At the end of May, an unidentified RMB-denominated fund stepped in to buy Shennan Industrial Office and R&D Park in Shanghai from a joint venture between DLJ Real Estate Capital Partners and Foresight Investment, reportedly for between RMB 150 million (€18 million; $24 million) and RMB 200 million. It might have been a small deal but, according to real estate services firm DTZ, it is big on significance as it was only the second time a dollar-denominated fund had sold to an RMB-denominated real estate fund.
The exit mirrors the burgeoning RMB fund scene. After all, RMB-denominated real estate funds raised the equivalent of nearly $5 billion in 2012, while Chinese insurance companies currently have an estimated $72 billion available for direct real estate. Together, this volume has heightened expectations that foreign funds could exit more investments to local capital, particularly because there is a shortage of high-quality properties in China and an influx of institutional capital seeking cash-flowing assets.
“When we were underwriting this deal, we never thought the exit could be to RMB capital,” admitted John Lien, managing director and chief executive of DLJ’s greater China operations, declining to identify the Chinese vehicle in question. “In fact, when the DLJ-Foresight joint venture invested in the asset five years ago, there was virtually no RMB capital around for such assets.”
Since then, big changes have taken place. In the past, investors in RMB-denominated private equity real estate funds predominantly were high-net-worth individuals rather than Chinese institutions. In addition, such funds often were single-asset vehicles with short-term investment horizons,
usually three years or less. As such, they carried the expectation of a high return. According to Jim Yip, managing director of DTZ China Investment, as Chinese institutions such as insurance companies and state-owned enterprises became bigger backers of RMB-denominated real estate funds, tolerance levels rose for more illiquid investments. Indeed, China’s large institutions have begun to follow their global peers in preferring bond-type yields with low risk, such as properties with steady income, rather than development projects. In that sense, China’s institutions are more likely to buy property from opportunistic vehicles that have manufactured core assets.
Still, Yip predicted that RMB capital only gradually would become relevant because a widespread foray into real estate investment was unlikely for at least another two to three years. Nevertheless, such investors should become active in due course as they fall short of hitting real estate allocations and consequently feel pressure to put money to work.
DLJ’s Lien believes the growing RMB fund industry does provide greater liquidity for China’s growing real estate market, as well as another exit avenue for foreign investment managers. “It’s increasing our options,” he said. “Where there used to be two buyers, there are now five buyers.”
On the other hand, one Hong Kong manager warned that RMB capital sources engaging with private real estate will not be automatic, not least because converting Chinese properties into institutional-quality buildings by international standards is no easy task. “Chinese institutions are not easy buyers,” he added.