Obtaining proper land use rights
Land use rights are usually acquired by a foreign investor either through direct tender from the local land administration bureau or by teaming up in a joint venture with a Chinese partner who already has land use rights.
While obtaining land use rights by tender provides the highest degree of safety in terms of title, the land so acquired is likely to be situated in new development areas where the market prospects are uncertain, and it often carries a relatively high price tag. Forming a joint venture is a more common way to pin access to prime sites held by Chinese corporations, but it is important to ascertain whether the development terms of the land use rights allow the rights to be transferred to a joint venture. This type of transfer requires the approval of the land administration and town planning bureaux, and, most probably, the payment of a premium if the terms of grant need to be amended. The most common amendment is the addition of the right to sell to overseas buyers, a term formerly not included in land use rights of Chinese corporations. The transfer to the joint venture is complete when a new land use rights certificate has been issued to the joint venture stipulating the terms of grant as required by it.
In cases of development by wholly foreign-owned enterprises, foreign developers commonly purchase land use rights directly from Chinese corporations rather than land administration bureaux. Caution should be exercised in this, however, as such acquisitions require the prior approval of the land administration and town planning bureaux, who will verify the right of the Chinese corporation to transfer the land use rights and examine the terms of transfer. The land administration bureaux will also require the payment of a premium, to be determined by the prevailing market price.
Developers who do not follow the proper route for obtaining titles with the required development terms risk disastrous consequences: approvals for subsequent sales could be blocked and titles could be voided, despite payments having already been made. Even when these problems can be resolved through negotiation, the developer could be hit with unexpectedly high premiums.
Obtaining development rights
Foreign developers must apply for development rights before engaging in any development project. As approval is not easily obtained by foreign companies, foreign developers may consider linking up with Chinese corporations who already possess development rights. A licence to this effect should be obtained before entering into any joint venture contract.
Obtaining pre-sale rights
It has been common for developers to offer the pre-sale of units as soon as a site has been cleared in order to fund construction. However, more stringent controls over the timing of pre-sales are now in place; for example, a certain percentage of construction must be completed before pre-sale will be allowed. In the case of Shenzhen, it is required that at least 25 per cent of the construction cost should have been expended.
Obtaining mortgage finance
Developers possessing a proper land use rights certificate and having obtained approval for carrying out the development project and selling to overseas buyers may aproach foreign banks in China for mortgage finance to support construction as well as for the arrangement of end-buyers' mortgage finance. However, because not every city has mortgage laws and title registration authority, mortgage finance is not available in all parts of China. Currently, The Hong Kong and Shanghai Banking Corporation Ltd is able to provide mortgage finance in the three Special Economic Zones in Guangdong (Shenzhen, Zhuhai and Shantou), as well as in Guangzhou, Xiamen and Shanghai. Construction finance will be considered on the merits of the project, in terms of its viability and the strength of the developers; end-buyers' finance can be arranged for both completed properties and properties under construction. In line with the market, the maximum tenure of end-buyers' finance is 10 years and the percentage of finance is usually up to 70 per cent of the property price subject to valuation.
Reprinted with the permission of HongKong Bank China Services Limited from its publication, China Briefing