Post 2006 restrictions, what is thelandscape for foreign investment there?


Dudek: China is trying to get a hold of itself.Prior to the new restrictions, it was possible to own real estatefrom offshore. That meant that there was really no approval processother than the mere transfer of land. At that stage the real estatebureau really had no capacity to consider the standing of who isbuying, and foreign investors could skirt the rules by which almostevery industry has to play. The new rules take that away and allowthe government to know who is investing where and how much, and itgives them the opportunity to say no.

| Much of the new restrictions revolvesaround the creation of foreign investment entities, no?


Dudek: That's part of it, but it covered a lot ofdifferent things. It was done by six different ministries. Forinstance, it also dealt with such issues as individuals. Foreignindividuals who want to buy real estate in China now actually haveto live in China for a year.

| Can you explain a bit more about the FIEimpact on foreign players?


Dudek: The corporate structure of China hasdeveloped over the years, and if you go back 15 or 20 years, therereally was no such law, and the earliest laws that came out did sobecause of foreign investors. One of the earliest was ajoint-venture law that allowed foreigners and the Chinese to put acompany together or to cooperate without a company. Then an equityjoint-venture law came out and then a wholly foreign-ownedenterprise law. The legal system developed really to controlforeigners in China. Then they realized the legal system had toexpand to deal with Chinese issues and corporations as well. So inparallel they created a completely different set of laws forChinese companies.

| Did the restrictions put a burden on yourbusiness?


Dudek: Business immediately picked up after thatfirst month. This past year we're talking $6.4 billion. I don'tknow exactly what the volumes are now, but I can say we're busierright now than we were last year at this time, and that's probablya proxy for the market. But right now you have a certain type ofinvestor since it's not a stabilized market yet. It tends to befunds of investment banks that are a bit more willing to take risk.But you're starting to see prepackaged one-property deals you canbuy outside of China where you end up with a Chinese or Shanghaiskyscraper and the risk has already been taken out. But most of thedeals are being done by funds.

| Is it easier for certain projects to geta green light than others?


Dudek: Absolutely. But it depends on where theproject is and if the government is trying to encourage developmentthere. If you come into a big city--Beijing or Shanghai--and you'rewilling to build mass quantities of low-income housing, housingthat's less than 90 sm, which is what they want, and you're willingto do it cheaply--because they're afraid prices will get too high,you'd get all of your approvals very quickly. But, of course, noone wants to do that because if the margins aren't there, why wouldyou invest in a place like China?


Also, when you go into historic districts, your approvals aregoing to be more complicated. This is true of course in everycountry and it's not true just of foreigners. But under the newrules, every aspect of creating a deal has become more complicated,which means you might need special approvals. For instance, forauctions, you effectively have to have a company in China to bid ona project. But it's a chicken-and-egg situation because you aren'tallowed to set up a company unless you have a project.

| What does 2008 look like?


Dudek: The Chinese economy acts like a race carwith no clutch. Yesterday's Shanghai stock exchange was a classicexample, and it's typical of China. They talk about the run up ofthe Shanghai stock exchange being over 100% over the past 12 monthsor so, but if you go back two years it was dropping just as fastfor no apparent reason. The reality is that the Chinese stockmarket is not the equivalent of the US market. The companies don'trely on it for their capital, and most of the companies that arelisted are still state-owned. In other words more than 50% of theirstock is owned by the government. Rumors started that thegovernment was afraid that, like real estate prices, the market hasgotten out of control and it would take rapid and huge measures toslow it down. So, people who are speculating--and China's trying tostop the speculation--started saying that if there's going to be asudden tax on these types of stock transactions, they needed to getout, and everybody fled. Everyone lives in fear of the governmentchanging its mind.

| And it does change its mind withoutnotice?


Dudek: If you go back less than 10 years inShanghai, no one was buying houses. So the government gave thisincentive: If you buy a house in Shanghai and you have a mortgageyou can deduct the mortgage against your taxes dollar-for-dollar.I've never heard of anything like that anywhere in the world. Butbuy houses they did. If you look at the statistics forhomeownership in China, it's extremely high and it's really allbeen in the past decade. Then suddenly the government decided theyhad to stop this and they've tried to put on a lot of taxes to slowthe market dramatically. Again it's the race car without theclutch. Either they give it too much gas or they put the brakes ontoo quickly. They can't fine-tune their economy. They're just notgood at that yet.

| But given the interest and flows ofcapital, aren't they starting to get it?


Dudek: It's a good question, and I think they are,partly because there's a market now, a real market, and the markettakes care of itself over time. But a lot will depend on whether ornot the government considers the economy to be overheating. If theydo the brakes will still be on. If it goes the other way and Chinagoes into recession, it will be easier to get projects through.

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John Salustri

John Salustri has covered the commercial real estate industry for nearly 25 years. He was the founding editor of, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.