Mainland security

Despite increased regulatory attempts by the government, the Chinese property market shows no signs of slowing down, particularly as domestic investors look to get into the game. By Aaron Lovell

Looking out towards Pudong from a hotel room in Shanghai, the city looks more and more like a completed picture. Sure, there are still cranes everywhere, but the city's now-famous skyline, still dominated by the landmark Oriental Pearl TV Tower, has come into its own as one of the most recognizable in the world.

The building boom seen in Shanghai beginning in the mid-1990s is now legendary. Depending on whom you ask, between a quarter and a half of the world's cranes were here in those heady days, while vast swaths of the old city were overshadowed and, in some cases, eventually bulldozed to make room. Companies that vacated China 50 years ago in the wake of Mao's victory began moving back as the market opened up—it was as if the decadent Shanghai of the 1930s had returned, albeit with less racism and more central planning. Today, Shanghai has come a long way from the city of “48-story skyscrapers built upon 24 layers of hell,” as described by playwright Xia Yan.

Private equity real estate firms from the US and Europe have long since grasped the opportunities in China, investing in office buildings, local developers and large-scale expatriate residential projects. But they did not lead the charge into the country; rather it was the listed firms of Hong Kong, including groups like Hutchinson Whampoa, as well as Singaporean firms like CapitaLand, who viewed China as their backyard, not some distant, “emerging” market.

Despite the increasing maturity of that market, many of those first-movers remain interested in mainland China today. In December, CapitaLand listed a vehicle comprised of seven Chinese malls on the Singapore stock market. And according to a survey released in January by accounting firm Deloitte Touche Tohmatsu, listed developers in Hong Kong were not deterred from the macro-economic controls that were recently put in place by the Chinese government.

“It wasn't surprising at all,” Andrew Chan, director of real estate advisory at DeLoitte, told PERE about the results of the survey. “We were expecting most companies to come back and say they're bullish.”

The first-movers from Singapore and Hong Kong have been joined in recent years by Western private equity real estate firms. Now, the third wave is beginning to ramp up.

Around one-third of the survey respondents said they expected to increase their investments in mainland China by at least RMB 100 million ($13 million; €10 million). The groups are largely interested in the Pearl River Delta, near Hong Kong and Macau, which 44 percent of respondents see as the country's best-performing region. Even the Land Appreciation Tax, a recently introduced property tariff, will not dampen the investment plans of a majority of the firms, according to the survey. One property investor told PERE that, while stockholders might have been momentarily skittish about the new laws, they quickly saw that most investors were already wellprepared to deal with them.

In fact, as the country's major coastal cities are increasingly being viewed by many players here in Shanghai as “developed” markets— the “developing” tag is now moving to the second- and thirdtier cities—industry practitioners are predicting an up-tick in core investment in 2007.

As markets mature, they naturally become more crowded and in China there may be additional competition on the horizon. Plans are underfoot in the Northern city of Tianjin to establish China's first domestic real estate investment trust. Tianjin mayor Dai Xianglong is reportedly petitioning the central government to start a pilot property vehicle, which could bring investment to the nearby Binhai New Area, an economic zone targeting the technology sector.

The proposal for the pilot program is still in the early stages and it could be slowed by the government's plans to dampen runaway real estate prices, but the writing is on the wall. The first-movers from Singapore and Hong Kong have been joined in recent years by Western private equity real estate firms. Now, the third wave is beginning to ramp up: established real estate investors in China may soon have some homegrown competition.

Apollo, SUN raise $630m India fund
New York-based private equity real estate firm Apollo Real Estate Advisors and Indian investment firm SUN Group have closed a fund on $630 million (€485 million) to invest in Indian property. The fund was launched last April and held a first close in August, according to the two firms. It has already invested in one development project, a 5-million square foot, mixed-use IT park located on 58 acres of land outside of Chennai. SUN is an investment firm owned by the Khemka family and is largely focused on the former Soviet republics, in addition to India.

Standard chartered invests in Chinese developer
The private equity arm of UK bank Standard Chartered is investing $35 million (€27 million) in Chinese developer Sino Ocean Real Estate Development. Chinese shipping and real estate company Cosco International invested $50 million in Sino Ocean last August, upping its investment in the company from 20 percent to 44 percent. Beijing-based Sino Ocean focuses on the residential and office sectors and reportedly plans to expand to Tianjian, Dalian and Shenyang. Standard Chartered has invested around $135 million in China-based developers since the beginning of last year.

New $250m fund to target Malaysian property
Singapore-based developer CapitaLand has formed a partnership with Malaysian financial services company Maybank Group to raise a new private equity real estate fund targeting Malaysia. The Malaysia Commercial Development Fund is targeting $250 million (€193 million) for investment in development projects across sectors, primarily in the Klang Valley region, which includes Kuala Lumpur. One Mont' Kiara, an office and retail complex, will be seeded to the fund, as will two other projects that have yet to be identified.

RREEF, H&Q team up for hotel JV in China
RREEF, the real estate and infrastructure arm of Deutsche Bank, and private equity firm H&Q Asia Pacific have formed a joint venture with Hilton Hotels to bring 20 limited-service hotels to China. Details of the partnership were not disclosed, but last month Chinese news sources reported that H&Q was investing $500 million (€379 million) in Hilton's burgeoning Chinese hotel business. According to a statement, the properties will most likely be in Shanghai, Beijing and Tianjian, as well as cities in the Yangtze River Delta and Bohai Bay area. The nofrills hotels will target business and leisure travelers.

ING raises $350m China fund
ING Real Estate, the property arm of Dutch insurance giant ING, has raised $350 million (€266 million) for its first private equity real estate fund targeting opportunistic property investments in China. ING Real Estate China Opportunity Fund I will focus on mid-range residential developments in primary and secondary cities in China.