International institutional investors, even those traditionally wary of risky investments, are beginning to express interest in China’s real estate market and have become increasingly willing to “take a bet on it,” according to Goodwin Gaw, chairman and managing principal of Gaw Capital Partners.
Despite the media hype about China’s GDP growth slowing over the past year, Gaw told PERE that he believes China’s growth has stayed consistent long enough to convince institutions that, in the long run, it will remain a growth market. Offering further comfort, he pointed to the “credit crunch” measures that China’s leadership has adopted as demonstrable of domestic confidence. Institutional investors should be encouraged by that, he noted.
“The new leadership has a strong conviction that China can sustain itself on 7 percent GDP growth,” Gaw said. In the short-term, this does create some credit flow issues for smaller developers in China, but that has translated into some interesting opportunities for foreign players, he added.
Most important for institutional investors, however, is that China is no longer an emerging market, Gaw noted. It cannot be considered developed yet, but returns from the real estate market are becoming more stable and predictable, which makes it more appropriate for institutional capital.
“In the past, investors had to be more ‘cowboy’ with their real estate investments, and they could shoot for outsized returns,” Gaw said. He does not expect that 2014 will provide many more ‘outsized return’ projects, but total losses also have become less likely.
“The message I am getting is that there is less interest in the high-risk markets,” Gaw added. “Since China is no longer considered emerging, it seems to be attracting the more risk-averse investors.” Gaw, whose private equity real estate firm just closed a $1 billion blind-pool fund for the country, mentioned that he personally has seen much more interest from US pensions this fundraising round.
As to what sectors investors might be interested in next year, Gaw suggested that “it’s hard to go wrong betting on the Chinese consumer.” With millions of people migrating to the cities, retail becomes a good bet. Even logistics can become a retail strategy with the growing e-commerce sector.
In the office sector, however, Gaw is less bullish. International investors need to be very picky when buying offices in Tier 1 cities, as exit options can be very limited, he explained.