Funding shortfalls brings opportunity in China

China continues to remain an attractive real estate market for experienced international institutional investors, even amid rising fears of a property bubble bust, said panelists at BlackRock’s Asia Media Forum held in Hong Kong today.

Expressing optimism about China’s property market, John Saunders, head of Asian Real Estate at BlackRock, said that the over-leveraged system has thrown up opportunities for investors.

“It was difficult to underwrite deals in China before because pricing was built on expectation of enormous rental growth. Developers wanted to buy as much land as possible and could pre-sale consent. Now, with loss of pre-sale consents and the loss of ability to generate very quick cash flows, what you’re left with is a levered system and opportunities where you can buy that debt with equity,” he said.

Faced with rising inventories and falling real estate prices, many local developers in China are turning to the offshore loan markets and foreign institutional investors as well as their traditional, domestic lending sources to finance their debt. The government is also initiating a string of macroeconomic measures, such as easing the rules on mortgage lending, to boost residential demand.

For Mark Ebbinghaus, global head of real estate banking at Standard Chartered Bank, the shakeout that developers are facing is healthy, and increases opportunities for investors who understand the market well.

“Over the last few years, whenever a Chinese developer was into trouble – either on the capital management front or because of a slowing market – plenty of partners were willing to come in and take an interest on the platform or asset level,” he said. Adding to that point, Rob Blain, executive chairman, CBRE Asia Pacific, said more than first-time investors, local developers were chasing the seasoned investors, with a track-record of investing in markets like China, for funding.

In terms of investment destinations, the gateway cities are currently the biggest draw, marking a change in trend from the last two to three years when there was a surge in demand in the Tier 2 and 3 cities, noted CBRE’s Blain, although Saunders said there were still opportunities in the retail sector in China’s secondary markets where growth could be found.

He cited the example of a retail asset the firm currently holds in Chengdu located in southwest China, which provides 15 percent rental growth, with “no evidence of slowing in this downturn.”

Looking ahead, CBRE’s Blain predicted healthcare facilities and residential campuses would become attractive sectors for institutional investors in the future.