How the tables have turned. Just a few years ago the US property market was booming, while across the Pacific Asia was undergoing a financial crisis. Today, as the US experiences a housing market meltdown, property prices in Asia are soaring. In both India and China, housing inflation is starting to price average people out of the markets, and interest rates are rising as authorities worry about too much development.
A key scapegoat for any overheating in the property market has tended to be foreign investors. Over the past year China has unveiled a series of new restrictions on foreign investment in the country's real estate that will clamp down on, among other things, when and how these investors can borrow money.
On a recent visit to India, I found the market abuzz with speculation about what new action that government might take to curb foreign investment. Rumors have been flying around that the government will take action to make foreign investment in property subject to approval by the Foreign Investment Promotion Board beginning on January 1, 2008. The board normally only regulates sensitive areas such as nuclear energy or defense, but under the rumored plan real estate would be added to the list, and the approval process could take between six and nine months.
Predictably, domestic fund managers could barely contain their excitement for the proposed changes. After all, if the rule goes into effect it would give domestic funds a big competitive advantage.
Needless to say, foreign investors and the people who advise them are quite nervous about this possibility. Restrictions on foreign investment in property were only loosened in India in 2003 and again in 2005. Investors are complaining that the advisory board's name is a bit of a misnomer, as it would actually have the effect of discouraging foreign investment rather than promoting it. If the government sends the signal that it is hostile to foreign investment, there are other places those foreigners can take their money. And many investors are speculating that the real reason for the changes is political, as the middle class becomes increasingly fed up with the rising housing prices. Politicians in any country can gain political currency by bashing foreigners. But even more problematic, say Indian market sources, is the fact that sellers won't wait around for six months while foreign investors get their approval.
Predictably, domestic fund managers could barely contain their excitement for the proposed changes. After all, if the rule goes into effect it would give domestic funds a big competitive advantage. Even domestic firms that are investing foreign capital will have a leg up, because they presumably have the connections and the domestic presence to expedite the approval process.
“The intention isn't to stop foreign investment, it's to look at the spirit of the investment and the quality of the money coming in,” said one manager from an Indian firm investing foreign capital. “If I take some funny money they can arrest me – I'm right here.”
Some service providers said they've had to rush some deals lately in anticipation of the potential change. Of course, it is still possible that there may be no change at all. One domestic Indian fund manager said he seriously doubts whether such a change will happen, saying that it would be virtually impossible for this small advisory board to handle the huge influx of approval requests if real estate is added to their mandate. He speculated that instead the government may just crack down on the foreign-investment regulations already in place but not being enforced. While this is a possibility, it may not be enough to satisfy an increasingly frustrated public of potential homebuyers, who want to feel that the government is taking action to combat rising house prices.
Even if the rumors of new hurdles for foreign investors do not come to pass, the fact that they have become so widely circulated and believed points to a permanent state of insecurity felt by many Western firms attempting to join in the great Indian property boom.
Scarborough Group plans £400m float of China venture
Scarborough Group, a property company run by Sheffield United Football Club owner Kevin McCabe, plans to list its China real estate subsidiary Scarborough International Limited on the Hong Kong Stock Exchange. The firm says the listing will have an anticipated value of around £400 million ($826 million, €558 million). Scarborough International Limited is a 50/50 joint venture with CH Wong of Top Spring Group, a China and Hong Kong retail investment and real estate developer. Over the past few years the fund has assembled a portfolio of investments and developments in mainland China with an expected development value of some £845 million. The funds properties include the Scarborough Landmark in Hangzhou, a 50,000 square meter shopping mall completed in August with Walmart as its anchor tenant. The fund also owns another planned ‘Scarborough Landmark’ development in Shanghai, a mixed-use development in Chengdu with a five-star hotel as anchor, a residential/retail complex in Longhua, and a hotel/residential development Changzhou.
Composition Capital launches second Asia fund
Composition Capital Partners, a Dutch real estate investment firm based in Amsterdam and Hong Kong, has held a first closing of its second Asia-dedicated fund, Composition Capital Asia Fund II. According to the firm, so far the fund has received a $100 million commitment by a ‘large institutional investor.’ Composition intends to raise additional capital from other institutions with a target fund size of $400 million. This fund is the successor fund of Composition Capital Asia Fund, which was launched in 2005 and is now fully committed to local partners across Asia. The Fund will target returns in excess of 15 percent and will invest in non-listed real estate investment vehicles, including private funds, secondary transactions and joint ventures with local partners.
China property fund raises $400m on AIM
The Pacific Alliance Group, a Hong Kong-based hedge fund and private equity manager with $3.5 billion in assets, is launching a Greater China real estate vehicle, adding to its existing portfolio of Asia-focused vehicles. The firm has listed the Pacific Alliance China Land fund on London's Alternative Investment Market, raising $400 million (€270 million). The property fund sold 400 million shares at $1.00 each. The fund will invest in residential, commercial and industrial properties in China, with approximately 60 percent of the fund being invested in second and third tier cities such as Hangzhou, Suzhou and Chengdu. The remainder of the fund will be invested in larger cities like Shanghai, Xian, Dalian and Macau, where the firm says it already has a pipeline of deals. According to the firm, the fund will focus on acquiring incomplete and completed buildings, co-investing with leading developers and taking pre-IPO stakes in emerging developers. The Pacific Alliance Group also controls VinaLand, a Vietnam-focused real estate fund listed in March 2006.
Cordea Savills launches JV in India
European property fund manager Cordea Savills has partnered with the Nichani Group to launch a joint venture offering Indian property funds. The first product launch is the $200 million Cordea Nichani Indian Opportunities Number One, which offers access to land and development opportunities in high growth regions of India targeting net returns of 25 percent per year. The fund will operate as a closed-ended private limited company incorporated in Mauritius that will concentrate predominantly on opportunities in Southern India and Maharashtra According to Cordea, The Nichani Group, a 60-year-old family business operating out of Chennai, Bangalore and New York, has a pipeline of contacts in key cities in this region with exposure to the booming information technology sector. The Indian developers with which the vehicle will partner hopes to cover all major sectors of the market, and will be minority shareholders in Cordea Nichani.
Lone Star to exit Japanese hotel operator
Lone Star Group intends to sell its Japanese hotel operator, Solare Hotels and Resorts, in a deal that could raise ¥150 billion to ¥200 billion ($1.4 billion to $1.8 billion), according to reports. Sources close to the deal told multiple news outlets that the business, which operates 55 hotels throughout Japan, will be sold either through a public REIT listing or through a trade sale. Lone Star acquired the hotels in 2003 from the Chisan Co. Group, which filed for bankruptcy protection in 2002. Since then the hotels have been managed by Solare, which is wholly owned by Lone Star. Solare recorded sales of 37 billion for the fiscal year ending in December 2006, up 43 percent from the previous year. Lone Star has made preparations to list a Japanese hotel REIT, having recently set up Star Hotel REIT Management Company. However, given that the Japanese REIT market may be affected by the US subprime crisis, the firm may instead seek to sell the company to another fund. According to the sources, Blackstone is believed to be one of the parties interested in the company. Both Blackstone and Lone Star declined to comment on the matter.
Trikona to realize 2x return
Trikona Capital has agreed to sell part of its holdings in four of its off-shore entities for about $65m (£32 million) to an affiliate of SachsenFonds, a German closed end fund which is a unit of Sachsen, the German public sector bank. The sale price is double the $32 million Trikona paid for these stakes less than a year ago, and will provide a realised gain of 108 percent over a holding period ranging from nine to 14 months. This makes the fund the first AIM-listed real estate fund focused on India to turn a profit. The assets being sold include a portion of a mixed-use IT park outside of Delhi in Greater Noida, a condominium project in Mumbai, a condo-retail mixed project in Hyderabad, and a commercial and retail center in Mumbai which is part of a slum rehabilitation project. Trikona was founded by Aashish Kalra and Rak Chugh in early 2006 to take advantage of India's burgeoning real estate market. It floated Trinity on London's Alternative Investment Market last April.
Merrill Lynch fund invests $377m in DLF projects
Merrill Lynch's private equity real estate fund has invested $377 million (€255 million) for a 49 percent interest in Indian housing projects being built by DLF, India's largest real estate company. The special purpose vehicles are developing seven mid-income housing townships in Chennai, Banglore, Kochi and Indore, according to DLF. These projects will be developed in seven to eight years. The investment, one of the biggest of its kind in India, is Merril Lynch's sixth in Indian real estate, and brings its investments in the sector to about $550 million.