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Foreign investors drawn to real estate

Deals

Falling prices, dwindling transactions and property developers’ discount offers may be frightening away individual buyers but seem to be attracting more international investors in the real estate sector.

International real estate service provider Jones Lang LaSalle said in a recent report that some international groups have raised substantial capital for China property funds and are now deploying the money, while others are moving capital from less vibrant markets in North America and Europe. The squeeze on bank loans and falling property prices, in fact, provide foreign investors with a good opportunity to enter the market.

Blackstone, one of the largest US private equities, in June acquired a commercial project in Shanghai for 1.1 billion yuan, the first time the company invested in China’s property market. Other international funds, said industry insiders, are also looking for mature properties in key cities. “We have received lots of inquiries from investors in the United States and Europe interested in investing on the mainland following a downward adjustment in property prices,” said Malcolm Tam Yuk-cheung, a financial advisory leader at Deloitte China Real Estate Industry. “They are looking both at opportunities to acquire a stake in a property company and to directly invest in projects,” he said, adding these investors typically target an average 15% internal return rate before leverage.

Due to the credit crunch, industry experts say, mergers and acquisitions in China’s real estate market are expected to reach a five-year high this year. Tam Yuk-cheung expects mergers and acquisitions deal values to grow 5 to 10% this year. Dealogic, investment bank data provider, said the value of merger and acquisition deals involving mainland property last year was $21.01 billion, the highest since 2003. By June this year, 171 deals worth $15.29 billion had been announced, up 142% from the $6.31 billion spent on 123 deals over the same period last year. “We will definitely strengthen our presence in Beijing by acquiring more projects from other players this year,” said the Zhang Xin, CEO of Hong Kong-listed SOHO China.

At the end of May, the cash-rich SOHO acquired local firm Kaiheng, which owns a commercial and residential project in Beijing, for 5.5 billion yuan ($803.6 million). SOHO China’s decision to buy Beijing Kaiheng also reflects a more general trend: China’s larger, wealthier developers are actively acquiring and merging with the smaller, cash-starved ones to gain access to new markets and greater land holdings. This is largely a result of government policies aimed at limiting speculation in the residential property market, tighter monetary policy and the plummeting stock market this year, experts said. “It is more difficult for developers to obtain bank loans, and new regulations have impeded some previous financing strategies such as utilizing the pre-sale of units to finance land payment and the latter stages of actual construction,” said Ben Christensen, head of research for Jones Lang LaSalle Beijing.

He said this trend is likely to continue and is an indication that the Chinese property market is becoming more sophisticated and competitive. Initial public offerings by fast-growing Chinese property firms have been hugely popular in the last couple of years, but have suffered recently as stock markets plunged and the global credit crunch put property securities out of favor. The turning point came in January, when Chinese developer Evergrande failed to sell its shares. Several developers have since postponed planned listings.

Local developer’s financing challenges are creating opportunities for international investors. Jason Leow, deputy CEO of CapitaLand (China) Investment Co Ltd, said the number of local developers contacting CapitaLand for “cooperation” has increased rapidly this year. “There are some small developers which would like to sell their projects and some listed real estate firms that acquired a lot of land parcel last year but find it hard to develop them now due to the credit crunch.”

Though international investors are eager to gain greater exposure to the Chinese property market, they continue to be cautious when conducting due diligence on potential partnership opportunities. Leow said CapitaLand will be “very careful” in conducting mergers and acquisitions. “In a market that’s now seeing a big shift from investment-orientated buying to self-use buying, we will be more careful about the location and quality of our products.”

Domestic developers are increasingly willing to lower land and asset prices as well as their own valuations to entice investment from international groups. But according to Chu IP Pui, director of Kerry Development (China) Ltd, the current price for mergers and acquisitions is not “attractive enough” compared with the company’s land reserve bought five years ago.

Hong Kong’s Kerry Properties and Beijing Huayuan Property recently launched a new luxury residence in Beijing, with the total investment hovering around 700 million yuan ($103 million). It is Kerry’s first high-end residential project in Beijing. (China Daily News)

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