Distressed Real Estate in China

Distressed real estate in China: what has changed

Distressed real estate in China is no longer a niche. Since the first large developer defaults in 2021, dozens of developers have restructured offshore debt, thousands of residential projects have needed rescue funding to complete, and owners of offices, shopping centres and hotels have faced falling rents and refinancing pressure. The legal response has been distinctive: policy has prioritised completing and delivering pre-sold homes, the courts have placed homebuyers at the top of the priority stack, and governments have created financing and purchase programmes to absorb inventory. For investors, lenders and foreign partners, value now depends on understanding that ordering as well as the asset.

The opportunities are real but specific. They include acquiring stalled projects or project companies, providing completion or rescue finance, buying loans secured on property, acquiring commercial assets from stressed owners, and participating in urban renewal and affordable housing conversions. Each route sits inside a framework that combines the Civil Code, the Urban Real Estate Administration Law, the Enterprise Bankruptcy Law, Supreme People's Court guidance and an evolving set of central and local policy measures. This guide maps that framework from the perspective of a foreign investor or creditor.

The priority stack in a distressed residential project

In a distressed residential project, several groups compete for the same land and buildings. Chinese law and judicial guidance rank them in a way that often surprises lenders familiar with other markets. The key change came with the Supreme People's Court's reply on protecting the rights of commercial housing consumers, in force since 20 April 2023. A buyer who purchased a home to live in and has paid the full price, or pays the balance before the end of first-instance proceedings, has a delivery claim that ranks ahead of the construction contractor's priority, mortgages and other claims. If delivery is impossible, the buyer's refund claim also ranks ahead of them.

Two further features matter. Pre-sale proceeds are paid into supervised escrow accounts and can be released only for construction of the relevant project, so they are not freely available to lenders or the developer group. And in bankruptcy, new money lent to complete construction after the case is accepted can be treated as a common-benefit debt payable ahead of ordinary claims, which is why many projects are rescued inside reorganisation rather than outside it.

The policy toolkit for distressed real estate in China

Central policy has moved from restricting developer borrowing to supporting completion and absorbing inventory. In January 2024, the Ministry of Housing and Urban-Rural Development and the National Financial Regulatory Administration required every prefecture-level and higher city to set up a real estate financing coordination mechanism. Local governments assess projects and put eligible ones on a whitelist; banks are directed to provide credit to whitelisted projects through streamlined approvals, to avoid withdrawing loans from projects with temporary difficulties, and to control the use of funds so that loans reach construction.

Other measures complement the whitelist. Since 2024 the People's Bank of China has provided relending to support state-owned entities buying completed but unsold homes for use as affordable housing; local governments have been permitted to use special bond funds to buy back idle land and housing; mortgage rates and down-payment ratios have been lowered; and many cities have relaxed purchase restrictions. The effect is uneven by city, but it has created a new class of buyer for residential inventory: local state-owned platforms acting under policy mandates.

For investors this policy setting has two consequences. It supports values and completion in projects that qualify for support, which makes rescue capital less risky. But it also means that many decisions, including which projects are financed, which creditors are paid and when sales happen, are taken through local coordination mechanisms in which policy goals, especially delivering homes and social stability, rank alongside creditor returns.

Developer insolvency: onshore reorganisation and offshore schemes

Developer groups typically have an offshore listed holding company in the Cayman Islands or Hong Kong, offshore bonds and loans, and hundreds of onshore project companies, each holding a single development. Their restructurings therefore run on two tracks. Offshore, holding companies have used schemes of arrangement in Hong Kong, sometimes with parallel schemes elsewhere, to exchange dollar debt for new notes, convertibles and equity. Creditors have used winding-up petitions as leverage. China Evergrande was ordered to be wound up by the Hong Kong court in January 2024, and its shares were delisted from the Hong Kong Stock Exchange in August 2025.

Country Garden followed the negotiated path. Its offshore restructuring of about US$17.7 billion was sanctioned by the Hong Kong court in December 2025 and took effect that month, and a winding-up petition against it was dismissed in February 2026. Onshore, developers have extended bonds through bondholders' meetings, sold projects and used court reorganisation for specific project companies or entire groups, sometimes on a consolidated basis.

The onshore track determines offshore recoveries. Offshore creditors rank behind onshore creditors of operating subsidiaries, and cash can leave China only after onshore claims, policy requirements on delivery and foreign exchange formalities are satisfied. Liquidators of offshore holding companies have sought recognition in Mainland courts, including under the 2021 pilot for Hong Kong proceedings in Shanghai, Xiamen and Shenzhen, but control of project companies still requires working through onshore corporate, court and policy processes. Our cross-border restructuring page explains the offshore tools.

Routes to acquiring distressed real estate in China

Investors can acquire distressed real estate in China in several ways, and the choice determines the liabilities they assume.

For foreign investors, additional gates apply. Investment in residential and commercial property is generally open to foreign capital, but must be made through an onshore real estate enterprise and comply with foreign exchange rules, which have historically been stricter for real estate than for other sectors. Real estate is not a listed sector for foreign investment security review in itself, but merger control applies to acquisitions of control where turnover thresholds are met. See real estate M&A and real estate finance.

Commercial property: offices, retail, hotels and logistics

Commercial property distress follows a different pattern from residential. Homebuyer priority is not relevant, so secured lenders and contractors have stronger positions, and sales are more often negotiated than court-led. Pressure comes from vacancy in office markets with heavy new supply, weaker retail tenants, hotel operators with high leverage, and refinancing walls for owners who borrowed at higher valuations. Sellers include developers raising cash, state-owned owners rebalancing portfolios and foreign funds exiting.

Buyers range from domestic insurers and state-owned platforms to international opportunity funds. Typical structures include acquisitions of project companies holding the asset, sale-and-leaseback arrangements, and acquisition of the senior loan followed by consensual sale or enforcement. Exit options have improved with the expansion of China's public infrastructure REITs to include consumer infrastructure such as shopping centres, which gives some stabilised assets a route to the capital markets; see China REITs and pre-REITs. Transfer taxes, including land appreciation tax on asset deals, often determine whether an asset or share deal is used.

Foreign owners selling Chinese commercial property face their own constraints. Buyers will scrutinise lease terms, tenant covenants and capital expenditure backlogs, and price in vacancy. Sellers need to plan the tax on gains, the remittance of sale proceeds through foreign exchange channels and, where the asset is held through an offshore holding company, the indirect transfer reporting rules that can make an offshore share sale taxable in China. Lender consent and release of security must be lined up with closing, since partial repayment arrangements are common when values have fallen below the loan.

Rescue finance and working with local authorities

New money is the scarcest resource in distressed real estate in China, and the law offers lenders three main ways to protect it. Outside bankruptcy, a rescue lender can take a mortgage over unencumbered land or buildings, a pledge over project company equity and control over escrow and sales proceeds, but it will rank behind homebuyers and the contractor on the same project and is exposed to later bankruptcy. Inside bankruptcy, a loan made to the estate after acceptance, with administrator and court approval, can be a common-benefit debt paid ahead of ordinary claims, and the reorganisation plan can grant it security. In pre-reorganisation, interim financing is often agreed in principle and then confirmed once the case is formally accepted.

Whichever route is used, the documentation needs to address the realities of the project. Lenders typically require a ring-fenced project account, a construction budget certified by an independent cost consultant, step-in rights to replace the contractor, cash-flow waterfalls that release funds only against verified progress, and reporting on homebuyer delivery. Where the project is on a city whitelist, the lender should understand the coordination mechanism's expectations, since banks are directed to support whitelisted projects and may be competitors or partners. Foreign lenders also need a compliant route for the loan itself, such as cross-border lending within the borrower's foreign debt capacity or an onshore lending vehicle.

Working with local authorities and coordination mechanisms

Local government involvement is a defining feature of distressed real estate in China. Housing and natural resources bureaux control permits and land matters; the coordination mechanism decides whitelist recommendations; and in many cities a task force supervises delivery of stalled projects, sometimes appointing a state-owned agent developer. Courts handling developer bankruptcies coordinate closely with these bodies. A plan that ignores their priorities, particularly delivering homes, paying migrant workers and maintaining social stability, is unlikely to succeed even if it maximises creditor value on paper.

Practical engagement means presenting proposals that show how homes will be delivered, how contractors and workers will be paid, and how the investor's capital will be protected. It also means understanding the authority's tools, including the release of escrow funds, land premium adjustments, changes of permitted use and support for converting unsold units into affordable rental housing. Early, documented dialogue with these bodies, conducted through licensed PRC counsel where formal submissions are required, reduces the risk of delay later in the transaction.

Distressed real estate in China: due diligence checklist

• Title and land: land use right certificates, land grant contracts, permitted use and term, unpaid land premium and idle land risks.
• Permits: planning, construction and pre-sale permits, and the stage of construction completed against each.
• Homebuyers: number of pre-sold units, amounts paid, delivery deadlines, complaints and pending litigation.
• Escrow: balance and history of supervised pre-sale accounts.
• Contractors and suppliers: unpaid construction price, priority claims and the 18-month exercise period, and subcontractor claims.
• Financing: mortgages, share pledges, trust and shadow-bank financing, and group guarantees.
• Court and enforcement: preservation orders, enforcement cases, bankruptcy filings and pre-reorganisation status for the project company and affiliates.
• Policy status: whitelist inclusion, local coordination mechanism involvement and any government support or conditions.
• Tax: land appreciation tax provisioning, deed tax, VAT and enterprise income tax exposures.

Common mistakes include relying on mortgage priority without quantifying homebuyer claims, underestimating the time a coordination mechanism or court process will take, and assuming that offshore control of a group gives practical control of onshore projects. Investors also sometimes overlook that a project company's guarantees of other group debts can make an apparently clean project a defendant in many unrelated cases.

How TRW & Co helps

From Shenzhen, where several major developers are headquartered, our representative office advises international funds, lenders, developers and joint venture partners on distressed real estate in China. We help structure acquisitions and rescue financing, coordinate legal due diligence on projects and groups, negotiate with developers, creditors and co-investors, and advise on Hong Kong and offshore restructuring tools and non-PRC finance documents. Where PRC legal advice, filings or court work are needed, we work with licensed PRC law firms and manage the combined team. See also non-performing asset disposal and real estate disputes. To discuss a project, contact us.