China’s lending environment has created a fluctuating market for property investors, but returns are possible with the right partner
At the PERE Forum: China in Beijing in early July, China’s shadow banking system was a big talking point. “Real estate has always been the fastest growing sector in the country, so a lot of financial institutions have come out with something like shadow banking for short-term investment,” said James Chou, head of China at Hong Kong-based private equity real estate firm Arch Capital Management.
Indeed, various financial organizations – even Internet sites – have spotted an opportunity to step in as lenders amid an ongoing credit crunch and a lack of regulatory oversight. In China, this system of unregulated lending is referred to as ‘social lending’ and can include the so-called peer-to-peer lending market, which already has Chinese banking regulators concerned. Over the past two years, the social lending system has skyrocketed to around RMB400 billion (€51 billion; $65 billion) from about RMB100 billion, as pointed out by Robert Ciemniak, founder of research firm Real Estate Foresight.
Short-term liquidity has kept China’s real estate market largely out of distress, but it could lead to greater distress in the long run, predicted Mark Ma, senior vice president for leveraged and acquisition finance at HSBC. China’s government is trying to address that problem with its ‘credit crunch’ policies.
“[The new government] does not want to develop the mentality that the [People’s Bank of China] and other banks will step in with loans whenever there’s trouble,” said Frank Chen, head of research for China at global property services firm CBRE. “Hopefully, banks will learn from this credit crunch and behave more responsibly.”
China’s dearth of institutional-grade real estate is no secret, and many Chinese banks have attempted to quicken its sophistication with financial engineering. Charles Lam, real estate managing director at Hong Kong-based Baring Private Equity Asia, pointed out that most of China’s core assets are only ‘financial core’ – they do not have the revenue of a core asset, but the banks rate them and lend to them as if they do.
Putting liquidity concerns aside, the most crucial step for investors looking to make headway in China is finding a local real estate partner. Although a hackneyed point by now, speakers at the one-day event underscored that uncertainties in China’s market mean one cannot invest in the country without spending the time and effort to develop a trusting relationship with “the right partner.”
Richard Vogel, president of Silverstein Properties in China, said the leadership and culture of the Chinese partner have to be “completely aligned” with the investors in order for investment to succeed. “I would take the best partner over the best site any day.”