Believe it or not, there are still a great number of people, Chinese or foreign, thinking bullish of Chinese property market, at least in a long run. Besides, given the expectation of Chinese currency to appreciate against US dollar, foreign investors are still looking into possible opportunities of purchasing real estate in China.

Since residential property market is under tight scrutiny and control by the central government, comparatively, commercial properties are now become hot to many investors. In this article, we also look at the possibilities of purchasing office properties in China.

Under current regulation on foreign purchase of Chinese properties, foreigners and foreign entities may only purchase properties for self-used purpose according to its actual need, and otherwise, you will have to incorporate a local entity in China in order to purchase and operate the property. We discuss here only purchase of properties for self-used purpose, a type of relatively small real estate investment.

There are basically two ways of buying office properties in Shanghai.

1. Via the representative office

Foreign enterprises can set up their representative office in China for liaison function, which is not allowed to conduct operational activities. However, rep office is allowed to buy property as its office. Given that setting up a rep office is relatively easy with most rep offices being able to be registered directly without obtaining any approval beforehand, and also tax burden for rep office is relatively light, a rep office is a convenient vehicle in purchasing offices in China.

It shall be noted that under current rules, a rep office’s office can only be located in those office buildings designated by local governments as “foreign-related office buildings”. While such designation has narrowed the scope for real estate purchase, the effect is insignificant indeed. Most of office buildings in Shanghai have been so designated and are eligible to provide office rooms to rep offices.

Buildings meeting certain conditions may apply to Shanghai Commerce Commission for the aforesaid designation.

2. Via your WFOE

For those foreign investors who have already set up a wholly foreign owned enterprises (“WFOE”), you may also buy office rooms via your WFOE provided that your WFOE is still leasing offices at the moment.

To use your WFOE to buy office property, there are two ways of getting foreign exchange (you don’t want to use RMB to buy) into your WFOE: one is to increase your registered capital, and the other is to take out foreign loans extended by shareholders or foreign banks.

Our phone inquires into Shanghai foreign investment administration and foreign exchange bureau have elicited a clear answer that such capital increase is allowable and such foreign debt is also doable.

Given the latest round of reform on the approval of changes to foreign invested enterprises, capital increase will easily pass the approval.

If the WFOE’s quota for foreign debts is not sufficient for your deal (for paying the down payment), you may also consider changing the amount of the total investment of the WFOE as well as the amount of registered capital, if necessary.

When purchasing such office rooms, it is important to make clear how the property (the whole building in which your property forms a part) is managed. Management often plays a critical role in the operation and value appreciation of such properties.

We, as qualified PRC lawyers specializing foreign invested real estate business, will be more than delighted to provide our professional legal service to you from A to Z in the course of your purchase.