ADIA to exploit capital crunch in China

The sovereign wealth fund sees a net deployment year for Chinese property on the back of the government’s deleveraging of the domestic economy, heard delegates at PERE’s China conference.

Abu Dhabi Investment Authority, the United Arab Emirates’ biggest sovereign wealth fund estimated by Sovereign Wealth Fund Institute with $828 billion of assets, has signalled its intent to capitalize on China’s deleveraging policy.

According to Harry Ip, senior portfolio manager at ADIA, the state fund expects investing opportunities to arise from Beijing’s strategy to limit the issuance of off-the-books loans, which is intended to create a tighter liquidity market environment.

“Because of the liquidity situation in China, it is really a good time to think about applying more capital,” Ip told delegates attending the PERE China Forum, held in Shanghai in late June.

Bad corporate debts on bank books have been rising steadily as borrowers struggle to repay their loans. Chinese commercial banks’ non-performing loans total hit 1.71 trillion yuan ($258 million) at year-end 2017, China Banking Regulatory Commission data shows. But some analysts say the bad debt is as much as 14 times higher because lenders use various methods to conceal the true figure, according to Thompson Reuters.

The Bank for International Settlements set China’s debt as 256 percent of its GDP as of September 2017, up slightly from a year earlier. Over the past two years, Chinese authorities have taken steps to deleverage the economy, contain debt and steady the real estate sector, a major receiver of corporate loans. Beijing has tightened regulations on the financial sector and informal lending while restricting land supply, development and property purchases in big cities.

“Logistics will continue to be our key focus, but we will also explore opportunities in residential space and office as well as alternative sectors like residential housing and private space. These are the opportunities that we are watching closely. It is not a good time to divest assets because of the liquidity situation so it is more likely to be a net deployment year,” said Ip.

“Now, capital is more valuable than before so we do see a lot more opportunities than 18 or 24 months ago.”

Harry Ip

His statements came during a panel debate discussing investors’ view on political and macroeconomic risks in China and possible opportunities created from the capital controls.

With ADIA as a long-term investor, Harry Ip highlighted that as long as the policy or macroeconomic trends do not change the key supply-demand dynamics of the Chinese property market, the sovereign wealth fund still will take a broad, positive view in China.  He said the country was a key market for ADIA in the Asia-Pacific because of its overall economic growth prospects.

ADIA has a real estate allocation target between 5 and 10 percent of the portfolio and, according to PERE’s annual Global Investor 50 ranking, the sovereign wealth fund has more capital – $46.94 billion – invested in the asset class than any other investor.

According to Ip, ADIA sees positive momentum for logistics and will continue to invest in the asset class, of which the sovereign wealth fund has a platform of around 32 million square feet across China.

“Other than logistics, we are also evaluating other opportunities across different asset classes, from residential and office where I think we will, more or less, focus on first-tier cities. Retail is going through a very fast change and also a repricing. We look at opportunities, but we have got to be very cautious on how we can offer a different experience to the customers, not the same kind of multi-national chains,” Ip said.

Among the alternative asset classes in China, ADIA sees positive repercussions from the new policies promoting rental housing that aim to create additional supply for people not being allowed to buy a home due to China’s hukou system where citizens have limited rights to buy homes outside the region or city they are registered. This policy is increasingly also affecting relatively more affluent white-collar workers, which the government wants to make more mobile.

Harry Ip sees a lot of positives from the rental apartment market, since it is a good thing that the government is trying to develop this market to de-compliment the for sale-market.

In terms of Chinese submarkets, Ip complimented the development in the Greater Bay Area in South China. The area consists of major cities such Guangzhou and Shenzhen as well as Hong Kong and the gambling mecca Macau. These cities are in the midst of a substantial increase in interconnectivity following a number of major infrastructure projects.