Friday Letter Lost in translation

The real estate policy announced on Sunday by China’s government has been interpreted by many as a clamp-down on international commercial property investors. However, much has been lost in translation, PERE sources say. 

Ever played Telephone, the game where you sit in a circle and whisper the same message from one person to the next until the message has gone all the way round? Most times, especially when the game is played with lots of people, the original message gets lost in translation.

The resonance between the game and how international ears are interpreting Chinese real estate policy these days is uncanny.

On Sunday, China’s Ministry of Urban-Rural Development and the State Administration of Foreign Exchange, jointly released rules on foreign investment into domestic real estate. Although they are predominantly focused on cooling residential prices in the country, a couple of sentences on commercial properties have caused consternation.

The rules, described by one firm PERE spoke to as simply a reiteration of rules introduced in 2006, have sparked a flurry of severe headlines and commentaries. Some of these have almost sounded the death-knell for international institutional capital inflows into the country’s commercial property market.

But there has been something of a misunderstanding.

At the centre of the confusion is whether foreign individuals and companies must invest in real estate for self-use or not. The original measure, one source tells PERE, was devised to prevent offshore companies from buying real estate without first setting up companies local to their acquisition first.

“This policy had been relaxed in some cities,” he said, “Therefore this notice reiterates the closure of that loophole. It is not meant to prevent investors from setting up local companies to acquire or develop real estate.” Setting up local companies to buy real estate is, of course, what most private equity real estate firms do.

Another source added: “The notice clarifies that the ‘non-residential property purchases for business use’ policy only applies to foreign branch offices and representative offices. However, this restriction does not apply to the onshore business of foreign-invested real estate companies which participate in real estate development and/or real estate investment.”

At the centre of this renewal of policy is a desire to prevent uncontrollable inflows of hot, speculative money – which is where the market has been heading. With the world’s mature markets still faltering, numerous international capital sources have been eyeing China to plug the gap, at least until their home markets improve.
But it is precisely this sort of ‘quick in, quick out’ investor, attracted by the notion of speedy 20 percent-plus returns with no need to establish themselves in the country, that the government is so adamantly keen to avoid.

In other words, the real message from the government is: If you want to invest in China, set up shop here properly first. Those that do, when they receive new policy, might lose less in the translation.