By Daniel Schaefer

In an effort to encourage foreign investment in its real estate sector—particularly in Tier II cities— last year China lifted the limit on the amount of properties a foreign entity can own. The year since implementation has been marked by an increase in foreign entities buying properties, but there are still unique regulations and restrictions that hinder attempts to enter the market.

Purchasing real estate in China can be a complex procedure. Because there are so many eligibility requirements for a mortgage and to buy real estate, it’s important for investors to be aware of the differences between owning real estate and land rights in China.

Real Estate and Land Ownership

In China, real estate ownership and land usage rights are separate. Land usage is limited, but ownership of real estate is not. China practices socialist public ownership of all land, meaning one person or organization cannot own land. When someone purchases real estate in China, he is leasing land usage rights that will expire. Land rights depend on how the land will be used:

real-estate-chart

Owners with land usage rights can manage the land however they choose (build houses and buildings, exchange land, inherit, pledge, or use it as collateral), but true ownership belongs to the state, which can withdraw the land leasing rights midterm for fair compensation.

If the land usage rights are transferred, the original contract expiration date still applies. At the end of the term, the contract could be automatically renewed, or the owner could be required to purchase the rights again.

Real Estate for Foreign Individuals

Paying upfront for real estate is generally the easier option for foreign individuals, but it is possible to get a mortgage in China. Before applying for a mortgage, foreign nationals must have been employed for at least a year on a work visa in the city where they seek to purchase property, and have a Chinese sponsor (generally an employer) guarantee the applicant’s income is sufficient to repay the loan.

The applicant also must submit documentation, including a passport, residence permit, certification of marital status, proof of employment, proof of tax payment, labor contract, and company business license. Upon approval, applicants may take out the loan at the same interest rates as Chinese citizens. However, the duration of the loan cannot be longer than the validity of the applicant’s passport, thus it is usually advised to renew one’s passport before applying for a mortgage.

Purchasing Real Estate

It is recommended to use an agent who can help sort through possible problems. It’s also important to conduct due diligence in the region, as policies and regulations vary by region. The application process includes:

  • Submitting an offer letter, with price, payment schedule, and other details. Once the offer is accepted, a deposit of 1 percent of the purchase price is required.
  • Checking the property and owner by legal representatives. Once complete, the applicant must receive the approval from the government and Public Security Bureau.
  • Drafting an “Official Sales Contract” to be notarized by the buyer. The buyer then pays the seller 30 percent of the purchase price.
  • Applying to transfer the deed to the buyer. The owner must pay off any expenses on the property, such as loans and taxes. After the deed has successfully been transferred, the buyer pays the rest of the purchase price.

About the Author
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.

Posted by Daniel Schaefer