Analysis of real estate private investment fund guidelines

The China Securities Regulatory Commission (CSRC) recently announced a pilot scheme for real estate private investment funds. The Asset Management Association of China (AMAC) issued the Guidelines for Real Estate Private Investment Fund Pilot Filing (for Trial Implementation), which came into effect on 1 March 2023.

SCOPE OF INVESTMENT

Under article 3 of the guidelines, the scope of targets for real estate private investment funds shall include housing for residential use (stock of commercial housing, subsidised housing and market-oriented rental housing), commercial and business premises and infrastructure projects. Compared with previous regulations, the scope has been expanded to include stock of commercial housing and market-oriented rental housing.

FUND MANAGER QUALIFICATION

The guidelines set relatively high requirements for the qualifications of fund managers. They must already have experience as existing fund managers and a track record with stable funding structures. The principal contributors and de facto controllers should not be real estate developers or their affiliates. Additionally, their paid-up capital should not be less than RMB20 million (USD2.9 million), and they should have the necessary scale, experience and professional staff for real estate investment management.

ADDITIONAL TYPES OF PRODUCTS

The AMAC set out the categories of institutions, businesses and their corresponding products, requiring managers to conduct specialised operations. “Real estate private investment fund” is a new product type introduced by the guidelines, and applicants should choose this option when seeking to set up a new fund, according to the guidelines.

INVESTOR ELIGIBILITY

The guidelines have set higher requirements for qualified investors in real estate private funds. Specifically, they should have a first round paid up capital contribution of not less than RMB10 million. In the case of natural person investors, their combined contribution should not exceed 20% of the paid up amount of the fund.

OPERATING REQUIREMENTS

Scope of first round fundraising. Traditionally, private equity real estate funds have no specific requirements on the total size of first round paid up capital, except that, in principle, each investor’s first round paid up capital should be no less than RMB1 million. By comparison, the size of first round paid up capital for real estate private investment funds should be no less than RMB30 million.

Providing loans or guarantees to investment targets. According to article 8 of the guidelines, which set out the conditions under which real estate private investment funds may provide loans or guarantees to their investees, the restrictions on debt-to-equity ratios have been loosened.

Provision of high levels of debt investments is permitted as long as there is sufficient control over the investee’s equity or assets. In particular, if all investors are of an institutional nature, funds and investees are free to decide on the debt-to-equity ratios in their contracts, which greatly facilitates the design of transaction structures for real estate private investment funds.

Gearing ratio. The guidelines expressly provide that managers may, taking into account the actual business situations, set a reasonable gearing ratio for real estate private investment funds, i.e. the total assets of the fund should not exceed 200% of the net assets. It should be noted that managers are forbidden from using tiered arrangements to disguise capital preservation and income protection.

Other requirements. The guidelines also set out provisions on mandatory custody, required terms of fund contracts, opening of subscriptions, subscription requirements, regulation of connected transactions, risk control and special risk disclosure, information reporting and information disclosure of real estate private investment funds, setting higher bars in these aspects.

IMPACT ON QFLP FUNDS

The Qualified Foreign Limited Partnership (QFLP) system is one of the most important channels through which foreign investors enter the Chinese market under China’s foreign exchange control policies. In recent years, local policies on QFLP have been optimised and improved, and the scale of the pilot has been expanded.

Currently, some of the QFLP pilot cities have implemented policies to prohibit QFLP pilot funds from investing in real estate but Beijing, Guangzhou and Shenzhen are not included. Foreign investors are reportedly enthusiastic about investing in real estate projects through QFLP, and the establishment of pilot real estate private investment funds is music to their ears.

In its notice, the CSRC expressly voices its encouragement for foreign investors to invest in real estate private investment funds via QFLP. The guidelines require a thorough inspection from investors, but domestically established QFLP pilot private funds targeting foreign investors are exempt from this scrutiny. This sends a positive signal that foreign investors will find a more relaxed policy environment when investing in China’s real estate projects.

With the guidelines taking effect, real estate private investment funds will have a significant and far-reaching impact on developers, revitalising real estate operators, and allowing private equity funds to better perform their function and role in serving the macro economy.

Ronald Xu is a partner at Guantao Law Firm. He can be contacted by phone at +86 139 1003 3074 and by email at ronaldxu@guantao.com
Zhu Xiaoya is an associate at Guantao Law Firm. She can be contacted by phone at +86 158 0118 9582 and by email at zhuxy@guantao.com