ASIA NEWS: Pricing power in China

Fresh from completing the debut purchases of its third property fund, Chinese investment and advisory firm CITIC Capital Holding, forecasted the country will see a bottoming out of real estate prices within nine months.

Speaking to PERE last month, days after announcing a trio of purchases to seed its $400 million CITIC Capital China Real Estate Investment Fund III, Stanley Ching, managing director and head of CITIC Capital's real estate arm, said the fund has a pipeline of nine more deals in tow, three of which should be completed within the next two to five months.

The fund has an investment period of three years but by Ching's reckoning, if the nine deals are completed by the end of 2009, the fund, which closed on its second $200 million of equity in December and is aiming to buy a mix of residential and commercial assets for between $30 million and $50 million each, will begin to see increased values from these assets immediately.

“As developers are willing to reduce price, transaction volumes will gradually pick up and hence the developer will reduce their inventory,” he said. “Then the developers might be able to regain some pricing power. As their balance sheets improve, they will not have to drop their prices anymore.”

Recounting a fall in prices of up to 40 percent from their peak in October 2007, Ching said the rate at which values decline will slow as the country is boosted by aid from sources such as stimulus funding from the government. He said: “The main theme of investment in China has not changed. It is still driven by gross domestic product growth, demographic change and an increasing urbanisation rate.”

According to Economist Intelligence Unit figures from October last year, GDP growth in China was forecasted to drop from its high of 10.8 percent between 2003-2007 to 8 percent this year and 7.5 percent in 2010, owing to a poor outlook for net exports, but Ching sad that growth rate is still an attractive proposition for investors.

He predicted transaction volumes will grow before prices do but he warned investors should expect prices to drop by a further five percent to 10 percent between now and year end. He highlighted Shenzhen and Guangzhou as two cities that will see volumes increase first.

CITIC Capital China Real Estate Investment Fund III announced the purchases of two offices in Changfeng, in Shanghai, and a 400,000-square-metre residential complex in Dalian, Northern China, last month. The properties will seed the six year vehicle, which has investment from both financial institutions and sovereign wealth funds. It will source debt from local Chinese banks, all of which are absolutely open for business, according to Ching, but on a deal by deal basis.