This article is sponsored by Sanne
After a slowdown in 2020 due to the covid-19 pandemic, international and Chinese domestic investors are keen to allocate their capital. China is gradually relaxing its restrictions on foreign investment, and overseas managers want to get involved in the Asia-Pacific region’s largest economy. Meanwhile, Chinese investment managers are starting to offer more than just renminbi funds for domestic investors; they are seeking capital from international institutions, too. Both foreign and domestic managers need assistance, whether it is in dealing with local regulations or the reporting demands of international capital.
Jing Jing Qian, managing director, Asia-Pacific, and Catherine Law, head of business development Asia at global fund administrator Sanne, explain to PERE’s Mark Cooper how outsourcing can help bridge the gap between local and global stakeholders.
How has the China real estate market been developing in recent years and what changes have you observed due to covid-19?
Jing Jing Qian: The real estate market in China has become much more diversified in recent years. Investors have moved from mainly office and retail to logistics and for-rent residential properties. We also have a lot of clients looking into logistics now. We’ve seen a lot of deals delayed due to the pandemic as people have not been able to travel to see assets, however, the market has picked up and been fairly active since the beginning of this year.
Catherine Law: Last year was definitely a very difficult year for managers in terms of deploying capital because deals were on hold and they faced mounting pressure to invest, as uninvested capital hurts their internal rates of return. Now managers are focusing on closing deals, but the focus is mainly on Tier One and larger Tier Two cities, such as Shanghai, Beijing, Tianjin and Chengdu. We’re also seeing a rise in restructuring deals, especially in the retail or hotel sectors. There is a big focus on yield, which is a lot harder to find now than it has been in the past five or six years.
What are the particular challenges for a fund administrator in China? What are managers asking for your help on at the moment?
JJQ: There’s a quite long list, although it depends on whether we’re talking to an international manager who is new to China, an established international player with a local platform or a Chinese investment manager. Navigating local tax and regulation is the primary concern for overseas managers but so too is the business culture in China and the differences in the way we do things here, such as the use of company chops. The way banks approach real estate is also slightly different from more developed markets.
There’s also the question of local understanding of international fund structures. For example, we often introduce international banks because they are more familiar with a fund structure and the know-your-customer (KYC) requirements. For China-based managers, outsourcing is still a new concept, so we need to familiarize them with the process and what it entails.
CL: We see a lot of Chinese managers expanding their investments outside China as well. Over the last couple of years, they have bought properties in Europe and the US, and also across Asia-Pacific. Obviously, they have teams in those countries looking at investments and doing the due diligence, however they also need to understand local taxation and regulation, but they have limited capacity in terms of their operational and finance functions. So, for these domestic managers it’s becoming more burdensome to look at overseas deals and overseeing all of these different structures themselves.
Simple things like opening a bank account, statutory filings and local tax compliance are very important, because they affect when the money comes back to them, and they run the risk of getting penalized if they don’t do a proper job. So, we would lend our knowledge and global footprint in other regions for Chinese managers.
JJQ: What we’re really trying to do is bridge the gap between the local and international. Everyone’s business is becoming more globalized – managers with investments in China are probably going to have different special purpose companies in other jurisdictions. It is key for us to be able to handle that and help them in all other jurisdictions and to be able to offer a one-stop shop. We really want to get international standards and best practice offerings to the Chinese asset manager and to make international managers comfortable with operating in China.
Do international investors in China find the local regulations hard to navigate? Is the environment easing or tightening for international capital?
JJQ: Our clients often prefer that we act as a bridge between them and the regulators where they need help. We’re more than happy to hold their hands and help them to make the right local connections. However, China has further relaxed the restrictions for foreign capital into China. We now have a Qualified Foreign Limited Partnership program developed by various local authorities, which allows capital to flow in and out with pre-approval. I think there will be more changes which will further relax the regulations.
CL: Chinese fund managers are finding that international investors are asking them for more information than they are used to giving to their domestic investors. Chinese managers have to get used to the fact that their reporting must be up to the standard of institutional investors. Reporting here used to be very simple, but these managers are now also struggling to put together all the data by themselves, especially last year, with people out of the office. One of the struggles is that managers need to standardize a lot of things and streamline their processes.
Do you see most demand for fund administration services from international or Chinese managers?
JJQ: There is constant demand from international players as more and more of them operate in Asia-Pacific and the China market is always one of their targets. So, that is quite a stable business for us. The really significant trend, however, is the growth in interest from Chinese asset managers looking to attract international capital to China for more long-term investments. It used to only be RMB funds and high-net-worth individuals, but now we’re seeing more targeting of international capital. Even since the last quarter of 2020, we have seen this sort of demand increase, which shows that China managers are on the right track and looking to do more institutional business.
Are you seeing more demand for ESG reporting and a need for firms such as Sanne to support managers in this regard?
JJQ: Absolutely, this is an area that we’re seeing growth faster than I expected. We see a lot of demand for ESG reporting and we’re also starting to see funds with a specific ESG remit. The pandemic has increased interest from investors and managers in these issues and it’s not just a focus on environmental factors; managers want to report better on all three factors, including the social and governance.
CL: Sanne is a signatory to the UN Principals for Responsible Investment and one of our product heads sits on the academic committee. This means that we’re in a great position to keep abreast of the latest developments and we can communicate them to clients and implement it in our reporting.
What does the future hold for China’s real estate market and the development of outsourcing there?
JJQ: As a third-party service provider, we see more international investors coming to China and wanting to invest in real estate, and we will continue to see more Chinese managers making their business more international and more institutional. If you look back 10 years, we didn’t get any enquiries from the local market because they didn’t understand outsourcing or the value of having an independent service provider to oversee their operations. Today, that has changed and we’re talking the same language now. That means there’s a great growth opportunity here.
Data security and privacy
Chinese managers’ focus on these issues is growing, says Jing Jing Qian
“Historically, there’s probably been less concern, or less awareness, from Chinese managers about data protection and confidentiality. However, they are now seeing the benefit of data security and encryption. While I don’t think there are yet the same standards of data protection in China as, say, Europe, these issues are starting to be taken more seriously than before. It is a learning process, but the response we usually get is: ‘Okay, we understand this is necessary so let’s go ahead.’ Regardless, as a fund administrator, we don’t reduce our compliance just because a client is less concerned about these matters or if it is not legally required. We work to achieve the best operational standards for both onshore and offshore clients. Our Chinese clients are looking to attract international capital and if they want to do this then they need to meet the demands of those clients around data security, and the same applies to ESG reporting. It’s very much driven by the needs of institutional investors.”