Private real estate investors from the West may be avoiding China for now, but more capital will return to Asia-Pacific’s largest real estate market over the long term, according to Singaporean manager Mapletree’s chief executive of private capital management.
“At the end of the day, I do believe people will start to be active in China again, when the global risk-return dynamics are more stabilized,” said Michelle Ling, speaking at the opening keynote session at the PERE Network Asia Summit at the Shangri-La Singapore last week. “But currently, it definitely is more of a North American play in terms of higher returning opportunities.”
Despite the geopolitical tensions between the US and China, the main reason why North American investors have avoided the market is because of relative risk-adjusted returns, Ling said. “Domestically, in North America right now they’re able to get higher returns from the credit or secondaries space and value-add opportunities,” she said. “And so… it makes it hard from a relative allocation perspective for them to choose China.”
She anticipated the current credit cycle in North America to last 12-24 months. “It’s a short-term cycle,” Ling said. “So for longer-term investors, for those that still have the ability to allocate, they will pivot back sooner or later to Asia. And if you are allocated to Asia, then China is difficult to ignore from a scale perspective and an impact perspective.”
Joe Gagnon, co-head of real assets at Rava Partners, the real asset platform of Asia-based private equity firm Hillhouse Investment, agreed. “The first thing that people forget is the size and scale of the Chinese economy,” which makes up between 15 and 16 percent of global gross domestic product, he said.
Even when a more conservative growth rate than what has been forecasted – say 3 percent – is applied to China’s approximately $18 trillion economy, it still amounts to $350 billion of growth, or roughly the size of the entire Vietnamese economy, Gagnon pointed out.
In Chinese cities such as Shanghai, Guangzhou, Shenzhen and Beijing, “there’s still lots and lots of opportunities, and it’s underpinned by this massive market, by a very entrepreneurial people,” Gagnon said. “Yes, you have to be realistic about the challenges. But also, I think there is tremendous opportunities still embedded in that market.”
As foreign capital has shifted away from the country, “China is going through kind of a domestication of its own financial sector,” he noted. “The entire market capitalization of the Chinese REITs is under $10 billion. The US, by equivalent, is $1.4 trillion. So if you scale for GDP, that’s a trillion dollar opportunity where assets need to be created or moved into income-producing vehicles serving domestic capital, and that creates a huge underserved need.”
For the foreseeable future, that domestic capital will fill the void from US and European investors sitting on the sidelines, Ling added. “I think it’s more of a China-for-China strategy at least for the short term to medium term,” she said. “There exists a lot of potential. They have to work through the regulatory and execution dynamics in order to effectuate the domestic capital base, RMB funds, C-REIT listings, but they definitely have the capacity to fill the void.”
The main challenge is the infrastructure for some of these domestic capital structures is not yet fully developed. “It will take some seasoning but I’m confident the Chinese regulators and the onshore intermediaries will be able to get there,” she said.
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