New Changes to Real Estate Policies
2023 At the end of August, there was a shift in real estate control policy. China’s four first-tier cities - Beijing, Shanghai, Guangzhou and Shenzhen - took the lead in fully implementing the policy of “categorizing households with mortgage records but no local home ownership as first-time homebuyers”, regardless of whether they have taken a loan to buy a home in the past, which has a significant short-term boost to the first-tier cities’ real estate market. Since then, other second-tier cities have also released local optimized purchase restriction policies one after another based on the specific conditions of the city,and will also be able to recover gradually following the lead of the first-tier cities. It is foreseeable that China’s real estate industry will soon climb out of the worst downturn, and the real estate market will enter a new stage of development upon recovery and restructuring.
Challenges Remain in the New Policy Backdrop
At the meeting of the Political Bureau of the CPC Central Committee in late July 2023, it was proposed that “in order to adapt to the new development of significant changes in supply and demand in China’s real estate market, the real estate policies need to be adjusted and optimized in a timely manner”, which predicted that China’s real estate policies would change timely. Under the new relationship between supply and demand, we should stay focused on meeting residents’ rigid housing demand and requirement for home improvement, mainly involving the following areas:
1. Fully implement the policy of “categorizing households with mortgage records but no local home ownership as first-time homebuyers”. Four first-tier cities - Beijing, Shanghai, Guangzhou and Shenzhen - took the lead in implementation, with Hangzhou, Xiamen and many other second-tier cities following suit.
2. Explicitly lower the lowest first-home and second-home down payments by 20% and 30% respectively, and lower the second-home mortgage interest rate floor to the loan market quoted interest rate for the corresponding term + 20 basis points.
3. Reduce the interest rate on existing first-home mortgages. Four major banks in China have issued operating rules to adjust the interest rate on existing home mortgages.
China’s real estate market ushers in a period of transition and deep policy adjustment, but debt default is still a major challenge for some real estate companies. For companies at risk, debt restructuring may be achieved by way of debt rollover, offsetting debts with assets and debt-to-equity swap, or risk may be mitigated by means of equity transfer, capital and share increase or issuance of preferred shares. At the same time, real estate companies also need to seize the market recovery period following release of the core city policies, strengthen sales to promote collection of payments, and ensure normal return of operating cash flow.
Real Estate Litigation Cases May See New Explosion
In the stage of deep adjustment of the real estate industry, another challenge that the real estate companies have to face is the sharp increase in the number of related disputes and litigation caused by capital chain rupture, which is mainly reflected in the following aspects:
1. Disputes over commercial housing sales contracts with house buyers. If the construction is delayed or even shut down due to debt crisis, the buyer will bring a lawsuit against the real estate company to court, requiring the company to continue to perform the contract or assume the liabilities for breach of contract for overdue delivery or late application for property ownership certificate or maintain the housing quality. If the problem is common to residential projects, it is likely to lead to group litigation, which involves not only a large number of parties, but also a large total amount of claims and fierce confrontation between the parties concerned.
2. Disputes over construction contracts with project constructors, including general construction contractors, sub-contractors, supervisors, designers and other parties; Such cases are characterized by a high degree of technical expertise, frequent initiation of forensic examinations and long trial periods. The main focus of such disputes mainly involves the determination of the effectiveness of the contract, payment of the project price, payment of performance bond, etc.
3. Derivative actions in bankruptcy reorganization proceedings. Bankruptcy proceedings involve a large number of related parties of interest with varying legal relationships. The relevant lawsuits not only focus on the basic legal relationship of the parties to the dispute, but also need to comply with the relevant provisions of the bankruptcy law.
In addition to the major types of litigation listed above, there are also disputes between suppliers of projects over sales contracts, and disputes between co-developers of real estate projects over cooperative development contracts. Related litigation cases to a certain extent have the characteristics of involving a large number of interested parties, complicated legal relationships, and a relatively large amount of litigation claims. Proper handling of these lawsuits will remain a difficult task for real estate companies, which should resort to external professional legal teams when necessary.
By Wu Fangrong Partner
Zhong Lun Law Firm
