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ASIA VIEW: Foreign flight

Though investment by domestic firms in Chinese real estate rose dramatically in the first half of 2008, investment by foreign firms fell sharply. Have Western investors fled from Chinese real estate for the time being? PERE Magazine December 2008/January 2009 issue

Real estate investors in China have been abuzz with speculation for some time about what was going on with the Blackstone-VXL deal. The US private equity giant had struck its first real estate deal in China with the Hong Kong-based property investor and financial services firm in June, acquiring a commercial property in Shanghai.

However in the autumn Chinese media reported the deal had been abandoned after the two sides failed to agree on a price. In the end, the deal is set to go forward but on a renegotiated basis, with Blackstone paying RMB536.7 million ($78 million; €60.2 million) for a 95 percent stake in the project instead RMB 625.5 million for a 90 percent stake as originally proposed.

Domestic Chinese property funds now have legs, and they seem to be filling a gap left by the lack of deals from foreign private equity firms – at least for the moment.

The fact that Blackstone appears to have had a change of heart about the value of the property reflects not only the reality of falling property prices but also perhaps some of the hesitation foreign investors are feeling generally about the Chinese property market.

According to a report released last month by property services firm DTZ, the number of real estate deals closed by foreign firms in China declined substantially in the first six months of 2008 – down by more than 75 percent over the same period in 2007. The fall is particularly noteworthy because during this same period, total investment in Chinese real estate rose by 78 percent compared to 2007.

According to DTZ's first half market review, a total of 318 major transactions of $10 million or more were recorded in the first six months of 2008, amounting to $25 billion. The vast majority involved site purchases for development. Around one third of transactions took place in major cities such as Beijing, Shanghai, Guangzhou and Shenzhen.

However only four of these recorded transactions involved non-Chinese firms, compared to 17 for the same period last year – a plunge of 75 percent.

The sudden drop is probably due to a variety of factors. Chinese government measures to dampen the property market have discouraged foreign investors, particularly the recent changes to off-shoring rules. Continued uncertainty over foreign investor regulation, as examined by PERE earlier this year, has also perhaps made foreign investors feel less confident in the market than they did in 2007. The beginning stages of the credit crunch may have pulled investor interest away as well. And the string of natural disasters that China has experienced over the past year has also likely made Western investors a bit jittery.

Despite the natural disasters and government attempts to slow down the construction boom, domestic investment in real estate is at a high.

Yet despite the natural disasters and government attempts to slow down the construction boom, domestic investment in real estate is at a high. And judging by the deals which have been done in China over the past several months, it appears that the trend is continuing.

Many of the recent funds to launch have been from domestic outfits. Last month E-House China, a real estate services company, launched a $73 million private equity real estate fund that will invest in residential and commercial sectors across China. Also last month, Shanghai-based investment firm Prax announced it would invest $30 million for a 35 percent stake in a joint venture with Chinese developer China Housing & Land Development. That fund closely followed China Everbright Holdings, the investment arm of Chinese financial conglomerate China Everbright Group, announcing it would launch a real estate fund of between $150 million and $250 million.

Domestic Chinese property funds now have legs, and they seem to be filling a gap left by the lack of deals from foreign private equity firms – at least for the moment. The fall in land prices over the course of this year has prompted many of these domestic firms to act quickly. Prices for strata-title and en-bloc buildings have also fallen.

Considering the distressed opportunities which are now arising throughout Asia, these domestic Chinese funds will likely continue to be active.