joel rothstein, paul hastings

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CHINA REAL ESTATEPOLICIESAND PROSPECTS

CHINA ROUNDTABLE

26 March 2013

Presented by:

Joel H. Rothstein

PartnerPaul Hastings LLP


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THEPRESENTER

Joel Rothstein

Chair Beijing Office

of Paul Hastings

Head Asia Real

Estate Practice

15 Years in Asia


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GOALSOF PRESENTATION

1. How has Chinas macro real estate policies evolved over the lastfew years? What is expected next?

2. In the current policy environment - what are the opportunities andchallenges currently facing foreign players that want to invest inChina?

3.In the current policy environment is there a meaningful role foroutbound investment?


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AGENDA

Macro Policies

Foreign Investment

Outbound Investment

Q&A


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MACRO POLICIESCooling and Heating


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The Problem


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Urbanization

Rising Wealth

Lack of Investment

Alternatives

Growth of Domestic

Developers

GFC Stimulus Policies

Local Govt. Policies

Activities of Trust

Companies

and PE Funds

Developments in

Debt/Equity

Capital Markets


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The Policy Response


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The Policy Response

THE PHASES

Phase One

Cooling

(2009-2011)

Phase Two

Cooling/Heating(2011-2013)

Next Phase

Cooling/Heating

(more or less)


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Phase One: How to Cool a Market

Chilly Limits on multiple residence purchases

Cool Stricter mortgage qualification requirements/higher down payments

Frigid Property tax pilot programs

Icy Limit bank financing to developers

Glacial Crack-down on informal lending market

ArcticActually enforce laws on books


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Phase Two : Dual PolicyCooling and Heating

> Deflate Bubble

> Housing Affordability Social Harmony

> Tame Inflation

> Banking System Risk

> Rational/Efficient Land Use

> Stable Economic Growth

> Housing and Other Policy Goals

> Local Government Forces

Cooling

Heating


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The Next Phase

More of the

SameHeating and cooling of

varying degrees.Goals: Guide HealthyDevelopment andStabilization of Market.

Heating

Cooling


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The Next Phase:Notice of the State Council on Continuing to Effectively Regulate

the Real Estate Market (26 February 2013)

Local Government Controls-Policies

Each province and major city must announce its real estate market control target (i.e.average unit price should rise no more than X% yoy). For those local governments

which cannot control price rise, the official in charge will be held accountable.

Limits on Ownership of Multiple Residences

Capital Gains Tax

Mortgage Loan Restrictions

Development Land

Zoning Affordable Housing


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Individual buyers non-local residents (without Hu Kou) cannot buymore than one housing unit in major cities.

Capital Gains Tax


Development Land



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Capital Gains Tax

20% income tax imposed on capital gain arising from sale of a housingunit.


Development Land



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Capital Gains Tax


Banks to raise down payment requirements and mortgage loan rates forsecond home purchases if the housing price of the relevant jurisdiction

rises rapidly.

Development Land



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Capital Gains Tax


Development Land

Local governments should make land parcels available for development toincrease supply.



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Capital Gains Tax


Development Land


Provide fast-track approvals for real estate projects focusing on small andmedium size residential units. 11 million affordable housing units in 2013.


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Macro Real Estate Policies

What does it all meanfor the foreign realestate investor?


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FOREIGN INVESTOROPPORTUNITIES ANDCHALLENGES Foreign Investor Regulatory Regime Specialty Real Estate Investment


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Foreign Investor

RegulatoryRegime


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Foreign Investor Regulatory Regime

Starting in 2006 laws/regulations have been enacted to make it moredifficult to directly invest in China real estate CIRCULAR 171.

All direct foreign investment into Chinese real estate is subject to acomplex regulatory approval regime ALL DEALS MUST BEAPPROVED BY THE GOVERNMENT.

Real Estate Foreign Invested Enterprise (FIE) approvalsmultiple agencies/steps

In last two to three years no major changes in foreign investorlaws/regulations involving real estate FIEs.


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Foreign Investor Regulatory Regime

THE DOOR

Sometimes more opensometimes more closed.


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In or Out

IN

Specialty RealEstate

PE FundInitiatives

OUT

High-EndResidential

SpeculativeStrata Title Deals

High-End Officevary by location

IN

OUT


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SpecialtyReal EstateInvestment


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Specialty Real Estate Investment: Types

Affordable Housing

Mixed Use Development

Senior Living

Healthcare

Bio-Technology and Research

Logistics and Warehouse Facilities


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Specialty Real Estate Investment:Common Features

Promotes government policies a good fit

Economic development impacts beyond project

Non-real estate real estate project


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OUTBOUND INVESTMENT:NEW FRONTIERS The General Policy Outbound Investment Approvals

Key Types


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YAP


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Yap

An island in the in theWestern Pacific

101 square kilometers

Population: 11,000


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Yap

Deng Hong Chinesereal estate developer

Proposed

Development 4,000 room casino and

golf resort

Infrastructure

improvements Cost: US$1billion++


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The General Policy


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The General Policy

Go Global!!

Chinas 12th Five Year plan and recent regulatory developments confirm

Chinas determination to realize its go global policy and enlarge thescale of overseas investment.

The governments announced intention is to encourage domestic

enterprises to look outbound to:

Gain access to new markets and advanced technologies Secure energy, mineral and precious natural resources

Tap opportunities in distressed markets in Europe and the UnitedStates.

Expand sphere of influence.


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The General Policy

Recent Legislative Developments

Law/Policy Agency Date Plan for the Utilization of Foreign Capital and Overseas Investment in the 12th Five-Year Plan

PeriodNDRC July 2012

Notice on Relevant Foreign Exchange Issues in Relation to Encouraging and Guiding the HealthyDevelopment of Private Investment

SAFE July 2012

Implementation Opinions on Encouraging and Guiding Private Enterprises in Actively InvestingAbroad

NDRC, MOFCOM,MFA, PBOC,CBRC, CSRC,SAFE, etc.

June 2012

Notice of the General Office of the State Council on Forwarding the Guiding Opinions of theNational Development and Reform Commission and Other Relevant Departments on Accelerating

the Cultivation of New Advantage in International Cooperation and Competition

General Office ofthe State Council

May 2012

Interim measures for the Supervision and Administration of Outbound Investments by CentralState-Owned Enterprises

SASAC May 2012

Measures for Administration of Verification and Approval of Overseas Investment Projects NDRC Draft IssuedPending Final

Approval


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The General Policy

Recent Legislative Developments - Impacts

Points to trend of simplifying and relaxing the approval regime.

Increasing delegation of approvals to lower level provincial authoritiesaway from central government authorities.

Emphasis that the projects commercial aspects (economic feasibility,

profitability etc.) should be determined by the investor on its own and not

by the government approval authorities.


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The General Policy

Policy vs. Reality

Caution:

While current policies aremaking outbound investmenteasier there is still acomprehensive legal approvalprocess that needs to be

complied with.


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The General Policy

Policy vs. Reality

Policy:Go Global

Reality:Chinese outbound investments are

subject to a restrictive regulatory

onshore regime


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Outbound

InvestmentApprovals


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Outbound Investment Approvals

Introduction

China has a comprehensive regulatory regime governing outboundinvestment by Chinese parties.

There is no one outbound investment law instead there are a variety oflaws and regulations which need to be consulted.

No one approval authority controls. Multiple governmental authorities are

involved.


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Potential Approval and Review Authorities

SAFEState Administrationof Foreign Exchange

NDRCNational Developmentand Reform Comm.

MOFCOMMinistry ofCommerce

SASACState-Owned Assets

Supervision & AdministrationCommission

General

SOEs

Industry Specific CSRCChina Securities

Regulatory Comm.

CBRCChina Banking

Regulatory Comm.

CIRCChina Insurance

Regulatory Comm.

MOFMinistry ofFinance

MOCMinistry of

Construction

OtherMinistry of CultureMinistry of Health

Etc.


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Approval Process


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Types of OutboundInvestment Activity


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Types of Outbound Investment Activity:Players

CIC: China Investment CorporationSAFE: State Administration of Foreign ExchangeNSSF: National Social Security Fund

Sovereign WealthFunds

PRC Insurance CompaniesQDIIs Funds and others

Emerging InstitutionalInvestors

Offshore listed large developersSmall developersPRC Developers

M&A driven companiesSOEs and Corporates

Individuals with access to offshore bank accounts and companiesEntrepreneurs

CDB: China Development BankChina EXIM: China Export Import BankDebt Providers


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Types of Outbound Investment Activity:The Deals

FUNDINVESTMENTS

and REALESTATE

SECURITIES

SovereignWealth Funds

EmergingInstitutional

Investors

Entrepreneurs

SEPARATEACCOUNTS

SovereignWealth Funds


Investors

Entrepreneurs

DEVELOPMENT

PRCDevelopers

Debt Providers

JOINTVENTURES


Investors

PRCDevelopers

Entrepreneurs

DIRECTACQUISITIONS

SOEs andCorporates


Investors

Entrepreneurs

DEBT

Debt Providers


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A Chinese Proverb

There are many paths to the top of a mountain

but the view is always the same..


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Q&A

Questions and Answers


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PRESENTER

Joel H. Rothsteinis a partner with the international law firm of Paul Hastings LLP and is based in the firms

Beijing and Tokyo offices. His practice focuses on real estate, banking and structured finance. He serves as

Vice Chairof the Beijing office and head of the firms Asia real estate practice.

With over fifteen years' experience serving clients in Asia, Mr. Rothstein is the firms longest serving real

estate attorney in Asia where he has played a leading role in the establishment and expansion of the firms

market leading real estate practice in the region. In his practice, he routinely advises and assists

international and domestic investment banks, financial institutions, private equity funds, and real estate

developers and investors in Asian as well as in other global markets in the following areas:

real estate venture formation and fund vehicle formation and management;

real estate and other asset-based financing;

asset securitization and secondary market trading of loan assets;

real estate debt and equity capital market transactions, including REITS;

NPL and hard asset portfolio acquisitions and dispositions; distressed asset and company restructuring and workouts;

property acquisitions and dispositions;

construction and development; and

hotel and resort finance, development and management.

Mr. Rothstein has participated in structuring, documenting and implementing a number of landmark

transactions and investment programs in both the United States and in Asia, including the first NPL

securitization transactions completed both in the United States and Japan, cross-border joint ventures, and

innovative conduit lending and non-recourse real estate financing programs in the United States, China,Japan and Korea.

In addition to being a lawyer, Mr. Rothstein is also an architect and urban designer and a graduate of

Columbia University's Graduate School of Architecture. He has previously worked on a number of

architecture and urban design projects in diverse locations ranging from Cartegena, Colombia, South

America, New York City and Los Angeles. Mr. Rothstein received his J.D. degree from New York University

School of Law and was the editor of the publication New York University Review of Law and Social Change .

Mr. Rothstein is a frequent lecturer and author on real estate finance and Asia real estate investment.

Joel H. Rothstein

Partner

Paul Hastings LLP

19/F Yintai Center office Tower2 Jianguomenwai Avenue

Chaoyang District

Beijing 100022

PRC

t: +86.10.8567.5380

f: +86.10.8567.5400

[email protected]


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www.paulhastings.com 2012 Paul Hastings LLP Confidential not for redistribution

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