Facing pressure from new government measures, foreign institutional investors began to change their means of buying into China's booming real estate market in the second half of last year.

"Equity investment has become more popular than asset investment, which dominated previously," said Tian Hui, director of the market research department of Regal Lloyds International's Beijing office.

Measures adopted last July, which shut the door on property ownership for foreign investors not registered in China, are believed by experts to be the biggest reason for the change.

"The shift from asset investment to equity investment means short-term speculation has been checked and indicates that new foreign capital hoping to tap into China's real estate market will follow this trend," said Tian.

In asset investment, foreign investors can directly purchase mature properties like offices or villas from local real estate developers and later sell them to make short-term profits. Equity investment means they buy stakes in development companies and hope to gain long-term returns.

Of the more than 100 overseas institutional real estate investors now active in China, a number of them are offshore and have now lost the right to buy assets directly from local developers.

The popularity of equity investment began last July when the central government for the first time decided to squeeze speculative foreign money out of the overheated market.

The curbing measures only silenced foreign investors for a while in the middle of last year, but didn't make them lose confidence in China's market.

"Foreigners still feel upbeat about China's real estate market and offshore companies have shifted to equity investment as a way to enter the market," said Tian.

Unlike some veteran foreign investors such as Morgan Stanley's real estate unit, which is known for asset investment, newcomers like Warburg Pincus are using equity rather than asset acquisition as a way into the market.

Morgan Stanley often purchases office or residential buildings and sells after holding them for a short time.

Last year in Shanghai, it bought four apartment buildings from Lujiazui Central Palace for more than $87.5 million and also bought a residential building from Chateau Pinnacle for $95 million.

But US-based Warburg Pincus, one of the largest private equity investment firms in the world, is now taking the lead among its competitors in buying bigger stakes in Chinese developers in addition to its non-real estate businesses.

After buying shares in R&F Properties and Sunshine 100, Warburg Pincus went on to acquire a 25 percent stake in the real estate arm of Shanghai Zhongkai Group this January.

Tax factor

Experts believe tax is another important factor in the change.

"Taxes on the transfer or selling of property have made asset investment costly for those onshore foreign companies who have rights to conduct asset investment," said Charles Zhang, a senior analyst from Colliers International's Shanghai Office.

The government began to remedy tax deficiencies in the real estate sector by collecting several new types of taxes, notably a 5.5 percent transaction tax.

What's more, the recent strict enforcement of an existing land appreciation tax has further increased the costs of buying assets, added Zhang.

Tian also attributed the change to the improved market conditions. Previously, high risks for foreign investors lurked in the market as they undertook development of a project.

"They generally felt it hard to control risks like land use rights during the development process," said Tian.

"But in today's market, uncertainty is reduced and they feel safe to develop property projects alone or with the aid of local developers," Tian continued.

Meanwhile, equity investment has also become an important financing channel for local developers and can be understood against the backdrop of real estate finance, said Tian.

"In the past, local developers could only borrow money from banks in the way of indirect financing," said Tian. "Now direct financing from equity investment can fuel those developers who are eager for money."