China has officially given the green light for the establishment of property-focused private equity (PE) investment funds as part of a pilot scheme and encouraged investment from foreign investors, in the latest attempt to revive the beleaguered real estate sector.
Under the plan, qualified PE managers will be permitted to set up funds dedicated to investing in residential property, including unfinished projects, affordable homes and rental projects, as well as commercial real estate and infrastructure, the China Securities Regulatory Commission (CSRC) announced Monday.
The watchdog said that it encourages overseas investors to invest in the funds through the Qualified Foreign Limited Partnership program, also known as QFLP, which allows them to invest in Chinese assets through PE funds.
On the same day, the CSRC-backed Asset Management Association of China (AMAC) issued guidelines on the registration of the funds, applications for which will open on March 1.
The scheme is part of a set of eased rules on equity financing for ailing property developers. The rules were announced by the CSRC on Nov. 28. Last year, China’s property development investments fell 10% to 13.3 trillion yuan ($1.9 trillion), logging their first decline since 1997.
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Each investor in the first funding round of the pilot products needs to put in at least 10 million yuan, and investors should mainly be institutions, according to the AMAC guidelines.
The main investors and actual controller of a property-focused PE manager shall not be property developers or their related parties.
The thresholds are designed to ensure that investors can manage risks inherent with these typically large-scale, long-life funds, said the CSRC in the Monday announcement.
If a property-focused PE fund lends money or provides a guarantee to the company it has invested in, it will need to have held at least a 75% stake of the company, so that the assets can be controlled, according to the CSRC.
However, the bar can be lowered to 51% if the fund obtains a guarantee from the invested company and all of the fund’s investors are institutions, it noted.
Prior to the pilot program, privately offered fund products with a property focus were only allowed to invest in debt.
Contact reporter Zhang Ziyu (ziyuzhang@caixin.com)
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