Phoenix Property Investors, the pan-Asia focused private equity real estate firm, has excluded China from the investment strategy of its flagship opportunity fund series for the first time, PERE can reveal.

The Hong Kong-based manager founded by Samuel Chu and Benjamin Lee in 2002 has started marketing to institutional investors the seventh iteration of its Phoenix Asia Real Estate Investments series and has had an initial closing on about $700 million, including capital for sidecars.

A further $200 million of commitments are also understood to have received principal approval and are close to being finalized.

The firm is thought to be targeting a fundraising for the vehicle of a similar amount to that of its sixth fund, which was closed on $1.16 billion in 2019. According to sources familiar with the matter, PAREI VI ultimately experienced $1.7 billion of commitments including sidecar capital. Phoenix’s seventh fund is anticipated to reach a similar scale.

While the fundraising target is similar, Phoenix’s strategy is notably different this time around with the omission of mainland China, a market in which the firm has previously made investments. It is understood the firm is responding to international institutional investor preferences to avoid political risk associated with exposure to assets in the country.

While the move is notable, it should not substantially impact the firm’s operations and asset base, which is currently valued at $13.45 billion, as per PERE data. Indeed, according to a PERE source, Phoenix’s exposure to mainland China has not exceeded more than 15 percent of total assets since 2010 and the firm has not invested in the country since the early part of the investment period of PAREI VI.

Furthermore, initial discussions with investors have agreed better risk-adjusted returns could be available in Asia’s more developed markets, where the firm has been investing across risk-return profiles.

A recent example of the firm’s adjusted approach came in Australia last November where it co-invested with local managers Burstone Group and Irongate Australia to buy an industrial estate in the country. The joint venture was announced in parallel with the purchase of a A$57.25 million ($38.2 million; €35.4 million) property in New South Wales.

While that was for its core-plus strategy, Phoenix is expected to deploy more opportunistic capital into the same markets, also including Japan and Korea.

It is believed while mainland China has been consciously omitted from the strategy, the firm’s home market of Hong Kong would still feature. The city, where the firm has made many investments historically, remains designated as one of Phoenix’s target markets, despite its growing ties with mainland China.

In terms of impact on performance, it is understood Phoenix is keeping faith with the series’ traditional return target for its seventh opportunity fund. According to a prior PERE report on the closing of Fund V, the firm was aiming to achieve an IRR of 20 percent and an equity multiple of 2x.

Phoenix is among a growing cohort of institutional organizations adapting their approach to China in investment theses on political risk grounds. According to PERE coverage, Ivanhoé Cambridge, the real estate business of Canadian institution Caisse de dépôt et placement du Québec, was closing its Shanghai office at the turn of the year, opting instead to manage its assets in the country from offices in Singapore, Sydney and Mumbai. The firm also disbanded its office in Hong Kong in 2021.

Last January, PERE revealed Gaw Capital Partners carved out a sidecar vehicle to its own seventh pan-Asia flagship opportunity fund for North American investors wanting no exposure to Chinese real estate. The sleeve within the firm’s Gateway Real Estate Fund VII accommodated up to $600 million of equity of the firm’s targeted $2.5 billion capital raise.

Read PERE’s deep dive feature on institutional capital attitudes to Chinese real estate, published last year, here.

Phoenix Property Investors declined to comment.