Client Update: Real estate law changes in China
4 June 2009
In brief: There have been a number of regulatory and policy changes recently introduced in the PRC real estate sector. Partners Nigel Papi (view CV) and Tim Manefield and Senior Associates Maggie Ma and Campbell Izzard look at four of these changes and summarise how they may affect you.
- Beijing introduces Pre-application System
- Industrial land discount policy
- State Council lowers required minimum ratio of capital for the development of residential projects
- CBRC releases draft measures for the administration of fixed asset loans
Beijing introduces Pre-application System
In order to avoid the bidding, auctioning or listing of land that ultimately does not result in a sale and the cost to the government and uncertainty associated with this, the Beijing municipal government recently launched a pre-application system in respect of the granting of land (the Pre-application System).
How does the Pre-application System affect you?
The Pre-application System can be applied in addition (and not in replacement of) the land bidding, auction and listing procedures currently in effect.
Under the Pre-application System, to participate in a bidding, auction or listing procedure, interested purchasers must first undertake to make a bid at, or above, the reserve price set by the Ministry of Land and Resources (MOLAR) and pay a deposit that may become non-refundable.
Pre-application System for land transactions
The Pre-application System was initially introduced by inclusion in the Provisions on the Grant of State-owned Land Use Rights through Bidding, Auction and Listing Procedures (for trial implementation), issued by the Ministry of Land and Resources on 31 May 2006. However, it was not until May this year that the Beijing branch of MOLAR first put the system to use.
We understand from media reports that the Pre-application System was first applied to four plots of land, located in Daxing District, Beijing.
The Pre-application System will not apply to every grant of land use rights (LURs). The Beijing branch of MOLAR will take into consideration the actual circumstances surrounding the LUR grant for each plot of land, and then decide whether or not to apply the Pre-application System or permit the land to be sold through the existing bidding, auction or listing process.
Under the Pre-application System, interested purchasers must quote their reserve price and undertake to make a bid at, or above, that price and pay a deposit (a standard amount of RMB 200,000) which will be forfeited if they later do not make a bid at the reserve price that they undertook to bid at or above. The reserve price must be no lower than the pre-application base price posted by MOLAR in respect of the land.
If the Pre-application System is applied, the land bidding, auction or listing procedure will commence only after one or more interested purchasers have registered their interest in a plot of land.
Industrial land discount policy
On 11 May 2009, MOLAR released a Notice on the Adjustment of the National Standards of the Minimum Grant Fees of Industrial Land (the notice). The notice introduces a discount policy for minimum LUR grant fees for industrial land.
At the end of 2006, MOLAR set up a 15-tier benchmark price schedule for industrial land. From 1 January 2007 until now, the benchmark price for the highest tier has been RMB 840 per square metre while that of the lowest tier has been RMB 60 per square metre.
How does the Pre-application System affect you?
Certain pockets of industrial land may be available at a discount to the standard pricing schedule of minimum grant fees for real estate projects.
Minimum grant fees of industrial land
While not exclusively related to real estate, the notice establishes that industrial land that is positioned for use as a 'priority' real estate project may be eligible for a discount of up to 30 per cent on its benchmark price. For this discount to apply, certain ratios applicable to the project must meet specified standards, eg the total floor area to building ground area ratio must be more than 40 per cent higher than the national standard.
Industrial land located in mid western areas of China may also be eligible for a discount up to 50 per cent if the land is unused State-owned land that is considered urban construction land under the State-devised Overall Land Use Plan. This aspect of the measures appears to be both in line with traditional attempts by the government to promote investment outside more developed eastern regions and stimulating investment in the real estate market in general.
Any grant fee that is achieved under the discount policy shall not in any event be less than the government's total actual costs incurred in securing and pre-developing the land and the fees to be charged to the grantee by the government.
State Council lowers required minimum ratio of capital for the development of residential projects
On 30 April 2009, the State Council announced that it will lower the required minimum capital ratio (ie, of registered capital to the prescribed total investment amount) for the development of residential projects.
How does it affect you?
The minimum capital ratio requirement is expected to be decreased from the previous 35 per cent requirement for all residential projects and, as a result, investors intending to invest in residential projects will be able to gear them more highly than in the past.
It is unclear whether or not the adjustment to minimum capital ratios made in the announcement will apply to foreign-invested enterprises.
Background
A minimum capital ratio requirement was introduced by the State Council in 1996. When it was introduced, the minimum capital ratio for the development of real estate projects was set at 20 per cent. In April 2004, the State Council increased the capital ratio requirement for real estate projects development to 35 per cent.
Capital ratio policy
At a meeting of the Standing Committee of the State Council (SCSC) held on 30 April this year, it decided to lower the required minimum capital ratio for the development of residential projects among other selected infrastructure projects.
This is the first time that the minimum capital ratio requirement has been lowered since 2004. As a result of the adjustment, investors may be able to secure up to 15 per cent more funds from financiers for residential projects.
However, the policy announced by the State Council applies only to the development of residential real estate projects. The details of the planned decrease have not yet been released and it is not clear exactly what form the policy will take.
This policy adjustment is just one of several measures taken by the government in its attempt to stimulate the economy, in particular, the real estate market.
CBRC releases draft measures for the administration of fixed asset loans
On 19 May 2009, the China Banking Regulatory Commission (CBRC) released the Tentative Measures for the Administration of Fixed Asset Loans (Draft for Comments) (the tentative measures) for the regulation of loan applications used for investment in fixed assets (the fixed asset loans).
How does it affect you?
Borrowers will be required to have the proceeds of loans that exceed 5 per cent of a project's total investment value or that are greater than RMB 500 million, paid directly to the party contracted by the borrower and to whom the funds would otherwise be on paid.
Administration of fixed asset loans
If they become effective, the tentative measures will regulate the acceptance, investigation, risk assessment and approval of fixed asset loan applications.
Real estate development projects would be governed by the tentative measures. The tentative measures essentially adjust the process for advancing fixed asset loans. Existing requirements, such as in respect of the qualifications of borrowers and the term and interest rates applied to the loans, are not expected to differ from those set out under existing rules.
The tentative measures provide that where a single loan of more than 5 per cent of a project's total investment or any amount greater than RMB 500 million is lent, the proceeds of the loan shall be paid directly to the party that is contracted to the borrower to receive the amount rather than to the borrower directly. Practically, this means that a borrower will need to specify in any loan application the person to whom the funds are to be paid, such as a vendor, supplier, builder or third-party service provider, and the financier will have to pay the loans directly to that person.
Single loans for a lesser amount may still be directly advanced to the borrower by the lender.
A final promulgation date for the tentative measures continues to be unclear, as CBRC is still awaiting public feedback on the draft. The deadline for feedback is presently 16 June 2009 and it is expected that the final measures will be released soon after.
These measures have been devised by CBRC in an effort to tighten the supervision of lending on fixed asset investment projects after bank loans surged this year, causing concern over the potential misuse of borrowed funds by borrowers.
Published 4 June 2009
For further information, please contact:
- Nigel PapiPartner,
Sydney
Ph: +61 2 9230 5179
Nigel.Papi@aar.com.au - Robert ClarkePartner, Allens Arthur Robinson TSMP,
Singapore
Ph: +65 6535 6622
Robert.Clarke@aar.com.au - Nigel RussellPartner,
Ho Chi Minh City
Ph: +84 8 3822 1717
Nigel.Russell@aar.com.au - Stuart MenglerPartner,
Beijing
Ph: +86 10 8515 0250
Stuart.Mengler@aar.com.au
