Lend Lease’s Asia chief executive officer for investment management, Ooi Eng Peng, believes there are more than enough developers in China trying to capitalise on the nation’s limited discretionary spend by plotting luxury malls.
Instead, the Sydney-based developer-cum-fund manager will aim to cash in on China’s “necessity spend” sector as it draws up plans for its fourth Asian real estate fund.
Speaking to PERE in Singapore recently, he said: “We think the first wave of retail development in China has been too focused on high-end. Touching the top 2 to 3 percent of China’s wealth is not sustainable.”
Rather, he said, there should be “a focus on mid-tier, less discretionary spending – that is, for long-term investors which look for more defensive investments.” Despite the defensive nature of this type of retail real estate, Eng Peng said that a return of more than 15 percent was still attainable.
Sales figures across China have defied the wider international malaise to date in 2009. According to China’s National Bureau of Statistics, domestic sales rose by 15 percent to 5.87 trillion yuan (€575.3 billion; $859.6 billion) for the first half of the year compared with 12 months earlier. As a result, The China Daily newspaper recently said both urban and rural spending had increased in line with per capita earnings and government stimulus measures had helped underpin consumer confidence.
Eng Peng added that rent levels across China’s suburban mall sector were more resilient to international market conditions, making it ideal for investors with a long-term view: “Rents have dropped less because they fundamentally service local traffic rather than the tourist-led discretionary spend.” Typical rents across mainland China’s suburban mall sector are between $2 and $8 a square foot per month.
Having spent much of the last year in consultation with its more than 100-strong LP base, Lend Lease is planning to introduce the vehicle in the first quarter of 2010, targeting approximately $500 million of capital commitments. The vehicle would seek to partner developers primarily in top tier cities, such as Beijing and Shanghai, the relative transparency and positive demographics of which, Eng Peng said, would provide investors with more comfort.
He said the structure of the fund would be influenced by the investors, principally European and Australian superannuation funds and pension funds, but that it would likely be similar to its Singapore-focused Asian Retail Investment Fund (ARIF). That vehicle invested in retail developments as a blind pool investment fund with a view to converting into a holding vehicle when the developments were completed. For investors such as fund of funds, Lend Lease could provide an early exit option.