Real estate investment managers have been buying property in China via dollar-denominated funds for years. Oftentimes, their biggest obstacle to capturing the best deals has been their Renminbi-denominated competition.
However, just as certain dollar-denominated managers like New York-based developer-cum-fund manager Tishman Speyer have leveled the playing field by raising RMB money of their own, a growing number of Chinese fund managers now believe a brighter future lies in doing the reverse. Indeed, such firms are adding or switching to dollar-denominated funds for their latest property investments.
Recently, three RMB-denominated fund managers have embarked upon US dollar fundraisings. Last month, Shanghai-based KaiLongRei Investment announced the launch of a $300 million fund, for which a first close is expected before the end of the year. In addition, it is understood that China-focused investment firm CDH Investments hopes to hold a final close by December on its $150 million fund, which was launched last year. Lastly, Star Capital, the fund manager backed by some of China’s most prominent businessmen, has begun soft marketing for its first dollar-denominated fund this past month.
Derek Roth, real estate partner at law firm Paul Hastings, told PERE that the trend is growing, adding that he knows at least two other RMB fund managers exploring the launch of US dollar-denominated funds of their own. “Now that they see others raising offshore funds, it’s possible they are starting to feel more comfortable with the idea,” he said.
A wider net
So, why is there growing appetite among Chinese managers for dollar-denominated vehicles? An executive at one Chinese insurance company, who preferred to remain anonymous, said RMB for real estate investment actually is harder to raise these days. As the Chinese government piles on regulation to cool the country’s property market, domestic investors increasingly have become wary about committing to the asset class.
That caution is reflected in domestic fundraising figures. According to PERE’s Research & Analytics division, RMB capital raised for real estate has steadily declined since 2010: $1.9 billion in 2010 to $1.2 billion in 2011 to $1.1 billion last year and just $955 million year to date. RMB capital also comes with certain limitations. Invariably, RMB real estate funds are raised using a bank trust structure from smaller, often individual, investors, each committing between RMB3 million (€364,000; $492,000) and RMB10 million, according to Ivan Ho, KaiLong’s executive director for fund management. Consequently, an RMB fund of any meaningful size has to attract hundreds of investors.
Another domestic fund manager, who also preferred to be unnamed, illustrated that a $500 million fund can have as many as 350 investors. “You need an army just to manage them,” he said. As such, it is challenging for RMB funds to achieve scale. Indeed, the largest RMB-denominated real estate fund to date has collected no more than $820 million – smaller than a number of recent dollar funds, all of which exceeded $1 billion.
Dollar funds, meanwhile, typically are raised from institutional investors such as pension plans and insurance companies, whose capital allows for single funds with far fewer investors. Unsurprisingly, Roth said the size of checks that foreign investors are able to write also permits RMB managers to engage deals on a bigger scale. “It could make the difference between a $30 million single-asset fund and a $300 million fund,” he added.
RMB investors typically prefer to keep real estate funds short-lived – usually two to three years. Accordingly, KaiLong adopted core and core-plus strategies as these types of properties offer the best liquidity. In addition, core strategies have yet to prove popular among international investors in China, permitting managers like KaiLong to venture from income-yielding assets into value-added and opportunistic investments, Ho explained, including some development.
Roth said RMB fund managers will lose some of the benefits of managing domestic capital, such as not requiring any currency conversion. In addition, Chinese managers might find the more onerous regulatory environment that comes with managing US dollar funds challenging. Indeed, stricter reporting requirements and risk management expectations will need to be embraced.
Still, after years of honing their skills on the RMB side, Roth speculated that Chinese managers are prepared to take on the US dollar challenge, and their domestic market knowledge could well provide a competitive edge over their foreign competition when they do. “These fund managers are well entrenched in [China],” he added, and that may start putting pressure on foreign firms to match their expertise.
Of course, RMB managers are not starting by targeting the world’s largest institutions for their dollars. KaiLong, for example, is targeting smaller family offices and corporations rather than giant pensions at the moment. However, success with smaller investors will see domestic groups graduate quickly. When that happens, international managers today might find themselves challenged for their dollars as well as their deals.