“In 2005, the total trading property areas of foreign funds exceeded 320,000 square meters, with a total value of over RMB6.5 billion (US$839 million). In 2006, the figure jumped to one million square meters worth RMB18 billion (US$1.3 billion).” That was how DTZ Holdings, a global real estate adviser, saw things in its market report 2006 of Shanghai’s real estate market.
Similar growth is expected in 2007.
Continue to Boom
Besides well-known American-European funds, 2006 has seen shadows of rarely-seen Asian and Middle Eastern funds (including South Korean and Malaysian funds) in Shanghai’s real estate market. Foreign funds were used to acquire office buildings in Shanghai in 2005. But with the rising value of the RMB and Chinese stocks, bolder fund managers extended their acquisition range into emporiums, hotel-apartments, and villas in 2006.
The end of 2006 even saw the involvement of core funds (core investors in the real estate industry) such as complete risk avoidance funds (pension fund) which began to invest funds in Shanghai office buildings. Ascendas, Asia’s leading space solution provider, acquired Ocean Tower in Shanghai for US$169 million while SEB Immobilien-Investment GmbH purchased Platinum from Macquarie Group, a leading provider of financial services headquartered in Australia, for US$250 million. It’s estimated the return rates of the two office buildings are 7.8% and 6.1% respectively. While those figures aren’t big, the owners should be satisfied with the lower risk and stable returns.
The real estate funds of Macquarie Group acquired Platinum for US$98 million in January 2005. After redecorating the building, they brought higher-end companies into the office space and also raised the rents. Macquarie’s real estate funds and JP Morgan Chase & Co were very active last year, described as “opportunistic funds” by the property sector.
“Returns are always proportional to risks,” explains He Enkai, with the research department of Jones Lang LaSalle, a leading real estate services and money management firm. “Property developers obtained the largest profits, as they shouldered the largest risks.” He explains that the “opportunistic funds” purchased the properties 12 months before they were completed, so they shouldered mid-sized property tenancy risks. Once the leases were settled, the opportunistic funds transferred the properties to core funds. Core funds get fewer profits with fewer risks. The involvement of Ascendas and SEB Immobilien-Investment GmbH should be taken as another meaningful event in the real estate sector after the emergence of foreign property funds in China’s market. They make China’s real estate industry chain more complete. Lately, it seems, global property funds can always find a promising investment in Shanghai.
In fact, foreign funds are lining up to acquire office buildings, condos, hotel-apartments, and villas. Jones Lang Lasalle estimates that 2007 will see even more foreign funds filing into Shanghai and other regions in China.
Indirect to Direct
Domestic property developers have made various efforts to respond to the financing bottleneck caused by the Chinese government’s macro-control efforts. The result was a large number of foreign funds flew into China’s domestic real estate market in 2006.
Standard Chartered Private Equity Limited (SCPEL), the private equity arm of Standard Chartered Bank, has recently invested in Shimao Property Holdings and Greentown China Holdings. After Shimao listed on the Hong Kong Stock Exchange (HKSE), the stock increased by twice its original value, and Greentown’s stock doubled. “Listed enterprises in the last two years have presented a wonderful development trend in terms of fund reserves, strength, and property reserves,” says SCPEL President Chen Fan. This year, SCPEL also bought shares in Sino-Ocean Real Estate Development Co., Ltd (SORED) for US$35 million. Established in 1993, SORED’s business scope relates to real estate development, office building, hotel management and property management.
The recent jump in activity by foreign funds in Shanghai’s commercial property sector will not have an immediate impact on the traditional property operation modes of developers, as it has on property prices. It’s expected that the very hot office building sector will see a 10-15% increase in prices. Hotel-apartments are also very popular with foreign funds. The Lakeville Regency near Xintiandi, one of the hottest tourist destinations and urban attractions in downtown Shanghai, is renting 180-square-meter executive apartments for US$7,000 per month. That’s even higher than the most expensive central London units.