News and Update on China

Mainland China magnet draws foreign investors

Billions of dollars continue to pour into the market despite the central government's efforts to control investment in the overheating sector.

Foreign investors say mainland residential properties offer good long-term growth potential, particularly the mass to middle segments, as people's buying power improves.

When the mainland's political leaders told the world that they would continue regulating the country's soaring property market, foreign investors seemed not to be listening.

An almost constant stream of newspaper reports tell of billions of dollars pouring into the mainland property market by global investors that include big players such as Morgan Stanley, Citigroup, ING and Deustche Bank's RREEF. And more newcomers are waiting in the wings for their turn.

Last year, the number of building transactions involving foreign investment jumped 38 per cent from 2005, while the total consideration surged 67 per cent to 29.5billion yuan from 17.7billion yuan, with Shanghai and Beijing the most popular investment locations, according to property consultant DTZ Debenham Tie Leung.

Why are they so keen despite the high regulatory risk?

"Foreign funds are interested in Chinese real estate mainly because of the comparatively high growth rates in the sector," said Edmund Ho, Hong Kong-based director and head of real estate investment banking at Citigroup. "Short-term volatility in the market would not deter investor sentiment because they have typically a five to 10-year investment horizon," said Mr Ho.

The US group recently closed a US$1.29 billion fund investing in property and related assets in the Asia-Pacific region with a focus on Greater China and India.

David Watt, chairman of DTZ Debenham Tie Leung's North Asia region, said some foreign funds did shy away from the mainland due to "country risk", a significant factor of which is the uncertainty caused by Beijing's continual tinkering with the property market.

"However, many more are prepared to accept this risk in the light of the fundamental attraction of China, which is the expectation of continued growth over the next decade at rates far exceeding many of their own markets," said Mr Watt.

The mainland economy is growing nearly as fast as last year's 10.7 per cent, compared with estimates of 3.3 per cent in the United States and 2.2 per cent in Germany.

The rapid growth in the economy and increase in personal wealth have spurred demand from the general public for better homes, propelling prices of housing and triggering concerns about social instability among political leaders.

From 2004, the central government has introduced a series of measures to curb speculation in the housing market and ensure that affordability of housing. They have included higher mortgage down payments and new tax charges such as capital gains tax on real estate. Last year, Beijing tightened rules on property purchases by foreigners.

To further stabilise prices, the government began to enforce a land appreciation tax last month.  It is expected that property tax payable annually on a property's value is on the drawing board.

Late last month, vice-premier Zeng Peiyan pledged to stabilise soaring property prices by putting up more real estate for sale, regulating the market continuously.

Housing prices in 70 large and medium-sized cities rose an average of 5.6 per cent year on year in January, 0.2 per cent faster than in December last year, the National Development and Reform Commission said.

Shenzhen ranked the first in the price increase last month with an annual rise of 10.2 per cent, while prices in Beijing have jumped 9.9 per cent in one year.

But global investors, including institutional funds and Hong Kong developers, said the measures would not be strong enough to hurt their buying interest.

"I think the measures are mostly targeting investors with shorter investment horizons who look to flip deals. We are more long-term-oriented," said Goodwin Gaw, chairman of Hong Kong property fund Gateway. Gateway teamed up recently with Swire Properties to buy a retail-hotel project in Beijing's Sanlitun district - the capital's diplomatic quarter and entertainment area - for 4.8 billion yuan.

"Yes, there will surely be more measures to be imposed by the central government. But most or all those measures are against short-term speculators," said David Ma, director and general manager of Hon Kwok Project Management, a wholly owned subsidiary of Hon Kwok Land & Investment.

The developer in 2005 sold a 40 per cent stake in a residential site in Dali Town, Foshan, to Morgan Stanley, which raised its stake to 50 per cent earlier last year.

Investors are also betting the property market will benefit from the continued appreciation of the yuan, which should bolster the value of yuan-denominated assets.

ING Real Estate said sound fundamentals were the key for the fund to invest in the country in the past 10 years. The Dutch company has raised US$350 million for its China Opportunity Fund, which invests in mainland development projects and owns properties in Tianjin, Shanghai and Changsha.

"China residential property offers good long-term growth potential from a demand perspective, particularly in the mass to middle segment on which ING is focusing," said ING Real Estate managing director Richard van den Berg.  "Rapid urbanisation and income growth, which lead to upgrading demand for better housing environment, will remain the key drivers of long-term development of the mass residential market."

Mr van den Berg welcomed the measures, saying they created new investment opportunities. In fact, in the residential market, price growth as indicated by government statistics had been generally in line with or even less than income growth last year, said Mr van den Berg. This suggested general market affordability was improving and the central government measures were working, he said.

In the wake of continued investor interest, the investment means have been changing, according to analysts.
Instead of buying assets, some foreign funds preferred to buy a stake in development companies after Beijing asked foreign investors to raise the minimum capital to 50 per cent for properties worth more than US$10 million.

ING and other global funds and developers such as CapitaLand, Henderson Land Development and Hutchison Whampoa are eyeing second- and third-tier cities for their higher growth potential.

Investors are expanding their investment targets from residential to office and retail properties as consumers' buying power is bolstered by the growing economy.

The sizzling property market seems to remain a hotbed for investors. "It may be that not everyone has fully priced in the risks involved in investing in China but, again, the fundamentals are compelling over the medium term," said Mr Watt.

(Source: South China Morning Post, 07-03-’07)