Bubble, anyone?

There has been plenty of talk about real estate investment opportunities in China and 2005 finally saw some high-profile deals getting done. And there is plenty of potential for more. As noted in a widely circulated New York Times story this fall, Shanghai already has 4,000 skyscrapers (buildings over 18 stories tall), which is twice the number found in New York – and the Chinese city has plans to build 1,000 more. This year, the piece predicts, more space for “living and working” will be built in Shanghai towers than exists in all the office buildings in the Big Apple.

While Shanghai is certainly at the top of the list, it is not the only city in China that is seeing tremendous growth. In Beijing, for example, an ancient Taoist temple sits in a parking lot for a shopping center twice the size of Minnesota's Mall of America. And with a population of 1.3 billion people and more than 170 urban areas with a million-plus inhabitants, China has plenty of other high-growth cities as well, including Xiamen, Shenzhen, Ningbo, Hangzhou and Guangzhou.

In spite of the shifting market fundamentals, foreign investment in China is expected to triple and hit more than $1 billion this year.

Considering all this, it's not hard to see why the country is being hyped as the next place for private equity real estate funds to make a lot of money. But, earlier this year, the excitement was tempered with news of a market correction in Shanghai and talk of a possible bubble in some of the country's hottest housing markets.

True to form, the Chinese government is stepping in with controls to artificially cool the property market. In late October, Zheng Jingping, a spokesman at the National Bureau of Statistics, addressed the state's response to the housing boom. “We want to regulate and curb excessive rises in housing prices, but we're not absolutely intent on pulling down prices,” he said, noting that fast-rising house prices are confined largely to a number of metropolitan areas.

The moves actually began last spring, when municipal governments began introducing measures to cool down the real estate market. While they vary from city to city, these include capital gains tax on properties depending on how long the buyer holds it, a ban on property sales prior to completion and tightening regulations on land-rights. In Shanghai, considered by many to have a disproportionate share of speculative investing, the government reportedly introduced rules forcing homeowners to pay off their mortgages before selling a property and lending rates for home loans were increased.

But whether or not Shanghai apartments represent the 2005 equivalent of tulip bulbs in Holland or shares of NASDAQ-listed internet companies, private investment firms don't seem to be deterred from making baby steps into the country: in spite of the shifting market fundamentals, foreign investment in China is expected to triple and hit more then $1 billion this year, according to real estate services firm Jones Lang LaSalle.

For example, Citigroup recently purchased an office tower in Shanghai, a move quickly becoming the standard toe-in-the-cold-swimming-pool play. Before this, Australian bank Macquarie purchased the 20-story Xin Mao Tower under construction in the city's Luwan district, followed quickly by Goldman Sach's acquisition of the 24-story Pidemco Tower in the waterfront Huangpu district for $108 million.

And it isn't just offices. Firms continue raising capital for new vehicles focused on other property sectors: Singapore developer CapitaLand, for example, has raised $400 million for its second China-focused private equity fund with an allocation to housing and the company has already announced a $108 million residential and commercial project in Ningbo. Other firms are taking a different tack, but still making bets on the housing sector: The Carlyle Group and Warburg Pincus have recently announced deals with Chinese realtors and developers, both of which will serve the burgeoning residential markets. Warburg Pincus' $31 million joint venture with RaycomReal Estate Development already has its sights on Olive City, a large mid-level development in Northeast Beijing.

For good or ill, talk of a bubble in the residential sector hasn't slowed down investors: in fact, the buzz surrounding investment in China seems to be as loud, if not louder, than the talk of the industry's imminent collapse.

REGIONAL NEWS

CapitaLand launches new China fund
Singapore-based real estate developer CapitaLand has committed $150 million (€128 million) to a private equity fund to invest in Chinese property. The CapitaLand China Development Fund has a reported $400 million in commitments, including $20 million from CBC International Realty, a real estate subsidiary of Citigroup. According to press reports, the fund will initially invest in a mixeduse project in Ningbo, valued at approximately $108 million; the Singapore developer was the majority owner of the site and is transferring it to the fund. Capita-Land's first China-focused vehicle was the CapitaLand China Residential Fund, which had $61 million in capital and is now fully invested.

Citigroup acquires Shanghai office tower
Citigroup Property Investors has acquired control of a downtown Shanghai office block for $50 million (€43 million). The 22-story Novel Plaza, located on commercial thoroughfare Nanjing West Road and completed in 1996, is comprised of more than 29,000 square meters of office space. The seller, Hong Kong-based property tycoon Chao Kuang-piu, sold the global financial group a 75 percent stake in the property, which was reportedly a flagship property for his Novel Enterprises. Citigroup joins a growing handful of global private equity real estate firms, including Macquarie and Goldman Sachs, which have invested in the Shanghai office sector in the past year.

China to monitor foreign investment in real estate
Amid concerns of a residential real estate bubble, the Shanghai branch of the State Administration of Foreign Exchange recently asked city banks to obtain approval on transactions involving foreign buyers of real estate. The move comes as the Chinese government takes steps to cool the country's red-hot real estate market and as foreign investors increasingly look to China for real estate opportunities. Last June, the government began requiring non-residents to receive official approval for any residential transactions valued at more than $1 million (€855,000). While regulations can vary between municipalities, in some cities the government has also implemented taxes on flipped properties and bans on selling a property before it is completed.

Ross eyes NPLs in India
New York-based distressed investor Wilbur Ross recently announced that he was entering into a joint venture with Housing Development Finance Corporation (HDFC), India's largest mortgage finance institution, to make investments in restructurings and turnarounds on the Asian subcontinent. The vehicle will look at opportunities in a number of distressed sectors, including nonperforming loans, corporate restructurings, bankruptcies, reorganizations, corporate spinoffs, privatizations, illiquid secondary stakes, cross-holding stakes and non-performing assets. HDFC, Ross' partner in the joint venture, has also been raising a private equity real estate fund for investment in Indian real estate, which it began after the government relaxed foreign ownership regulations earlier this year.

Paul Hastings beefs up RE team
The Tokyo office of San Francisco-based law firm Paul Hastings has reportedly added four real estate professionals to its roster in recent months. William Yoo and Alexander Jampel have both been promoted to partner: Yoo has worked with financial institutions and private equity real estate clients in Japan and South Korea, with a specialization in joint ventures, fund formation, development and hospitality. Jampel has also worked in a number of real estate areas including acquisitions, financing and joint ventures. Earlier this fall, the firm added Ayako Kawano and Jun Usami, both Japan-qualified lawyers, to the real estate practice.