China Restricts Foreign Real Estate Investment

It's finally official: China today announced new laws restricting foreign real estate investment. 

The Wall Street Journal, in its article, "China Restricts Foreign Spending on Real Estate," says the new rules will "reduce the amount big foreign property buyers can borrow by requiring them to provide at least 50% of the capital up front for property investments of $10 million or more, up from 35% of the total now. The rules also limit who can purchase an apartment to overseas nationals who actually live in China."

It is questionable how much effect these relatively small measures will have on China real estate investment:

The rules, unveiled yesterday, target property speculation and could help reduce investment from overseas. But their effect on the overall market is likely to be primarily psychological because foreign money accounts for a relatively small share of total spending on property in China, analysts said.

Foreign real estate purchases in China are believed to make up less than 2% of the total and it is unclear how much these new rules will impact that:

China's property market is driven mostly by domestic spending. Foreign purchases of property totaled about $3.4 billion in 2005, according to Chinese government data. While precisely comparable figures weren't available, government data show that investment in residential property alone totaled about $165 billion last year.

Foreign spending on real estate has been growing and these rules will no doubt serve at least to slow that down a bit.  "And foreign investment is spreading beyond well-known cities like Shanghai and Beijing. Last month, a real-estate unit of ING Groep NV said it would invest $22.4 million in a joint venture with a Chinese partner to develop residential and other projects in the central city of Changsha." 

Like all laws in China, it remains to be seen how rigorously these new ones will be enforced, particularly if the real estate market starts cooling down.

You can read more on this topic in the China Daily as well as at the China Economic Review, the Sinofile Weblog and Forbes online (hat tip to China Digital Times).   For an interesting, on the ground, contrarian view of Chinese real estate, check out the Shenzhen Ren Blog.