A herd of white elephants?

China's explosive economic growth has led to some amazing real estate projects. But what happens if the bubble bursts? By Aaron Lovell

Thames Town seems like your average, run-of-themill rural English village, complete with a sandstone church, cobbled streets, tiny boutique shops, mock Tudor houses and an inn, much like the Rock Point Inn in seaside Lyme Regis, West Dorset.

The thing is, Thames Town isn't on the English coast. It's in Songjiang, on the outskirts of Shanghai. As China's financial and trade hub continues to expand, the city has commenced building a series of satellite towns on its periphery, all based on different European countries.

Anting, a city looking to become a center for automobile production, is reportedly taking its cues from the German industrial town of Weimer—right down to the pastel apartment buildings, Bauhaus-influenced offices and Formula One track.

Thames Town got the details of the Rock Point Inn so well that the owner of the original property in England—as well as the Cob Gate Fish Bar, also copied—felt a bit miffed.

“As you can imagine, the jokes are absolutely rife here,” she told the Reuters news service last month. “They are as follows: ‘I have been Shanghai-ed’ and ‘My business is on the Chinese take-away menu.’”

Additional jokes about bootleg DVDs and CDs aside, economic growth in China has been one of the biggest real estate stories of recent years. And the country's fundamentals continue to impress.

According to a recent report released by the International Monetary Fund, China's GDP grew by 11.3 percent in the second quarter of 2006 versus the same quarter the year before, fueled by a “renewed acceleration in investment growth and surging net exports.” Meanwhile, the demographic story has become the stuff of legend: legions of people moving to cities and metropolises springing up out of the rice paddies.

The evidence of this growth is everywhere. In addition to the planned satellite cities of Shanghai with playful, EPCOT-style themes, Shanghai has also opened its own deepwater port to compete with Hong Kong and Singapore.

But there is also growth further inland, away from the vaunted coast. Here, the investment is driven by local governments and developers. For example, Zhengzhou, a dusty, medium-sized plains city, is reportedly positioning itself to become the “Chicago of the East,” going so far as to pursue large-scale convention and cultural projects in the style of the Windy City.

recent Wall Street Journal article on the country's building boom provided a laundry list of the city's imaginative and expensive civic projects: a hotel, modeled after a pagoda, that will stand threequarters as tall as the Empire State Building when completed; a $100-million (€80 million) waterfront art complex seemingly modeled on a nest of eggs; a conference center, replete with climate-controlled seats, that reportedly looks like an “unfurled umbrella”; and an exhibition center that sports the largest free-standing roof in Asia. Dubai may be looking over its shoulder.

Private equity real estate firms have certainly become entranced with China, slowly entering the market via office buildings and luxury residential projects in the primary cities on the country's affluent coast. But before they wander too far from the shore, shouldn't the Chinese government get their house in order?

Despite government measures to slow down the overheated economy, the investment and construction continues unabated, oftentimes in defiance of the central government. As the Journal reported earlier this fall, Beijing has taken to using spy satellites to scope out illicit construction projects in distant provinces.

Of course, it isn't hard to understand why cities are pushing for arts centers that look like duck eggs— those projects help boost the local economies.

But what happens when that economy tanks? When the country's low inflation starts creeping upwards? What if US consumer spending drops and hurts China's export market? Who's going to come to the exhibition center to see Asia's largest roof? It's somehow not hard to imagine a city like Zhengzhou turning into a post-modern ghost town, a Mad-Max landscape of abandoned civic projects and a derelict hotel that looks like a giant pagoda.

Of course, that probably won't happen. But with local, regional, national and now international investors looking to place capital in China, keeping an eye on the overall economics trends, not to mention the downside of a project, are probably more important than ever.

Because the exit market for distressed convention centers in Henan province probably isn't everything it's cracked up to be.

RREEF enters China
RREEF, the property arm of Deutsche Bank, has made its first move into China by teaming up with a group of Chinese co-investors to develop a $225 million (€175 million) mid-market residential scheme in the southern coastal province of Zhuhai. The project, known as Zhongzhu Uptown, will include approximately 2,000 apartments and a small number of shops that will be built on a 100,000 square meters of land. Over the next three years, the firm and its partners are planning to develop 20 towers for the project, largely targeting middle-class owner-occupiers.

Zell continues Brazilian shopping spree
Sam Zell's Equity International has invested $44.5 million (€35 million) in ECISA Group, a Rio de Janeiro-based owner and operator of Brazilian shopping centers. Equity International will control approximately 14.4 percent of the retailer's shares with an option to acquire an additional 13.1 percent. GP Investments, a Brazilian private equity firm, will acquire an equal stake in the company. ECISA's 13 shopping malls are located primarily in Brazil's major cities like Sao Paolo and Rio de Janeiro.

Carlyle to target Latin American property
Continuing its push into property markets around the world, The Carlyle Group is establishing a private equity real estate presence in Latin America, according to sources. Though Carlyle has yet to make an announcement, sources close to the firm said it may have a real estate team up and running by the end of the year. The firm will invest primarily in Brazil, though other countries may also be targeted. Local press reports speculate that Carlyle may tap Eduardo Machado, the real estate head at Banco Fibra, or Rossano Nonino, a director of real estate investment firm Brazilian Capital, to head the team.

Aberdeen has first close on Asian FoF
Stockholm-based Aberdeen Property Investors held the first close on $91 million (€72 million) for its new fund of funds vehicle focused on Asian real estate vehicles. The vehicle, called AIPP Asia, will invest in real estate funds across Asia, in addition to joint ventures and co-investments. The fund is targeting a net IRR of between 13 and 17 percent. The fund size is capped at $600 million. Last year, Aberdeen launched the first and largest pooled fund of funds for European property funds, which raised €624 million.

Xander invests in Indian JV
Private equity real estate group Xander Real Estate Partners has acquired a 20 to 25 percent stake in a joint venture developing the Bandra Kurla Complex, a mixed-use project with office space, serviced apartments, luxury residential units and a shopping center. According to local press reports, the stake could be worth as much as $120 million (€94 million) and could be the largest property investment in India. Xander was founded by Arthur Siegel, a professor at Harvard Business School, with a focus on Indian property.