China Law Blog

Our previous post on the tightening of foreign real estate investment brought us a somewhat frantic letter from a developer we know. He is a bit panicked (probably rightfully so) about his investment in a Chinese project never approved by Beijing.

Steve sent out the following email reply, explaining what is and what is not considered a real estate investment in China and why Beijing's approval is so crucial:

The rules for approval in Beijing for ALL FOREIGN INVESTED REAL ESTATE PROJECTS have been in place for a long time. If there is no mention from you local folks, that is a problem. Retail/shopping center is not on the restricted list. Further, a venture that is not classified as a real estate investment is not covered by any of these rules. For example, if a company invests in building a factory, acquisition of the real estate for building that factory is part of the process of the overall investment; it is NOT considered a "real estate investment" and therefore is not subject to any of the restrictions on real estate investment.

The same applies to a foreign investor who builds a health club. Health clubs are on the encouraged list. Therefore, the real estate acquisition as part of the health club development is also on the encouraged list. I have not seen the details of any of your projects, but I would assume that the straight retail portion is simply treated as a retail investment and therefore probably does not fall within the real estate investment restrictions. However, any portion of the project that includes residential, hotel, office and convention centers DOES fall within the category of real estate investment and MUST be approved in Beijing. Also, any portion of the project that involves raw land development is simply prohibited except in the form of a joint venture.

You CANNOT RELY ON LOCAL OFFICIALS. The whole point of the recent changes is that local officials routinely ignore the policies set out in Beijing. The local officials just want your investment and they will be reluctant to tell you the truth about the regulatory regime. If you listen only to the local authorities, your fate is uncertain. You must get your advice from a neutral party, not the interested party.

Several things can happen. The most benign is that the project will be shut down after you have spent much time on the design. The more likely scenario is that you will get your money in, but not be able to get it out. Even worse is that the project will be shut down after you have already completed construction. These are not trivial matters. Even if the worst does not happen, if the approval is uncertain, you will be subject to locals threatening to report you to the higher level authorities after it is too late for you to pull out. For all of these reasons, you must be certain you are abiding by the laws.

Real estate acquisitions associated with an improved investment (industrial, logistics, recreational) are not affected by the new rules; only what the Chinese classify as "real estate development" falls under the rules. Perhaps that is the point of the new "restricted" area. Beijing wants to be clear that residential, hotel, office and convention centers fall into the area of "real estate development" and not some other unrestricted category.