China Orient to launch first private RE funds, targeting $2bn

The Beijing-based bad loan bank is planning to raise $1bn each for two funds, one focused on the US, the other focused on China. 

China Orient Asset Management International, a subsidiary of Beijing-based China Orient, one of China’s largest bad debt banks, is breaking into the private equity real estate space with the launch of two funds targeting $1 billion each, according to a statement.

One of the funds will focus on buying office properties in the US, while the other will focus on providing financing for real estate companies operating in China, primarily those that are listed in Hong Kong.  Both funds are expected to be US dollar denominated.

China Orient is teaming up with Hong Kong-based property and hotel company Great Eagle Group, which will help China Orient manage the US fund while it handles most of the management for the China fund. Both vehicles are expected to be structured as blind-pools with lives of seven and five years respectively.

Although the return targets of the funds were not disclosed, the US fund is expected to target core-plus to value-added returns and has a hurdle rate before its carried interest is paid of 8 percent. The key, according to the firm, will be its ability to enhance the buildings it buys. The hurdle rate for the China fund is 10 percent.

To start the funds out, China Orient will be committing $150 million to the US office property fund, while Great Eagle will contribute $230 million in the form of three office properties in San Francisco. “Although the pickup in demand has been uneven across the US, [Great Eagle and China Orient] believe some cities will see solid improvements as the recovery in the US spreads,” the statement said. “The strategy of the fund is to acquire office properties in selected cities which [we] believe will benefit from positive demand drivers, and where there is a lack of new supply to underpin improvements in those office markets.”

For the China Investment Fund, Great Eagle will be committing $100 million overall while China Orient is expected to commit $150 million of capital overall. China Orient and Great Eagle will contribute their capital in tranches in line with capital closings for both funds. The final closings of both funds are expected by the end of 2015.

“By sharing and leveraging our expertise and resources, we believe this strategic partnership will result in superior returns to our investors,” China Orient president Ziai Zhang said in the statement.

Although both Great Eagle and China Orient have extensive experience in property investment, with China Orient boasting about RMB1 trillion (€116 billion; $160 billion) of distressed assets, this is the first time either has raised private equity property funds.

A Great Eagle spokeswoman told PERE that both firms will largely be relying on the connections of China Orient in China to draw investors for the funds. Target investors include large state-owned enterprises, private enterprises and high net worth individuals in Mainland China, as well as high net worth individuals outside Mainland China.