Swimming with China’s regulatory tide is getting harder

The collapse of Blackstone’s acquisition of Soho China is a hammer blow to already wobbling international investment confidence in the country, and a reminder that state interventions supersede all.

If international investors were already wobbling over executing real estate investments in China, the sight of Blackstone being thwarted by regulators in its attempt to execute its biggest property outlay in the country will have knocked at least a few over. After all, the New York-based heavyweight is a firm whose very reputation has, at least in part, been forged by its certainty of execution.

Blackstone was first linked to a $4 billion takeover of real estate developer Soho China in March 2020, but the deal stalled two months later because of the pandemic. It was revived in June 2021 at a reduced price of $3 billion.

However, in a joint statement last Friday, Blackstone and Soho China said the offer had been withdrawn due to “none of the pre-conditions to the making of the offer [having] been satisfied”. These conditions are understood to have included a review by China’s antitrust regulator, the State Administration for Market Regulation.

Regulatory uncertainty has come to dominate and, to a degree, undermine the inbound investing element of the Chinese economy during 2021. Last month, the government-endorsed Asset Management Association of China announced that it would halt private equity funds from raising money to invest in residential property developments in the country. The China Banking and Insurance Regulatory Commission also probed Ping An Insurance’s real estate investments as part of a broader crackdown on the country’s highly leveraged property sector. Those events are happening as the systemically important travails of China Evergrande, almost certainly the most indebted property company in history, play out – with the world watching for ripples.

All this market uncertainty is, predictably, having an impact on China’s fundraising and transaction activity. Internationally funded, China-focused real estate funds attracted just $1.6 billion in the first half of 2021, down from about $3 billion for the same period last year, according to PERE data. Meanwhile, real estate investment in the country declined by 28 percent to 194.4 billion yuan ($30.1 billion; €25.3 billion) last year, according to research by broker CBRE. If even Blackstone cannot push a transaction through, then satisfying the China allocation of an Asia real estate allocation looks extremely challenging in the short to medium term.

Of course, it will be hard for foreign investors to avoid one of the world’s biggest economies in the long term. And some degree of domestic regulatory risk will always be a factor in any jurisdiction.

Yet swimming with the regulatory tide is an ever-present factor in China and a factor that is perhaps more relevant there than in many other countries. In prior PERE coverage, folks including Gaw Capital’s chairman, Goodwin Gaw, and Dutch pension manager APG Asset Management’s Asia head, Graeme Torre, have insisted on always investing in line with the moment’s governmental direction.

Last year, government policy favored investment in sectors such as logistics and data centers. For certain market participants, the One Belt, One Road infrastructure-led initiative remains the safest route for international capital to achieve success. There, Blackstone, for example, completed its landmark acquisition of a logistics park in Guangzhou for $1.1 billion, and Singapore-headquartered logistics specialist GLP raised more than $3 billion across two China funds – notable events for the past year. But, outside of investments like that, on current evidence, to swim with China’s regulatory tide right now might well mean not investing in the country at all.