Anybody in the world who wants to make money is looking at China. But, for property investors, the allure of rising capital values, double-digit economic growth and strong returns is tempered by the fact that it is a nigh-on impenetrable market.
“Every day I get at least one investor saying they want to buy a trophy building in central Hong Kong, or on the Bund in Shanghai,” says David Watt, head of Asia Pacific investment for DTZ, which, in 1993, became the first foreign property adviser to arrive in the People’s Republic. “Some of them just have no idea how difficult that is. They think they can just wade in.” Robert Tincknell, deputy managing director of Irish developer Treasury Holdings, agrees: “You can’t come to China and say, ‘I want to spend £500m.’ You have to build relationships and that takes time.”
And, Watt explains, even those with an established presence and years of expertise are having difficulties.
Last month, at MIPIM Asia in Hong Kong, ING Real Estate launched a $500m Asian property fund. The fund will target assets in Hong Kong, Singapore and Japan but China is firmly in its sights too. “You can’t ignore that market,” says David Blight, chief executive of ING Real Estate Investment Management. Blight said the company would focus on Asia over the next three years.
But Blight remains cautious. “It is still difficult to do business in China, as you’ve got to have local people, which we have. It’s a slow process, as you have to be able to forge relationships there. Our China opportunity fund closed heavily oversubscribed, so we’re doing well. “
And therein lies one of the dangers of investing in China. The returns may be there, even though some markets such as Shanghai retail and Beijing offices look wobbly. And there is heaps of investor appetite. But it is still incredibly difficult to invest.
Many of the vehicles to invest in China real estate are heavily oversubscribed, as ING’s is. A recent listing of Hong Kong’s third REIT, for example, which will target the mainland, was oversubscribed by 495 times because of the appeal to retail investors of the growing Chinese economy. “$5 is chasing every $1 worth of real estate in Asia,” says CY Leung, DTZ’s Asia chairman.
Nevertheless, considerable sums are being invested. By the end of 2005, there were just over 2,000 joint ventures between domestic Chinese property companies and foreign investors. This year, over US$5.4bn in foreign capital was spent on Chinese real estate in the first quarter. Most of the cash over 90% was directed at Beijing and Shanghai.
DTZ predicts that investment purchases in the Asia Pacific region in 2006 will be double that of 2005 up from $83bn to US$166bn.
But, as Richard Middleton, Cushman & Wakefield’s MD for Greater China, points out, this is still a small proportion of the total market. “Foreign direct investment into China’s real estate accounts for 2% of GDP, which is up from just 0.5% in 2000. But while it has grown from 14% last year, foreign investment in real estate is only 17% of the country’s total investment.”
But CY Leung says: “In the next 18 months, the total amount of transactions will actually come down.”
ING is one of the most active Western investors in Chinese property, along with Morgan Stanley, Australian bank Macquarie, Merrill Lynch, Goldman Sachs, Singaporean giant CapitaLand, US developer Hines and Citibank. But even it has difficulty finding ways to put money into China. Since the official launch of its ¤250m China Opportunity Fund in June, its only major investment has been a 51% stake in a project of Chinese developer Gemdale, worth €15m. The two are jointly developing a project in Tianjin.
The problem, essentially, is that there is nothing to buy. First, the market is actually smaller than it appears. China’s entire property market amounts to $468bn. That may sound like a lot, but it is less than half that of Japan, at $1.1 trillion. And also, little of it is investment-grade stock.
“And for the little stock that is investment grade, undoubtedly the biggest problem is that no one wants to sell,” says Watt. “Why would they? They can see the growth just as well as foreign investors can.”
The market, he says, is not at all liquid. “Over the past year, there have been only a dozen major transactions in Shanghai, and only five in central Hong Kong. People simply don’t want to sell.
“There is very little decent, investment-grade stock, so pure investors are having difficulty. Many are now turning to development, but that requires different skills and different partners.”
Another hindrance for would-be investors is the simple fact that the Chinese government is actively trying to keep them out.
This is because the central government feared a destabilising surge in property values, and phased in new regulations or Opinions, as the are called in the PRC to restrict foreign investment in property, and thereby calm the market.
China may be the place to get rich, but it is only for the brave, the smart, the patient and the fortunate. Or, as the Chinese themselves say, with time and patience the mulberry leaf becomes a silk gown, and you can’t catch a cub without going into the tiger’s den.
Doing business in China or Confucian you will be
