COMMENT: Time for new friends(1)

As the Chinese government pursues its anti-corruption policies, those firms prioritizing private sector relationships over Guanxi stand to benefit from a more level playing field.

Confined in a hotel somewhere in Beijing sit the senior executives of a Chinese state-owned real estate investment business. They are not allowed to leave the hotel pending an investigation into corrupt practices amid a wider effort by the government to clean up national business practices, not just in real estate, but in general. We don’t know the facts of the investigation and for that reason will not name the firm or the executives we believe to be involved.

What we have heard is that communication has been cut between these executives and their colleagues and friends, even their families. There is deepening concern for the executives, needless to say, but also for those organizations and peers that have worked with the firm and are worried about becoming embroiled in something they believed to be not of their making.

Meanwhile, at PERE’s annual Asia Summit in Hong Kong, private real estate investment firms currently focused on China illustrated how the conversations they were having with government officials were changing. An appreciation was prevailing that ‘Guanxi’, roughly translated as ‘privileged relationships’, with such folk no longer resulted in special favors for certain groups within a certain proximity. And it was agreed that this was levelling the playing field when it came to land auctions and other deals.

Conference chairman Goodwin Gaw of Gaw Capital pointed out in his opening comments how relying on Guanxi to get good deals done was over. So here was a Hong Kong entrepreneur effectively denouncing the “unrivaled access” enjoyed by some of his contemporaries whom he said had now become wary of doing deals in the mainland. The message was the new government was separating business from politics in ways that will render their particular brand of relationship-driving ineffective.

Consequently, “skills, knowledge and ability” will be the means to creating value more than ever before, and for everyone. This, Gaw pointed out, would lead to a more “institutionalized market”.

Unsurprisingly, this was music to the ears of those private real estate investment firms that concentrate their relationship-building around other private property market professionals, rather than those with state badges. And for the international private real estate investment firms, long disadvantaged by having to compete with firms that possess this domestic edge, such a shift is particularly poignant.

One firm told PERE on the fringes of the conference how it had decided when setting up for business in China that it would prioritize its energies on relationships with private sector counterparties. The firm recalled meetings in the past where a state-owned enterprise tried to sell it agricultural land, blatantly ignoring state rules prohibiting the sale of such land. The firm walked away from the transaction.

Not to say that a change in government direction in regards to its correspondence with property companies will necessarily provoke greater investment, not in the immediate term at least. A prevailing sentiment at the two-day conference was that China’s economic slow-down would mean little capital raising and fewer deals done.

The aforementioned firm on the sidelines did not subscribe to this prognosis, suggesting instead that in the face of political and market headwinds, it was the perfect time to take the contrarian view and to get deploying. The firm is raising capital right now, hoping it can convince prospective backers that its clean hands will safely navigate their capital into and out of a property market that it said still has plenty of growth to deliver.

Whether those state-owned enterprise executives under house arrest in Beijing get another go at China’s property market is another matter.