In early April, PERE broke the news that Gaw Capital Partners, the Hong Kong-based private equity real estate firm, had corralled around $700 million in the first close of its latest flagship opportunistic fund. The firm also had a ready deal pipeline for approximately one-third of the capital raised via Gaw Capital Real Estate Fund V – Gaw's fifth opportunistic vehicle launched late December 2015 with a $1.3 billion target.
More interesting, however, is the firm's changing stance on China. Gaw Capital has decided to invest at least 70 percent of Fund V's capital in the country, breaking away from its initial decision at the time of the fund launch to limit its exposure to China to only 50 percent. PERE understands that the higher allocation has been made to take advantage of the cyclically low pricing in the market currently.
A Hong Kong-based investment manager told PERE he isn't surprised by the seemingly contrarian stance taken by managers such as Gaw Capital because “opportunistic managers are generally drawn to where bad news is coming out.”
Indeed, China's economic slowdown, which has been accompanied by stock market and currency swings has, in the past year, spelled bad news for the property sector. According to CBRE's 'Great Wave of Fund Expiration' report, out of the 430 assets that still need to be harvested from Asian funds slated to terminate by the end of this year, 33 percent are in China. Most of these comprise retail and hospitality properties in lower-tier Chinese cities where there has been weak investor interest.
According to industry observers, however, it is not just because of the potential to get discounted assets in a stressed market that some investors are willing to commit capital to China again after months of waiting on the sidelines. While there is universal admission that the country's real estate market has reached a trough, certain green shoots are beginning to emerge.
Elvin Lim, managing director at Hong Kong and Shanghai-based private equity real estate investment firm StarCrest Capital Partners, said there now appears to be a lot more integrity in the economic and property data being released, and that is making some investors more comfortable about investing in China.
According to the latest March data released by China's National Bureau of Statistics, property prices rose in 40 out of the 70 cities surveyed. Shenzhen, for instance, reported a 61.6 percent year-on-year rise in March. According to reports in the Chinese media, the real estate industry grew 9.1 percent in the first quarter of this year while construction activities grew by 7.8 percent from the same period last year. Overall, the gross domestic product rose 6.7 percent in the first three months of this year. Monetary easing measures, including availability of easy credit, have contributed to this rebound.
However, that does not mean the outlook is all rosy. Several economists and analysts have called China the tale of two cities because of the conflicting narrative in China's economic picture. In an interview with Bloomberg, Henk-Jan Rikkerink, global head of research at Fidelity, said, “there is a story of two halves, old and new, and also a story of north and south,” in China. In a March press conference, Chen Zhenggao, head of the Ministry of Housing and Urban-Rural Development in China, reportedly agreed that the gap between the housing markets in the top-tier and lower-tier regions is only widening, creating challenges for government regulations.
International investors therefore remain divided on China, with some regarding Gaw Capital and other managers deploying capital in the country as outliers.
StarCrest's Lim adds: “You're still seeing two extreme views on China – some are cautious and some are not as pessimistic. It all depends on what is their current allocation and their past investment performance in China.”