Friday Letter The game changer

Until now, most RMB-denominated real estate funds have involved a number of high-net-worth individuals backing domestic vehicles dedicated to particular properties. However, at PERE’s first conference in mainland China this week, there was talk of a change.

It was not surprising that one of the panelists of this week’s inaugural PERE Forum: China conference – Ryan Botjer, senior managing director and head of China at Tishman Speyer – courted attention both on and off the stage. During his panel, he was questioned about the New York-based developer-cum-fund manager’s RMB1.2 billion (Euros154 million; $188 million) development fund, which was raised in May, and he was still fielding questions from delegates about the firm’s approach to China even as the day-ending cocktail reception was winding up.

The prospect for international investment managers of raising Renminbi for their programmes is mouthwatering, and that is particularly understandable today given little international institutional capital has been successfully courted for China investment vehicles of late. Some of the few that have had success have done so accepting very strict investing criteria, reduced discretion and other constricting conditions.

As the 100-delegate conference heard, the proprietor of an RMB-denominated fund does not have to concern itself with the hurdles international managers face when bringing foreign capital into China and does not take a year or more to raise US-dollar denominated funds for instance. One panelist – not Botjer himself though – suggested Tishman Speyer’s RMB fundraise took only “a matter of months.” It was little wonder Tishman’s effort was widely respected.

Judging by what was said on stage, it appears Renminbi is actually edging its way closer to more real estate funds, and conversations with firms during the conference suggested some groups are formulating plans to capture this money right now. Nonetheless, as the participants of the concluding panel on fund structuring made clear, there is still someway to go before these vehicles begin to resemble their international counterparts, particularly in terms of scale and sophistication.

If anything, many current RMB funds appear more like investment clubs bespoke to particular properties or portfolios. They are assembled by wealth aggregators that group together capital from scores of high-net-worth individuals, and often they are far smaller. In fact, Tishman Speyer’s fund – itself dedicated to one mixed-use development in Suzhou Industrial Park – arguably is on the big side.

The engagement of China’s institutions is “the game changer” for RMB funds, as another panelist put it. The good news is these groups appear to be coming. The final panel shared experiences of dialogues with Chinese institutions, including insurance companies, pension funds and other corporate groups warming to the notion of backing domestic real estate funds.

We’re talking about a mountain of capital here. China’s insurers are worth $15 billion alone, by certain estimates, and in 2010 they were permitted to invest up to 10 percent of their assets in real estate. When they proceed with investing those allocations, they’ll be doing it through RMB-denominated entities.

Of course, there has been little movement yet. At the conference, one executive of an insurance company hinted at his organisation increasing its real estate investing activity, but he gave away little other detail.

Then again, things in China can happen very quickly. Perhaps the next PERE Forum in China might yield evidence of larger RMB-denominated funds populated by China’s biggest institutions. Of course, another question entirely is whether international firms will be granted access to the capital or will the maiden effort of Tishman Speyer look like more like a one-off, allowing China’s own firms to enjoy the spoils.