CHINA: An Introduction to Real Estate (PRC Firms)

Outlook for China’s Real Estate Industry in 2023-2024

China’s real estate industry: a new phase begins

At the start of 2023, the central government took proactive measures to steer the anticipated recovery of the real estate market through comprehensive easing policies. These measures included increasing financial support for real estate companies and simultaneously reducing the costs associated with home ownership for residents. Nevertheless, recent data from the National Bureau of Statistics paints a less rosy picture, indicating that the efficacy of these financing efforts and commercial property sales remains lacklustre.

At the end of August, there was a shift in real estate control policy. China’s four first-tier cities – Beijing, Shanghai, Guangzhou and Shenzhen – have taken the lead in fully implementing a policy that allows homebuyers who have previously owned a home in another city or have had a mortgage, but do not currently own a home in the city where they are buying, to be treated as first-time homebuyers (the “First-Time Homebuyer Policy”). Following suit, other second-tier cities have also released local optimised purchase restriction policies.

Following the implementation of this policy, a noticeable short-term boost in the real estate markets of first-tier cities was evident. This uptick is likely to serve as a catalyst, leading to a recovery in second, third, and fourth-tier cities as well. As a result, China’s real estate industry is poised to exit its most severe downturn, entering a new phase of development characterised by both recovery and restructuring.

Market and policy shifts and responses of real estate companies

In late July 2023, at a meeting of the Political Bureau of the CPC Central Committee it was proposed that “in order to adapt to the new development of significant changes in supply and demand in China’s real estate market, the real estate policies need to be adjusted and optimised in a timely manner”. This came in response to significant changes in the supply and demand dynamics of China’s property market. The focus now shifts to addressing the basic housing needs and home improvement requirements of residents, principally in the following areas:

• fully implementing the First-Time Homebuyer Policy: China's four first-tier cities were the early adopters of this policy – several second-tier cities like Hangzhou and Xiamen also embraced this change, with Hangzhou, Xiamen and many other second-tier cities following suit;
• lowering minimum down payments for first and second homes by 20% and 30% respectively, and lowering the second-home mortgage interest rate floor to the loan market quoted interest rate for the corresponding term + 20 basis points; and
• reducing the interest rate on existing first-home mortgages – four major banks in China have issued operating rules to adjust the interest rate on existing home mortgages.

China’s real estate market is entering a transitional phase marked by substantial policy adjustments, but debt default is still a major challenge for some real estate companies. For companies facing this risk, debt restructuring strategies such as debt rollovers, debt-asset swaps, and debt-to-equity swaps may be viable options. Additionally, risk mitigation approaches like equity transfers, capital and share increases, or the issuance of preferred shares could be considered. At the same time, real estate companies must capitalise on the market rebound stimulated by the introduction of new policies in core cities. Focusing on robust sales strategies to expedite payment collections will be crucial to ensure a stable return of operational cash flow.

Transformation and opportunities in the real estate legal services industry

As the real estate industry in China undergoes a period of substantial adjustment, it is imperative for real estate companies to comply with the relevant policies, monitor industry trends, and enhance their own capabilities in crisis management, policy identification, and regulatory compliance. Achieving these objectives requires the support of skilled legal service practitioners in several key areas, as outlined below.

Bankruptcy and reorganisation of at-risk real estate companies

As the market has changed, the focus of real estate legal services has shifted from traditional investment transactions and M&As to helping real estate companies secure financing, dispose of non-performing assets, and undergo bankruptcy and restructuring. These steps aim to rejuvenate the financial health of struggling real estate companies.

Litigation disputes related to real estate companies 

The disruption in the capital chain can result in contract breaches by real estate companies involving project suppliers, general contractors, investors, and co-developers. This raises the potential for increased dispute resolution between various stakeholders. Additionally, quality issues with delivered properties may lead to group actions from buyers. Derivative litigation could also emerge in the midst of bankruptcy or reorganisation proceedings. Such disputes can materially impact real estate companies and therefore must be navigated with caution.

Compliance requirements 

At present, policies are favourable to the supply, financing and demand side. Accordingly, the government will strengthen the administrative supervision of the land acquisition process, fund management and sales of real estate companies, in order to prevent excessive financing, illegal development, infringements upon the rights and interests of buyers, and other forms of non-compliance.

Agility and client-centric focus 

In summary, practitioners in the real estate legal services sector must be agile in adapting to the evolving trends within both the industry and their client base. Understanding the immediate and critical needs of the real estate sector, as well as individual clients, is paramount. This calls for timely adjustments to the range and depth of legal services offered, ensuring they are comprehensive and tailored to current challenges. By doing so, practitioners will be better equipped to safeguard the rights and interests of their clients in a rapidly changing landscape.