One thing that comes across clearly when talking to investors who have made commitments in China is how important it is to have good local partners.
Cautious investors like pension funds and insurance companies need to know that their money is not going to be lost in a failed development or be tied up in a costly battle over title. In China, the risks are so great that some US pension funds are still refusing to even contemplate it as an investment option.
One institution that does not lack trusted relationships in the region is GIC Real Estate. The Singaporean sovereign wealth fund began investing in the PRC in the late 1990s. The group's president, Seek Ngee Huat, says: "We are confident of the People's Rupublic of China's (PRC) long-term growth potential and will work with like-minded partners to seek out appropriate investments which deliver strong results."
In keeping with its overall strategy of working with strategic partners who are strong local property players, GIC has built a presence in key areas such as Nanjing, Chengdu, Qingdao, Shenyang, Wuxi, Tianjin, Taiyuan and Dalian. The investment projects are diversified across sectors such as residential, retail, offices and hospitality.
The Exchange development in Tianjin is owned by GIC Real Estate and Hong Kong Resort International Limited. The Exchange is the only fully integrated, mixed-use development in Tianjin of its kind, spanning a total of 190,000 m2 with two Grade A 36-storey office towers, a retail mall and a deluxe hotel. The first phase of the project was completed in 2002 and consists of The Exchange Mall and The Exchange Tower 1, a Grade A 36-storey office tower. The second phase was more recently completed in early 2007 and comprises the second office tower and the 22-storey deluxe Nikko Hotel.
GIC Real Estate still has major involvement in Beijing, Shanghai and Guangzhou. In Shanghai's Pudong area, it has been a major partner in the Azia Center, a development that is currently 99% leased. Tenants include the Development Bank of Singapore, Bank of Tokyo Mitsubishi, Deutsche Bank and TÜV Rheinland Group: the lease lengths are typically about three years.
Of GIC Real Estate's investment approach in China, Seek says: "GIC Real Estate's partnerships with strong property players in China enables us to continue with our strategy of investing in the PRC's high-growth cities. Our experience as a diversified global real estate investor puts us in a good position to bring value to the local markets we invest in."
An indication of the Singapore government's strong belief in the China growth story is the extent of its various investments in the country. Temasek Holdings invested over $1bn (€0.73bn) in the financial year to April 2007, much of it into housing projects.
The Chinese government is continuing its attempts to cool the feeding frenzy by overseas investors and speculators. China has applied a raft of measures to reign in property investment, including interest rate rises, levies to discourage construction of luxury homes and restrictions on borrowing offshore. Foreign investors must now secure land purchases before setting up joint ventures or wholly-owned foreign enterprises in China. While these measures may have dampened the market, they will not be enough to deter the big players.
Howard Rosario, chief executive and responsible officer for the superannuation fund Westscheme in Western Australia, says his fund, which already has a broad allocation to alternative assets, is still at the early stages of developing its global property portfolio. Within its risk and return guidelines, it has identified suitable opportunities as far afield as North America, Europe and Japan. India has been included, but not so far China.
Rosario explains: "We haven't considered China because we believe that in these countries it is about having a valued and trusted relationship with a local partner. It has not worked out for us yet in China, whereas we have been fortunate to have engaged in a relationship in India that has given us the right level of contact and comfort. We got involved in AMP's Infrastructure Trust in India. That has allowed us to talk to people locally and to make investments in way that allows us to understand the risks. When you are investing on behalf of scheme members, making an allocation to these countries without local input, doesn't seem to me to be all that risk aware."
Real estate is one of the asset classes that Dutch civil servants pension fund ABP has been focused on since it set up its Asian base in Hong Kong earlier this year. Part of ABP's reasoning for setting up in Hong Kong was to be closer to the deal flow and to build a network of local partners. President of ABP Investments Asia, Jeroen Schreur, says the fund's main targets are Japan, Korea, Singapore and Hong Kong, "but if you look at the growth prospects in China, you can fairly obviously expect a greater allocation there. For China we have an opportunistic approach that covers the most important sectors. Residential is a major part of our portfolio." While he would not comment on specific investments in China, Schreur says the team's focus is on mid-range residential development.
For investors looking at China, there is a strong argument in favour of by-passing the main cities and going inland. Schreur says it depends on the risk appetite of the investor and the opportunities presented: "It also has to fit within the risk profile of the portfolio. Upfront we are not excluding investments in tier-2 or tier-3 cities in China. The focus here is on mid-range residential housing, if the return/risk characteristics meet our requirements. For office and retail investments, we predominately look at the gateway cities."The fund is here for the long haul, so Schreur is pleased with progress: "Building relationships in China takes time and being a long-term investor we have to be patient. Our network is broadening and we continue working building investment relationships. We like to work more with fund managers who have a China-only real estate focus."