ASIAVIEW: Houses as well as shops


Many private equity real estate firms currently deploying strategies in China right now are focused on its retail space, which has faced fewer political headwinds than its residential cousin.

That makes sense given that the government has tried to shift the country from an export orientation to domestic consumption. Still, it should come as little surprise that certain PERE sources are predicting 2012 to be a year when China’s housing market once again will offer up interesting opportunities.

The reason for the renewed interest has nothing to do with the fact that Beijing has just permitted Chinese banks to hold less capital in reserve for the first time in three years. It doesn’t mean they suddenly will make more money available to real estate borrowers and doesn’t alter the country’s tight monetary policy towards residential property lending, which exists to prevent what most international news outlets keep referencing – a bubble.

On the contrary, in the short term at least, it is expected there will be a capital shortfall in the residential sector, and that capital will need to come from somewhere other than domestic banks and the more expensive trust companies.

Indeed, domestic residential developers are finding themselves in more challenging times. As they struggle to meet their existing financing obligations, analysts are predicting average declines in value of 20 percent for the country’s major cities over the next 12 to 18 months, and not just in Beijing, Shanghai and Hangzhou.

There are indeed clear signs that the era of outsized gains for developers in China’s housing market is effectively over as investment and project starts slow. News service MarketWatch reported that, while housing investment in December rose 12.3 percent from one year earlier, it fell considerably from November’s year-on-year gain of 20.1 percent. Housing developments to break ground in the month also were down by 24.8 percent, providing further indication of deteriorating conditions.

The argument is that this combination of events could well precipitate an era of losses and, given the considerable loan books of China’s banks and trust companies, considerable pressure to deleverage. That, in turn, means more developers will seek to discount existing stock and reduce their investment appetite for new land acquisitions while seeking new capital partners.

China’s market moves quickly and, when times improve, those developers squeezed to within an inch of their lives won’t be saying ‘Thanks for saving me’ but ‘You took advantage of me when I was down’ – before they tie the knot with someone else.

All this paves the way for those well-positioned private equity firms to take advantage and buy cheaper in what is ostensibly still very much a market characterised by growth. Whether providing fresh capital to keep developments going or acquiring existing projects at a discount, private equity real estate has been afforded an opportunity to step up.

As one source put it: “With China, there are windows when you want to invest. One is when the equity markets are shut and the government has put the brakes on capital supplies, which is exactly where we are right now.”

Not that a window for housing investments means those bent on walking China’s retail beat should be concerned. Instances of double-digit percentage annual wage increases are still normal, and China’s people are still spending this accrued wealth exponentially.  That is showing in consumer trend statistics.

Citing China’s National Bureau of Statistics, MarketWatch also reported that retail sales for December grew 18.1 percent from one year earlier, accelerating November’s 17.3 percent rise. Even adjusting for inflation, spending rose 13.8 percent year-on-year, after rising 12.8 percent year-on-year in November. As one of the news provider’s sources said: “The data showed that mainland consumers hadn’t lost their stride.”

Of course, as intimated above, the skill for private equity real estate firms lies not in navigating their way through the numerous reports and anecdotal evidence out there, rather it lies in positioning themselves well when entering into investments, whether they are retail, residential or any property type for that matter.

Indeed, the need for top domestic partners remains essential, so it is important to avoid simply “cashing out” a developer, as one source termed it. While it also is important to ensure that private capital takes up the preferred position in any deal, one word of caution: China’s market moves quickly and, when times improve, those developers squeezed to within an inch of their lives won’t be saying ‘Thanks for saving me’ but ‘You took advantage of me when I was down’ – before they tie the knot with someone else.

As with anything, a good balance between short-term opportunism and long-term relationship creation is imperative. Assuming that balance is struck, there seems a real opportunity to make attractive inroads into properties that house China’s people as well as its goods.