Common ways of financing commercial real estate acquisitions
Mortgage is the most commonly used financing tool to purchase property in the PRC, especially for small and medium transactions. Residential real estate purchasers will often be required to pay about 30% of the purchasing price initially, while the requirement for purchasing commercial real estate is generally higher.
For large commercial real estate acquisitions, off-shore and on-shore bank loans and corporate bonds are the main sources of funding. IPOs, trusts and private investment funds are also used by investors.
Under the current PRC foreign exchange control regime, companies (both domestic companies and FIEs) in China are required to register all foreign loans or debt in either foreign currency or RMB borrowed from non-PRC residents or entities. Failure to register will result in the unenforceability of the loan agreement and an inability to repay and remit the principal and interest to the offshore lender. FIEs may choose to be subject to the debt-equity ratio as discussed in Section 2.2 or a new regime introduced in 2016. Under this regime, the maximum amount of foreign debt allowed is calculated based on the outstanding amount of the debt with adjustment based on the different terms, types and currencies of the loan until the expiry of the transitional period, which is still to be announced. However, SAFE will not process any foreign loan, registered debt or settle foreign loans for foreign-invested real estate enterprises that are approved by or filed with MOFCOM on or after 1 June 2007. Such policy constitutes a critical barrier to financing foreign-invested real estate enterprises. This effectively restricts foreign parent companies from extending shareholder loans or intercompany loans to such enterprises, and leaves capital injection as the main source of offshore funding for such enterprises.
Typical security created
Typical security interests include:
- Mortgage over the land use right and/or real property;
- Guarantee provided by the borrower or its parent company; and
- Pledge over the shares of the borrower or the company holding the title to the property.
- The security documents should be in writing in order to create a valid security interest.
In addition, registration is mandatory in certain circumstances in the PRC to create security interest, such as mortgage over the land use right and/or real property and pledge over shares of a PRC-registered companies.
If a security interest is of a cross-border nature which falls within the scope of onshore security for offshore indebtedness (where a security interest is provided by an onshore guarantor for a debt owed by an offshore debtor to an offshore creditor) or offshore security for onshore indebtedness (where a security interest is provided by an offshore guarantor for debt owned by an onshore debtor to an onshore creditor), such security is subject to registration with the competent local counterpart of SAFE within 15 working days upon execution of the security documents. If not, performance of the security agreement in question may not be achieved due to the potential failure of fund remittance.
Costs relating to the granting and enforcement of security
In the PRC, stamp duty is payable on loan agreements with financial institutions.
Registration fee for the registration of real estate mortgages and share pledge will also be payable. If the party to a financing or security documents is a non-PRC party, notarisation by a notary public and legslisation by a Chinese embassy may be required and relevant fees will be incurred correspondingly.
Updated on 1 March 2019.