China Restricts Foreign Real Estate Ownership - Analyst Blog

In a concerted move to restrict the inflows of speculative investment into its economy and ease inflationary pressures, China has imposed a new set of regulations limiting foreigners from buying residential or commercial property on the mainland.

The Chinese Ministry of Housing and Urban-Rural Development in association with the State Administration of Foreign Exchange issued a joint statement regarding the fresh rules that allow foreign companies to purchase only such commercial property, which are intended for their own use. In addition, the existing restrictions that limit foreign individuals from purchasing a single residential unit per person for self-use were reimposed.

Economists feel that this restrictive move would have minimal effect on the economy as a whole, as data from the National Bureau of Statistics reveals that foreign investments accounted for 0.8% of property development in Chinain 2009.

However, the lack of clarity about the proposed regulations could add an element of uncertainty to the real estate market in China, which is rife with issues such as volatility and sharp increases in property values.

Industry experts believe that the new restrictions are aimed to keep a tight rein on capital inflows into the real estate market to clamp down on illegitimate investments in the property market and avert an asset bubble. Property prices in China had increased 9.1% and 8.6% in September and October 2010 respectively compared to the year-earlier period.

Investors are speculating that under the new rules, government might prevent a foreign investor from paying an astronomical price for an office building on one hand and approve huge redevelopment costs on a dilapidated asset on the other.

The recent developments could hamper the long-term plans of U.S. REITs (Real Estate Investment Trusts) such as ProLogis (PLD) and AMB Property Corp. (AMB) that have significant interests in the mainland. Nevertheless, the U.S. REITs and private equity firms that have invested in Chinese real estate companies are presently keeping a close tab on the developments and waiting for the uncertainty to pan out.