking policy that determines occupational trends is paramount for any investors in China’s housing sector, including PERE’s readers, even though in this case, institutionally capitalized international investors are not a concern for China’s central government as it delivers its edicts. Indeed, it is unclear why foreign investors, which account for no more than 1 percent of those taking part in its real estate deals, should have been affected by the country’s previously stringent policies in the first place.

However, if such folk want to make waves in China’s private property market, it is done by selecting strategies that chime with, or at least do not contradict, what the country is trying to achieve. At least, that’s what seasoned China investors say, and they are as good a guide as any.

Read more about Circular 340 in our forthcoming Private Real Estate Fund Services Guide, published with the September issue of PERE.