A welder works on the 42nd floor of the Shanghai World Financial Center in the city yesterday. The tower, which will stand 101 stories and 492 meters when it's completed in 2008, aims to be the tallest building on China's mainland.

Foreigners will be restricted from buying property to cool down overseas investment in real estate, the government announced yesterday.

According to a package of new rules, foreigners need to be resident in China for at least a year before they can buy homes to live in; and need to secure government approval to buy property they don't intend to live in or use.

The residency restriction does not apply to overseas Chinese or compatriots from Hong Kong, Macao or Taiwan who can buy houses for their own use.

For overseas real-estate developers, the ratio of registered capital should be more than 50 per cent of any project that surpasses US$10 million.

The Ministry of Construction, the Ministry of Commerce, the National Development and Reform Commission and the People's Bank of China said the rules are part of government efforts to regulate the real estate market and to improve the efficiency of foreign investment.

"Governments at various levels should realize the potential problems relating to excessive overseas investment in real-estate development," said the statement.

The number of newly-established foreign-invested real-estate firms increased by 25.4 per cent in the first half of this year, compared with the same period last year. The amount of foreign capital actually used in the sector was up 27.9 per cent.

The number of new construction projects jumped by 22.2 per cent in the first half of the year, fuelling a 11.3 per cent rise in economic growth in the second quarter, the highest rate in a decade.

The government has tried to rein in the property sector by raising interest rates, tightening lending rules and imposing strict controls on land use but apparently with little effect.

According to a recent report by DTZ Debenhan Tie Leung, a London-based property consultant, overseas investors bought US$4.5 billion worth of property in the first quarter, nearly a third more than the whole of last year. Beijing and Shanghai are reported to account for more than 80 per cent of overseas purchases.

Andy Xie, an economist with Morgan Stanley in Hong Kong, said there was an element of speculation in China's real estate market. He said a combination of low interest rates and expectations of further appreciation of the renminbi have caused an influx of overseas money.

Some experts said the latest measures would not have much of an impact on the market.

"The proportion of foreigners buying houses in China is rather small. And foreigners are focusing on high-end apartments and villas, a sector with a high vacancy rate," said Susan Zhang, national director of Jones Lang LaSalle, a multinational real-estate consultancy in Beijing.

A Beijing real-estate agent engaged in property intermediary service said only 10 per cent of its clients are foreigners.

The purpose of the rules, as Michael Hart, head at Jones Lang LaSalle's research department in Shanghai, understands, is to "bring greater transparency to the market" and "make sure investment is longer term, not short or speculative."

But they might not have much effect because China's property market is "mostly driven by local buyers and local developers," he said.

It is generally believed that foreign investment accounts for some 4 per cent of property sales in Shanghai and Hart said the new rules would have some impact on "a few projects targeting foreign buyers."

Wayne Zane, director of research and consultancy department in Colliers International Property Services, Shanghai, said: "It obviously shuts down a door on foreign investment in the property market."

Weng Haitao, a researcher with the Shanghai office of Savills China, said some foreign investors may face financial pressures in the short term because the new rules require foreign investors put down 50 per cent, instead of the previous 30 per cent, of development costs for investments of US$10 million or above.

Editor: Yan