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CHINA REAL ESTATE

POLICIES AND PROSPECTS

CHINA ROUNDTABLE
26 March 2013

Presented by:
Joel H. Rothstein Partner Paul Hastings LLP

THE PRESENTER

Joel Rothstein
Chair Beijing Office

of Paul Hastings
Head Asia Real

Estate Practice
15 Years in Asia

GOALS OF PRESENTATION
1. How has Chinas macro real estate policies evolved over the last few years? What is expected next?

2. In the current policy environment - what are the opportunities and challenges currently facing foreign players that want to invest in China?

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

AGENDA

Macro Policies
Foreign Investment Outbound Investment Q&A

MACRO POLICIES
Cooling and Heating

The Problem

GFC Stimulus Policies Local Govt. Policies

Urbanization

Rising Wealth

Activities of Trust Companies and PE Funds

Lack of Investment Alternatives Growth of Domestic Developers

Developments in Debt/Equity Capital Markets

The Policy Response

The Policy Response

THE PHASES

Phase One Cooling (2009-2011)

Phase Two Cooling/Heating (2011-2013)

Next Phase Cooling/Heating (more or less)

Phase One: How to Cool a Market

Chilly

Limits on multiple residence purchases Stricter mortgage qualification requirements/higher down payments Property tax pilot programs Limit bank financing to developers Crack-down on informal lending market

Cool

Frigid

Icy

Glacial

Arctic

Actually enforce laws on books

Phase Two : Dual Policy

Cooling and Heating

Cooling

> 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

Heating

The Next Phase

More of the Same

Heating Cooling

Heating and cooling of varying degrees. Goals: Guide Healthy Development and Stabilization of Market.

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

The Next Phase:

Notice of the State Council on Continuing to Effectively Regulate the Real Estate Market (26 February 2013)
Local Government Controls-Policies

Limits on Ownership of Multiple Residences

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

Capital Gains Tax

Mortgage Loan Restrictions Development Land Zoning Affordable Housing

The Next Phase:

Notice of the State Council on Continuing to Effectively Regulate the Real Estate Market (26 February 2013)
Local Government Controls-Policies Limits on Ownership of Multiple Residences

Capital Gains Tax

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

Mortgage Loan Restrictions Development Land Zoning Affordable Housing

The Next Phase:

Notice of the State Council on Continuing to Effectively Regulate the Real Estate Market (26 February 2013)
Local Government Controls-Policies Limits on Ownership of Multiple Residences Capital Gains Tax

Mortgage Loan Restrictions

Banks to raise down payment requirements and mortgage loan rates for second home purchases if the housing price of the relevant jurisdiction rises rapidly.

Development Land Zoning Affordable Housing

The Next Phase:

Notice of the State Council on Continuing to Effectively Regulate the Real Estate Market (26 February 2013)
Local Government Controls-Policies Limits on Ownership of Multiple Residences Capital Gains Tax Mortgage Loan Restrictions

Development Land
Local governments should make land parcels available for development to increase supply.

Zoning Affordable Housing

The Next Phase:

Notice of the State Council on Continuing to Effectively Regulate the Real Estate Market (26 February 2013)
Local Government Controls-Policies

Limits on Ownership of Multiple Residences Capital Gains Tax Mortgage Loan Restrictions
Development Land

Zoning Affordable Housing

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

Macro Real Estate Policies

What does it all mean

for the foreign real estate investor?

FOREIGN INVESTOR OPPORTUNITIES AND CHALLENGES

Foreign Investor Regulatory Regime

Specialty Real Estate Investment

Foreign Investor Regulatory Regime

Foreign Investor Regulatory Regime

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

All direct foreign investment into Chinese real estate is subject to a complex regulatory approval regime ALL DEALS MUST BE APPROVED BY THE GOVERNMENT.

Real Estate Foreign Invested Enterprise (FIE) approvals multiple agencies/steps

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

Foreign Investor Regulatory Regime

THE DOOR
Sometimes more open sometimes more closed.

In or Out
IN
IN
Specialty Real Estate PE Fund Initiatives

OUT
High-End Residential Speculative Strata Title Deals High-End Office vary by location

OUT

Specialty Real Estate Investment

Specialty Real Estate Investment: Types

Affordable Housing
Mixed Use Development Senior Living Healthcare Bio-Technology and Research

Logistics and Warehouse Facilities

Specialty Real Estate Investment: Common Features

Promotes government policies a good fit
Economic development impacts beyond project Non-real estate real estate project

OUTBOUND INVESTMENT: NEW FRONTIERS

The General Policy

Outbound Investment Approvals

Key Types

YAP

Yap
An island in the in the

Western Pacific 101 square kilometers Population: 11,000

Yap
Deng Hong Chinese

real estate developer Proposed Development

4,000 room casino and

golf resort Infrastructure improvements Cost: US$1billion++

The General Policy

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 the scale 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 United States. Expand sphere of influence.

The General Policy

Recent Legislative Developments
Law/Policy
Plan for the Utilization of Foreign Capital and Overseas Investment in the 12th Five-Year Plan Period Notice on Relevant Foreign Exchange Issues in Relation to Encouraging and Guiding the Healthy Development of Private Investment Implementation Opinions on Encouraging and Guiding Private Enterprises in Actively Investing Abroad

Agency
NDRC

Date
July 2012

SAFE

July 2012

NDRC, MOFCOM, MFA, PBOC, CBRC, CSRC, SAFE, etc. General Office of the State Council

June 2012

Notice of the General Office of the State Council on Forwarding the Guiding Opinions of the National Development and Reform Commission and Other Relevant Departments on Accelerating the Cultivation of New Advantage in International Cooperation and Competition Interim measures for the Supervision and Administration of Outbound Investments by Central State-Owned Enterprises Measures for Administration of Verification and Approval of Overseas Investment Projects

May 2012

SASAC NDRC

May 2012 Draft Issued Pending Final Approval

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 authorities away 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.

The General Policy

Policy vs. Reality

Caution:
While current policies are making outbound investment easier there is still a comprehensive legal approval process that needs to be complied with.

The General Policy

Policy vs. Reality

Policy: Go Global

Reality:
Chinese outbound investments are subject to a restrictive regulatory onshore regime

Outbound Investment Approvals

Outbound Investment Approvals

Introduction

China has a comprehensive regulatory regime governing outbound investment by Chinese parties. There is no one outbound investment law instead there are a variety of laws and regulations which need to be consulted. No one approval authority controls. Multiple governmental authorities are involved.

Outbound Investment Approvals

Potential Approval and Review Authorities
General NDRC
National Development and Reform Comm.

MOFCOM
Ministry of Commerce

SAFE
State Administration of Foreign Exchange

SOEs

SASAC
State-Owned Assets Supervision & Administration Commission

Industry Specific

CSRC
China Securities Regulatory Comm.

CBRC
China Banking Regulatory Comm.

CIRC
China Insurance Regulatory Comm.

MOF
Ministry of Finance

MOC
Ministry of Construction

Other
Ministry of Culture Ministry of Health Etc.

Outbound Investment Approvals

Approval Process

Types of Outbound Investment Activity

Types of Outbound Investment Activity: Players

Sovereign Wealth Funds Emerging Institutional Investors PRC Developers SOEs and Corporates Entrepreneurs Debt Providers
CIC: China Investment Corporation SAFE: State Administration of Foreign Exchange NSSF: National Social Security Fund

PRC Insurance Companies QDIIs Funds and others

Offshore listed large developers Small developers

M&A driven companies

Individuals with access to offshore bank accounts and companies

CDB: China Development Bank China EXIM: China Export Import Bank

Types of Outbound Investment Activity: The Deals

FUND INVESTMENTS and REAL ESTATE SECURITIES
SEPARATE ACCOUNTS DEVELOPMENT JOINT VENTURES DIRECT ACQUISITIONS DEBT

Sovereign Wealth Funds

Sovereign Wealth Funds PRC Developers

Emerging Institutional Investors

SOEs and Corporates

Emerging Institutional Investors

Emerging Institutional Investors

PRC Developers

Emerging Institutional Investors

Debt Providers

Debt Providers Entrepreneurs Entrepreneurs Entrepreneurs Entrepreneurs

A Chinese Proverb

There are many paths to the top of a mountain but the view is always the same..

Q&A
Questions and Answers

Joel H. Rothstein is 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 Chair of 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:

PRESENTER
Joel H. Rothstein Partner Paul Hastings LLP
19/F Yintai Center office Tower 2 Jianguomenwai Avenue Chaoyang District Beijing 100022 PRC t: +86.10.8567.5380 f: +86.10.8567.5400 joelrothstein@paulhastings.com

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.

www.paulhastings.com

2012 Paul Hastings LLP

Confidential not for redistribution

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