Villa Construction and Management - Prohibited in the New Catalogue of Industries for Guiding Foreign Investment (2011 Amendments)

Abstract/Summary

The PRC National Development and Reform Commission ("NDRC") and the PRC Ministry of Commerce have recently published the Catalogue of Industries for Guiding Foreign Investment (2011 Amendments)(hereinafter referred to as the "2011 Catalogue" which will become effective on 30 January 2012 and repeal and supersede its 2007 version). The 2011 Catalogue will have re-categorised "villa construction and management" from the Restricted Category to the Prohibited Category, thus banning foreign investment in this type of real estate business in the future.

Background

The Chinese government has called to stop the supply of land use for villas since 2003.

• On 18 February 2003, the Ministry of Land and Resources ("MLR") issued the Urgent Notice on Cleaning Up All Kinds of Park Lands and Strengthening the Regulation and Control of Land Supply, which provided that any land supply for villas should be stopped.
  
  
• On 30 May 2006, the MLR issued the Urgent Notice on Further Strengthening Current Land Administration, which provided that any land supply for villa real estate projects should be stopped and no further land use procedures in relation thereto should be processed.
  
  
• On 12 December 2006, the MLR and the NDRC issued the Catalogue on Prohibited Land Use Projects, which categorised a "Villa Real Estate Project" as a "Prohibited Land Use Project". The MLR and the NDRC (including their respective local counterparts) should not process any land use or investment procedures for any Villa Real Estate Project.

An issue frequently puzzling developers and other industry practitioners is that so far there is no legal definition of the term "villa" under the PRC law. In the past, the MLR has appeared to have accepted the concept that a villa means a single detached court villa, which indicates that any semi-detached villa, townhouse, overlapped villa or penthouse might not be categorised as a "Villa Real Estate Project". However, there is a market saying that the MLR is now considering to officially define the term "villa", which might catch semi-detached villas or townhouses, thus banning foreign investment in such “quasi-villa” projects. It is yet to be seen how and when such legal definition would be formulated and officially released.

The plot ratio of a real estate project is an important indicator on whether such project is a villa project. Usually the range of plot ratio for a villa project would fall between 0.2 to 0.5, which ratio might differ from city to city. We are aware that many cities would like to cap the plot ratio for a villa project at 0.35.

In conclusion, since the prohibitions of any land supply for villas have been provided in various rules since 2003, the impact of the 2011 Catalogue on real estate industry appears may not be huge in this regard.