PERE research shows China-focused private real estate funds raised $26.34 billion of equity since the beginning of 2013. Further, China is a major target for Asia-Pacific private real estate funds. A number of large funds have reached a final close this year and most are aiming to invest significantly in China.
Blackstone Group’s $7.1 billion Blackstone Real Estate Partners Asia II, AEW’s $1.12 billion AEW Value Investors Asia III and Baring Private Equity Asia’s $1 billion BPEA Real Estate Fund II are all expected to invest significantly in China.
As in many developing markets, the number of foreign private equity players involved is relatively small but new entrants continue. For example, BPEA made its first China investment relatively recently, but the nation is expected to be a major focus for Fund II.
A ripe rental market
A major focus for private equity investors has been rental housing, a sector that has seen significant fundraising from both domestic and international firms. They have been lured by the as-yet underdeveloped market, which has been granted a coveted seal of approval from the highest levels of Chinese government, including President Xi Jinping.
Rising prices have made buying a home difficult for Chinese citizens, particularly young professionals, and Beijing wants to see the development of a private rental sector with long-term ownership and professional management of assets. Of particular interest to private equity investors has been the co-living sector, which provides small apartments with shared facilities such as kitchens, gyms and rooftops.
Earlier this year, Gaw Capital Partners and Chinese co-living group Harbour Apartments set up a $1 billion vehicle which will acquire existing properties to convert into co-living apartment blocks. In May, GIC Private and Warburg Pincus-backed platform Nova joined forces to launch a 4.34 billion yuan ($630 million; €540 million) rental housing business. Warburg Pincus is already a backer of co-living operator Mofang. Meanwhile multifamily specialist Greystar is active in China via its joint venture with Macquarie Capital.
China’s rental housing sector offers significant scale and less competition from major domestic developers, most of which focus on building to sell and which do not have long-term ownership and management capabilities.
State control remains a concern
Government intervention remains arguably the single most significant factor for investors in China.
For example, while the rental residential sector is being encouraged, attempts to slow price growth in the build-to-sell sector continue. A range of cooling measures, such as increased lending costs and restrictions on second home ownership, are in place and Chinese media is predicting more to follow.
funds in market
funds in market
Nonetheless, measures imposed to control real estate-backed borrowing could be a boon for overseas private equity investors, which can step in to buy assets if domestic developers cannot raise finance. Private equity players can also profit from lending to Chinese real estate companies. InfraRed Capital Partners announced in July that it had made an $88 million mezzanine loan on a development in Yangzhou.
However, one particular strand of government intervention is likely to add to competition for private equity investors. After a series of high-profile overseas investment sprees from Chinese investors, the government has cracked down on foreign real estate investments. A more rigorous approval process was introduced in 2017 and this is expected to lead to more capital invested at home.
In the longer term, China is expected to be a major source of capital for private equity real estate groups, as its pensions and insurance businesses continue their rapid growth. In May, Savills Investment Management announced plans to raise a renminbi fund and said there was “an enormous opportunity” to raise renminbi capital to invest locally. US developer Tishman Speyer raised its first renminbi fund in 2012 while domestic managers continue to raise billions of yuan.
Logistics: A favored sector, but vulnerable to trade wars
The logistics sector has been favored by both local and domestic private equity investors in recent years and remains a hot tip for the future. A Colliers International report released in June identified 14 areas of opportunity, of which five were in the logistics sector. The broker picked Shenyang, Chengdu, Beijing and a number of provincial cities as potential investment destinations.
The logistics sector may be vulnerable to external threats, however. China headlines have been dominated in recent months by the growing trade war with the USA. Both nations have imposed swinging tariffs on a number of products. This has not yet affected real estate prices in China, but stock markets have fallen around 20 percent since the US’s first move and the RMB has weakened considerably against the dollar, which will advantage foreign capital in the short term.
Henry Chin, head of Asia-Pacific research at CBRE, says the effect of the trade war has been “fairly benign” so far, but argues that if it develops further, the industrial and logistics sector is the most vulnerable.