ASIA NEWS: Shopping the right funds

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I’ve seen shopping malls empty for more than 10 years and when malls are dead, they are dead

Rong Ren, chief executive officer, Harvest Capital Partners
The notion of a fund manager making sure it doesn’t exceed its capital raising target would have been strange prior to the global economic downturn. But as investors become more calculated about the managers they invest with, it is little surprise that the products they are being offered are similarly calculated.

Hong Kong-based Harvest Capital Partners adopted this theme last month as it launched a pair of retail funds focused on tier II and III cities across mainland China, the CR China Retail Real Estate Income Fund I and the CR China Retail Real Estate Development Fund I. The former fund is targeting $300 million of equity while the latter is eyeing $500 million. Both fundraisings are expected to complete by June.

According to Rong Ren, chief executive officer of the 40-strong firm majority owned by state-owned conglomerate China Resources Group, prospective investors will be best served if the fund manager does not overreach itself. The firm will ensure this by selecting a limited number of target investments and by not raising more capital than it needs to acquire these assets. In fact, it already knows many of the assets that it wants to buy.

“We think shopping malls are the most difficult assets to manage,” he said. “If you fail you have very limited chance to recover. Unlike with a sector like residential, you can lower your prices by 10 percent and see additional demand for your asset. Lower them by 20 percent and you can see [occupation of the] the units disappear overnight. I’ve seen shopping malls empty for more than 10 years and when malls are dead, they are dead.”

Ren said the firm had already soft-circled $200 million in capital commitments from its existing investors, approximately the same amount it returned to investors after shelving the follow-up to its $350 million China Real Estate Opportunistic Fund last year. He reiterated: “We don’t want to go beyond what we can manage.”

Ren is convinced the funds will be oversubscribed because of what he describes as a “unique” offering of a pre-identified deal flow from one principal source, namely another China Resources company, Shenzhen-based developer, SZITIC Commercial Property. SZITIC developed 28 malls in China between 2004 and October 2009, eight of which have been identified for acquisition. Each of the assets is currently wholly held by SZITIC, which has in the past developed in joint venture partnership with firms including CapitaLand, Morgan Stanley and Simon Property Group.

The purchase of the malls, each of which will be 90 percent leased (approximately 40 percent by a Walmart brand), is dependent on investor approval, but Ren said: “Once the fund has raised sufficient capital, those assets will become available to the income fund.”