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Private Equity Real Estate Pilot Program to Boost Housing Market in China

China’s new private equity real estate pilot program is designed to boost investment in the property sector and attract increased foreign investment, say Li Shuting, senior manager, and Joanne Zhou, assistant manager, Fund Services.

China has introduced a private equity real estate (PERE) pilot program in a bid to revive a flagging property market.

The pilot program, announced by the Securities Regulatory Commission (CSRC) last month, is intended to boost private investment in the Chinese real estate market and open it to foreign investors. The aim is to improve liquidity and reduce property developers’ debt ratios. The program opened for applications March 1, 2023.

The primary focus of the program is the troubled housing market in China. The PERE pilot program facilitates investment in residential housing, including affordable homes, market-oriented rental housing, and the secondary market for residential housing, as well as commercial real estate and infrastructure projects.

China’s approach to the coronavirus and slow economic growth affected the local real estate market. The much-publicized debt crisis at residential developer China Evergrande Group was emblematic of wider problems in the residential market, with developers across the sector facing a cash-flow shortage.

The three arrows strategy to stabilize the housing market in China

In 2022, capital raised by Chinese private property companies plummeted to a seven-year low of RMB 227.1 billion ($32 billion), according to China Real Estate Information Corp. As a result, homebuilding slowed and property sales plunged.

This housing slump followed a boom the industry attempted to control with measures to restrict investment in residential property, including a 2017 ban on private equity investment in 16 mainland cities.

In 2019, in the wake of tighter regulations, the market began to stabilize. The Central Committee of the Chinese Communist Party promoted a policy of “housing for living, not for speculation” but liquidity subsequently dried up.

The PERE pilot program is part of a three arrows strategy to promote long-term stability in the market by injecting new sources of capital into specific segments, and loans and bond financing for property developers.

The CSRC has imposed restrictions within the new PERE pilot program. General partners and limited partners cannot be real estate development companies or related entities. General partners must have successfully exited more than three real estate private equity investment projects, and funds must raise at least RMB 30 million ($4.4 million) in the first round of financing. This is higher than the RMB 20 million threshold required for private equity funds in general.

The pilot program is intended to attract large institutional investors, such as insurance companies, into large-scale areas of the Chinese real estate market that have longer maturity. Each institutional investor must contribute no less than RMB 10 million ($1.45 million) in the first round to PERE funds in the pilot program. Participation by individual investors is restricted to 20% of the total contributed capital.

Favorable conditions for the PERE pilot program

The CSRC has also loosened rules for real estate private funds in the pilot program. The eight-to-two equity-to-debt ratio defined in 2020 has been relaxed and requirements are evaluated on a case-by-case basis.

Funds offering loans or guarantees to companies in which they are invested must hold a stake of at least 75% in those companies. This can be lowered to 51% for funds with solely institutional investors, but only where the invested company provides a guarantee to achieve asset control. Funds with individual investors must contribute no less than a third of the total invested capital, while this ratio can be determined by contracts for funds with only institutional investors.

When it comes to leverage, the total assets of funds in the pilot scheme should not exceed 200% of net assets. This clarifies previous guidance from the regulator.

The CSRC is encouraging foreign investors to participate in the new PERE pilot program through the Qualified Foreign Limited Partnership (QFLP). The QFLP is not subject to penetration verification if all investors are foreign based. Moreover, QFLPs can now be categorized as institutional investors rather than natural individuals.

By introducing the PERE pilot program, China hopes to diversify the investor base for developers.

The market for China real estate investment trusts (C-REITs) has surged since June 2021, raising capital of more than RMB 75 billion ($15 billion). China first introduced REITs in 2015 with “pre-REITs”. C-REITS followed in 2021, and in 2022 their investment scope was broadened. In August 2022, three new C-REITs based on affordable rental properties were more than 100 times oversubscribed. This helped to mitigate the debt crisis in the affordable rental market.

The PERE pilot program complements that initiative. It offers a private-market alternative to REITS for institutions and high-net-worth individuals who can sacrifice liquidity in hopes of a higher return.

Economic rebound through real estate investment in China

How attractive the proposition will prove for foreign capital remains to be seen. In the fourth quarter of 2022, overseas investors committed less than half the amount they had invested in Chinese real estate in the first quarter of 2021, according to MSCI data.

Real estate fund managers report a split among international investors on China. Rising geopolitical tensions with the U.S. mean some investors are choosing to exclude the country from their APAC real estate investment portfolios or to diversify away from it.

Overall, however, global capital is returning to China as the economy rebounds post-pandemic. In January, foreign investors committed a record RMB 141 billion ($21 billion) to mainland Chinese equities through Hong Kong’s Stock Connect program.

If the new PERE pilot program functions as the Chinese authorities expect, it’s likely to find a permanent place in the roster of investment vehicles in China and will become part of a burgeoning private real estate market in APAC.

Data from shows that fundraising in APAC reached a record high of $16.6 billion in the first half of 2022, while global private real estate fundraising was down 14% compared to the previous year.

Alongside the developed markets of Japan, South Korea, Australia, and New Zealand, private market investors are targeting emerging economies such as Vietnam and the Philippines.

Now they can put China in their sights, too.


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