Last month's devastating 7.9 Richter scale earthquake in Southwest China created a monumental sudden need, with the government rushing to send rescue forces, food and water to the affected region. Though the emerging superpower has largely sought to undertake the relief effort itself, it has accepted some aid from its neighbors. One of the offers it has received has been a very basic need that often gets overlooked in such a crisis: Homes.
Japan, China's historical rival, has stepped in with an offer to donate temporary cardboard huts, a solution it has developed after years of trial and error taking care of the needs of its own citizens after its many earthquakes. The cardboard huts, which resemble Mongolian yurts, can be put together in just two hours using sticky tape and can accommodate five people.
In a larger sense, when it comes to housing, these days Japan has excess to go around. As Japan lends its temporary housing expertise to China, it is facing a housing problem at home that is threatening to derail the country's economic recovery.
Japan is right now facing a glut of unsold homes, condominiums and apartments, and as a consequence, new home construction has dried up. Data from the Ministry of Land, Infrastructure and Transport shows that housing starts in the country in March fell 15.6 percent from a year earlier, to 83,991 units. Though economists have been prepared for a drop-off, this fall was vastly greater than the 6.8 percent fall that had been expected for the month. And the pace of the decline is hardly promising. In February, housing starts only saw a five percent drop from the previous year.
What has caused this dramatic decline? Rather than being caused by unwise lending practices or a housing bubble like in the US, Japan's housing problem has been a result of regulatory chaos. Last June, Japan hastily implemented new rules requiring more stringent structural checks for new buildings, following a scandal over the fact that many developers were taking advantage of laxness in the previous law which let them use fake engineering data.
But not only are the new rules requiring additional time for approval, but the government hadn't finalized the rules by the time they were, technically, to go into effect, which kept the market in limbo for months. Developers didn't know what was going on and housing starts fell 30 percent in the second half of 2007 from the same period in 2006.
Though the government had hoped that this situation would change once the new rules were ironed out, this has failed to materialize. Once the developers emerged from the new regulation confusion, consumer demand had fallen. Developers are now ready to start building again, but they are facing a reluctant homebuying population worried about the effects of a global economic slowdown and the lack of wage increases in Japan. According to a report by Reuters, sales of new condominiums have now fallen to a staggering 14-year low in Tokyo in the year to March. Many analysts agree that neither these sales nor housing starts in general are likely to pick up this year.
The troubles are not just a sign to steer clear from the residential sector in Japan. They could also have significant consequences for the Japanese economy as a whole. The government had hoped that housing would be a component of overall growth for the economy, but it now looks likely to drag it down. Some analysts are saying that the trickle-down effects of a lack of housing investment – which affects many other sectors – could add up to a loss to the overall economy of about one percent. What makes it even worse is that analysts had previously predicted growth for the housing sector. Morgan Stanley, for instance, was predicting a three percent housing growth rate for the year to March 2009. Now they've cut that prediction to a 0.5 percent fall.
All of this just serves to remind us that the Japanese economic recovery is still fragile. Last month, Dr. Seek Ngee Huat, president of GIC Real Estate and one of the 20 most influential LPs selected in PERE's May issue, said that the contagion effects of the US subprime crisis will likely accelerate the downward spin of the current property cycle in Japan. Though there are still sectors with good vital signs in the country, including the office market and senior housing, there are troubling signs for the market as a whole.
As Japan sends its emergency housing solutions across the Yellow Sea to China, it is probably hoping that it receives its own rescue from its current housing mess. Otherwise the economic recovery could quickly turn into an economic disappointment.
CBRE invests in Shanghai mixed-use
CB Richard Ellis has acquired a joint venture interest from HK TaiQi Real Estate Development in a 534,000-square-foot mixed use project in Shanghai. Guangdong Bank Tower is located in central Shanghai and includes a serviced apartment tower and an office tower over a retail podium. Financial terms were not disclosed. The deal comes two months after CB Richard Ellis closed the value-added vehicle Strategic Partners Asia II on $400 million (€258 million). Equity commitments were garnered from institutional investors in the US, Europe and Australia. The fund is the second investment program of the Strategic Partners series to be launched in Asia. It is aiming to acquire, reposition, develop and sell institutional-quality real estate in major Asian markets, with a primary focus on China and Japan.
Lombard in Philippines health care deal
Lombard Investments, a San Francisco-based private equity firm, has acquired 18 percent of Professional Services, the owner and operator of The Medical City, a private tertiary-care hospital in the Philippines. The investment was made through the firm's South East Asia and Greater China private equity fund, Lombard Asia III. The purchase price was not disclosed. The Medical City's facilities include a 500-bed hospital complex (soon to be expanded to 750 beds) and 280 medical clinics. Lombard also has offices in Bangkok and Hong Kong. The Medical City investment closely follows the firm's investment of $18.9 million in Krungthep Land Public Company in Thailand, a privately held midsized residential home builder. Lombard took a 20.2 percent equity interest in the company in February.
Vinum targets Chinese wineries
California-based Vinum Capital Management will look to Chinese wineries as it seeks to invest its recently formed $250 million (€162 million) buyout fund, Vinum Capital Partners I. The San Anselmo, Californiabased firm told PERE it would consider investments in China as well as more traditional wine-producing regions such as California, New Zealand and Australia. Robert Dellenbach, a partner with Pittsburgh-based law firm Reed Smith, which oversaw VCM's formation, said Vinum would look to tap the growing Chinese wine market and in the long run “potentially acquire Chinese operations.” According to industry reports, wine sales in China have jumped 42 percent in the five years to 2006, with consumption increasing 55 percent.
Axis raises $148m for infrastructure
Axis Private Equity, the private equity arm of India's Axis Bank, says its infrastructure fund has held a first close on 6 billion rupees ($148 million, €95 million) for its India infrastructure fund. The bank, formerly known as UTI, said it had already committed more than half the fund and would focus on investments in transport, irrigation, energy networks and hotel developers. It said the money was raised within six months of its launch, with a final target of $600 million. The firm first indicated its interest in such a fund last year when it registered a domestic fund with the Securities Exchange Board of India. It has also reportedly registered a fund in Mauritius to take advantage of tax benefits.