Real Estate investing in China - dropping prices attract an international crowd

Large discounts from property developers, dropping prices and a dwindling amount of transactions might be frightening away the individual investor, but seem to be attracting more groups of international investors in the Chinese property market

Jones Lang LaSalle, an International real estate service provider said recently 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 credit crunch and falling property prices are providing foreign investment groups with a good incentive to enter the market.

Blackstone, one of the largest US private equities, recently purchased  a $160 million  commercial project in Shanghai the first time the company invested in China’s property market. Other international funds also looking for mature real estate in the top 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 percent internal return rate before leverage.

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 5-10%.

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 percent 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, SOHO acquired local firm Kaiheng, which owns a commercial and residential project in Beijing.

China’s bigger developers, with cash to spare are actively acquiring the smaller, cash-poor ones to gain access to new markets and greater land holdings.

Chinese governmental policies which try to limit short term speculation in the residential property market, tighter monetary policy and the plummeting stock market are all contributing to the current situation.

“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.

Initial public offerings by fast-growing Chinese property firms have been extremely popular in the last couple of years, but interest fell sharply this year when Evergrande, a Chinese developer, failed to sell its IPO. Several developers have since postponed planned listings.

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 groups 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.