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Condo-hotels in China - Regulatory Framework Remains Challenging

21 September 2011
Mayer Brown JSM Newsletter

Condo-hotels have a chequered global history.  This has left leading international hotel and serviced apartments operators reluctant to lend their brands to such projects.  The absence of internationally branded strata-sold hotels and apartment developments is particularly striking in China where the legal and regulatory framework, or lack of it, poses a number of issues.

National Regulations

First, there are prohibitions on property ownership by foreign companies and individuals for investment purposes. Foreign entities and individuals, subject to certain conditions, can buy properties only for self-use, which severely limits foreign investment in condo-hotels and branded residences.  In addition, in a normal process of land development, a developer acquires a land use right on a site for a specified period based on a planned type of use for the site. It is unclear whether the land use for a condo-hotel should be residential or commercial and there are no specific national regulations. If the unit is being operated and licensed as a hotel, the user should be commercial. This could, however, block the issue of  separate title certificates to individual buyers.

Varying Local Regulations

In some cities, the authorities prohibit, limit or supervise the sale of hotel rooms to individuals.  The Beijing authorities have barred the division of property into condos for the purpose of sale where the land was granted after 31 May 2010.

In August 2010, Guangdong issued a circular strengthening the regulation and administration on the sale of "marketable housing" and criticising the strata sale of "serviced apartments" on land where the user was a hotel or another non¬-residential user.  In October last year, Sanya officials banned the strata sale of hotel projects. However, other cities have been more conducive to the development of condo-hotels.

In Zhuhai, regulations state that the land for construction of a condo-hotel or serviced apartments should be residential land and that this can be strata sold to individual investors with separate title certificates. In Zhoushan, the land for construction of condo-hotels should be commercial land but can be sold on a strata basis.

Compare this with Shanghai and Hefei, where serviced apartments are treated as residential and each unit can be sold with individual title certificates.

There are different regulations and practices in different cities and for the moment developers are likely to follow the local regulations in the absence of national ones.

Other issues

Individual owners have the right to terminate the property manager with a simple majority vote.  It is arguable that the owners can also terminate the hotel manager.  This is obviously an issue for an international management company that is typically entering into a 15 or 20-year term to operate the hotel or serviced apartments, and needs some security of tenure.

There are possible solutions to most of these issues, but they are understandably scaring off many of the international developers and operators.  Until national regulations are issued to cover this area, it is difficult to see the market taking off for the strata sale of high-end hotel rooms, branded residences or service apartments.

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