NDRC relaxes restrictions on China's outbound real estate, hospitality and fund investments | Practical Law

NDRC relaxes restrictions on China's outbound real estate, hospitality and fund investments | Practical Law

The NDRC has published a new batch of answers to frequently asked compliance questions, which works to relax the agency's scrutiny on certain Chinese outbound real estate, hospitality and fund investments.

NDRC relaxes restrictions on China's outbound real estate, hospitality and fund investments

by David Blumenfeld, Paul Guan, Meka (Qingkai) Meng and Cece Yang, Paul Hastings LLP
Published on 19 Jun 2018 • China
The NDRC has published a new batch of answers to frequently asked compliance questions, which works to relax the agency's scrutiny on certain Chinese outbound real estate, hospitality and fund investments.
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The NDRC published answers to certain frequently asked questions to clarify the application of its Outbound Investment Measures. The Q&A works to relax the agency's scrutiny on Chinese investors' use of offshore capital for outbound investment in real estate, hospitality, and investment funds; it also removes certain types of outbound investment in these sectors from the NDRC sensitive sectors catalogue. This change is particularly good news for those Chinese investors who already hold significant offshore assets and desire to use those offshore assets (without onshore credit support or financing) to make outbound investments in the real estate, hospitality, and investment fund sectors.

Background

Following its December 2017 issuance of the Administrative Measures for Outbound Investment by Enterprises (企业境外投资管理办法) (Order 11) (which took effect 1 March 2018), the NDRC published answers to certain frequently asked questions relating to the enforcement of Order 11 from time to time, with the latest batch dated 15 May 2018 released in early June (NDRC Q&A).
Among other clarifications and changes, the NDRC Q&A lists the sensitive sectors to which Order 11 applies and addresses the previous uncertainty regarding the application of Order 11 by specifically exempting certain types of outbound investment from the NDRC approval/filing requirement. Absent the applicability of other rules or regulations, the NDRC Q&A works to relax the agency's scrutiny on Chinese investors' use of offshore capital for outbound investment in real estate, hospitality, and investment funds. Market players may interpret this development as a welcome sign indicating the relaxation of restrictions on certain outbound investment projects in these sectors.

Offshore capital carved-out from NDRC approval/filing for selected sectors

The NDRC Q&A significantly narrows the applicability of Order 11 to outbound Chinese investments in real estate, hospitality, and blind pool equity investment funds/platforms, by introducing the offshore capital carve-out. That is, where only offshore capital will be used or raised for these investments (which means involving neither any asset or equity investment from, nor any financing or guarantee provided by, an onshore Chinese entity or citizen), they will not be deemed a sensitive or restricted investment under Order 11, and thus neither NDRC approval nor NDRC filing is required.
This change is particularly good news for those Chinese investors who already hold significant offshore assets and desire to use those offshore assets (without onshore credit support or financing) to make outbound investments in the real estate, hospitality, and investment fund sectors.

Updated list of sensitive sectors

Order 11 has a non-exhaustive list of sensitive sectors. Under the Outbound Investment Sensitive Sectors Catalogue (2018 Version) (境外投资敏感行业目录（2018年版）) (Outbound Catalogue) (effective the same date as Order 11), the list of sensitive sectors is composed of:
  • Real estate.
  • Hospitality.
  • Movie theatres.
  • Entertainment industry.
  • Sports clubs.
  • Research, manufacture, and repair of weapons.
  • Development and usage of cross-border water resources.
  • News and media.
  • Blind pool funds or fund platforms (that is, setting up overseas equity investment funds or investment platforms with no specific investment identified at the time of investment).
The NDRC Q&A provides additional guidance and exceptions to the reach of Order 11.

Real estate

The NDRC Q&A adopts a conservative interpretation of the term "real estate" by primarily including the following two types of outbound investment:
  • Acquisition and/or development of residential or commercial real estate assets (including land zoned for residential or commercial use).
  • Acquisition of, or investment in, real estate companies (including by way of subscription for new shares in an existing real estate company or by investment into a REIT).
Note that the NDRC Q&A explicitly excludes from the Outbound Catalogue's regime the following types of outbound investment:
  • Investment in property management or real estate agency service businesses.
  • Construction or acquisition of office properties or staff dormitories for self-use.
  • Investment in infrastructure development for industry-oriented facilities, such as industrial parks, technology parks, or warehousing/logistics parks.
  • Acquisition of a minority stake in a development project by a construction company/contractor for the purposes of securing the construction contracts for the project.

Hospitality

Similarly, the NDRC Q&A narrows the applicability of the Outbound Catalogue by excluding the following from the definition of "hospitality":
  • Investment in hotel management industries which do not hold or own hotel properties.
  • Investment in catering industries which do not involve lodging services.

Blind pool funds or fund platforms

Alongside the offshore capital carve-out, setting up blind pool funds or fund platforms with a pre-existing approval obtained from the relevant financial regulatory authority (such as the CBIRC) in China is also exempted from the remit of the Outbound Catalogue.

Implications for practice

The Chinese government appears to be sending a signal to Chinese investors, particularly large institutional Chinese investors with overseas platforms and assets, that the government will not stand in the way of those investors exercising their business judgement in determining how they will pursue their overseas investment strategy in real estate, hospitality, and the investment fund sectors.
See below a diagram showing a three-step test to assist both Chinese investors and their counterparties to identify whether any NDRC clearance needs to be obtained. It is noteworthy that, under step three, the Chinese investor's investment amount must include not only their equity funds but also the debt financing raised by the Chinese investor (including through its offshore subsidiaries) from onshore and offshore lenders.
Image 1 within NDRC relaxes restrictions on China's outbound real estate, hospitality and fund investments​

Source

NDRC website: Government Affairs Hall.