Key Points of Private Real Estate Funds Filing Gui

Pilot Qualifications for PE Fund Managers

The Guidelines set out relatively high conditions for PE fund managers to establish private real estate investment funds. In addition to the requirements on the paid-up capital, major shareholders, and the background of the de facto controller, the Guidelines require that (1) the investment principal in the real estate managed by the fund manager shall be no less than RMB 5 billion, or the cumulative investment principal in the real estate managed by the fund manager since its registration shall be no less than RMB 10 billion (these thresholds may be lowered to RMB 3 billion and RMB 6 billion respectively if all investors of the Pilot Fund are institutional investors); (2) the fund manager shall have at least three private real estate investment projects that have exited successfully; (3) the fund manager shall have  professionals with real estate investment experience, with at least eight professionals with more than three years of real estate investment experience in the investment department, among which at least three shall have at least five years' experience in real estate investment; and (4) the fund manager’s major shareholder and the de facto controller shall not be a real estate development enterprise nor its affiliate. We believe these strict conditions indicate the regulatory authorities’ prudent attitude toward promoting the pilot filing of private real estate funds.

To calculate the size of real estate investments managed by a fund manager, the following methods must be followed: (1) they must be the real estate investments of those filed PE funds (excluding VC funds), excluding the investments managed by other fund managers affiliated with the fund manager and its senior management personnel; (2) the investments shall be in residential properties (i.e. ordinary residential properties, apartments, government-subsidized housing, market-oriented rental housing), commercial premises (office buildings, shopping malls, hotels, etc.), and infrastructure projects (traditional infrastructure projects such as high-speed railways, expressways, airports, ports, warehousing and logistics projects, urban rail systems, municipal road projects, municipal facilities for water, electricity, heating, and industrial parks as well as new infrastructure projects such as 5G base stations, industrial internet, data centers, new energy, wind power and photovoltaic facilities; and (3) they shall be calculated based on the real estate investment principal, i.e. the paid-up equity capital that a fund invests in the real estate project, excluding any portion that may arise from added value after re-appraisal, any loan leverage obtained externally, or any investments from a FOF that invests in the real estate industry.

Requirements on Pilot Funds

The Guidelines require that the first-round paid-up capital for a Pilot Fund shall be at least RMB 30 million, the first-round capital contributed by each investor shall be at least RMB 10 million, and the total capital contributed by all natural-person investors shall not exceed 20% of the total paid-up capital for the Pilot Fund.

The Guidelines require looking-through verification on a Pilot Fund’s investor who pools multiple investors’ money and the relevant exemptions. Notably, the Guidelines explicitly provide that QFLP pilot funds that are established in the PRC and raise capital from foreign investors may be exempt from the look-through verification, which leaves room for QFLP pilot funds to invest in onshore private real estate funds. However, it remains to be seen in practice whether such a policy would promote more business opportunities for onshore fund managers to manage offshore capital.

The Guidelines allow for a reasonable leverage ratio for a Pilot Fund, while the total assets of the Pilot Fund shall not exceed 200% of its net assets.

According to the Guidelines, a Pilot Fund may open to subscription and purchase after completing the fund filing, provided that it is still within the investment period as agreed in the relevant fund contracts.

The Guidelines require that Pilot Funds must be held in the custody of qualified fund custodians according to the law, and require fund custodians to perform their custody duties, supervise the ongoing compliance of private real estate funds in respect of their investment scope, investment methods, qualified investors and others, and submit reports to the AMAC on the operation of the private real estate investment funds in terms of the investment targets and changes in investors on a quarterly basis.

The Guidelines state that Pilot Funds may provide loans or guarantees for an invested enterprise, but such activities shall be subject to certain conditions. For example, if the Pilot Fund has natural-person investors, the Pilot Fund shall hold at least 75% of the equity interest of the invested enterprise, and the amount of equity contribution made by the Pilot Fund to the invested enterprise shall be not less than one third of the total amount of the capital contribution made to the invested enterprise; if all investors of the Pilot Funds are institutional investors, the Pilot Fund shall hold at least 75% of the equity interest of the invested enterprise, or at least 51% of the equity interest of the invested enterprise and the invested enterprise shall provide a guarantee to enable control over its assets.

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