China’s Securities Regulator Enlists Aid of Private Equity Funds to Support Real Estate Market

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The China Securities Regulatory Commission (CSRC) kicked off trials for the operation of private real estate equity investment funds, amidst ongoing efforts to drive a recovery in the Chinese property market following its debt woes last year.

On February 20, CSRC announced that it had recently launched a trial scheme for real estate private equity investment funds, with the goal of “further leveraging the advantages of private equity funds in diversified asset allocation and professional investment operations, and satisfying rational demand for finance in the real estate sector.”

“This trial work is an important measure for the China Securities Regulatory Commission to implement the decision-making and arrangements of the Party Central Committee and the State Council on ‘promoting a virtuous cycle and healthy development of the real estate industry,’ as well as improving the role of the capital market, promoting the revitalization of the real estate market, and supporting the private equity sector to play an important role in serving the real economy,” CSRC said in a statement.

The investment scope of real estate private equity investment funds participating in the trial will includes residential housing (including existing commercial housing, welfare housing, and market-oriented rental housing), commercial housing, and infrastructure projects.

CSRC said that in order to adapt to the investment strategies of real estate private equity investment funds, the trial scheme will involve real estate private equity investment funds providing loans or guarantees to companies in which they invest.

Real estate private equity investment funds must hold over 75% of the equity in the invested companies, or hold more than 51% of the equity of the invested companies and provide them with guarantees, in order to achieve asset control and separation. Registered products and their underlying assets for the trials should be kept separate from the main credit risks of original stakeholders.

At the same time, in order to promote the steady progress of the real estate private equity investment fund trials, CSRC has outlined regulations on fund custody, required clauses of fund contracts, related party transactions, fund leverage, prohibited activities, special risk disclosure, fund filing, information disclosure and reporting.

The first round of paid-in capital made by investors in products under the trial shall not be less than 10 million yuan, and focus shall be on institutional investors. If there are natural person investors, the total capital contribution of natural person investors shall not exceed 20% of the paid-in amount of funds, while CSRC will also impose certain restrictions on the fund investment methods.

The scale of the first round of paid-in funds raised by real estate private equity investment funds shall not be less than 30 million yuan, and fundraising may be further expanded if certain requirements are met. Foreign investors are encouraged to invest in real estate private equity investment funds by means of qualified foreign limited partnerships (QFLP).

CSRC has also stipulated that private equity investment fund managers participating in the trial scheme must have a stable equity structure, sound corporate governance, and paid-in capital that satisfies requirements. Key capital contributors and the actual controllers of participating private equity funds cannot be real estate development companies or their affiliates, while the funds should have experienced real estate investment professionals on staff with no record of major violations of laws or regulations in the last three years.