Signs of life in commercial real estate

Up until Spring Festival, Frank Chen was taking it easy.

Chen, the manager of an Asian real estate fund, was involved in a commercial property project in Shanghai in November but give up on it because of the uncertainty of the market. Mostly, he stayed at home in Beijing, made his regular calls, and never missed a day at the gym.

But that is all over now. These days, Chen flies every other day to Shanghai and Guangzhou. He has two deals in the works and hopes to close them by the end of the year. Business is booming, but his waistline is suffering.

After a period of relative inactivity, China's commercial real estate market is heating up again. Analysts expect prices to stabilize in the second half of this year, thanks to the government's stimulus package, and both foreign and domestic investors are looking for deals.

"Compared with the fourth quarter of last year, foreign institutional investors are much clearer about their investment targets in China, due to a re-confirmation of their risk/return requirements and less perceived uncertainty in the market," Grant Ji, director of Savills (Beijing), told China Daily.

Most of the real estate funds contacting Ji are from Southeast Asia and the US, and most of them are looking for office buildings or retail opportunities.

David Hand, head of investments at Jones Lang LaSalle China, is seeing the same thing.

"We expect at least five major transactions to be closed this year. Two or three of them are already in negotiations," said Hand. "The buyers are likely to be major regional real estate funds from Asia."

The year got off to a good start, as Parkson Retail announced on Jan 15 that it will acquire the Suntrans Building in Beijing's Chaoyang District for 1.128 billion yuan, cash. This is the biggest property deal so far this year.

"The raised funds have to go somewhere, and China will be one of their major targets," said Ji.

CITIC Capital raised $400 million in late December, targeting projects in China's first- and second-tier cities. Merrill Lynch put together a $2.6 billion Asia real estate fund in October, aimed at Japan, China, and India.

CapitaLand, Southeast Asia's biggest developer, said in February it will raise more than $1.2 billion, in anticipation of merger and acquisition opportunities.

Industry experts believe China's property market will stabilize in the second half of this year, buoyed by the government's stimulus package.

In fact, it has already shown signs of warming up. Real estate sales in China's major cities increased for four straight weeks in February, due to developers' price-cutting efforts .

Property transactions in Guangzhou were up 85.6 percent over the previous month. Beijing and Shanghai also saw an increase of some 50 percent, according to China Index Institute, the country's largest real estate research organization.

"Investors who want to close deals in the second half of 2009 should really be well into negotiations by now," said Hand. "If the economy recovers as strongly as some predict in 2010, pricing may well recover quicker than expected."

But some investors are still taking a cautious approach.

LaSalle Investment Management, for example, expects the property price correction in China to be slower than in other markets due to the government's stimulus package.

"We will take a very cautious approach this year and will not be in a hurry to make investments," said David Edwards, Asia director of LaSalle. "It is still hard to tell when China's property sector will complete the price correction, as it depends on the recovery of demand."

LaSalle, the fund management arm of Jones Lang LaSalle, launched its Asia Opportunity Fund III in 2007. So far, about 20 percent of the $3 billion property fund has been spent, mostly in China, Japan and Australia, according to Edwards.

"Buying price is still the key concern for real estate funds. They mostly adopt an investment valuation approach to guide their pricing," said Hand. "Across the board, sellers should be looking for yields of 8 percent or more."

According to Hand, income-producing office buildings and shopping malls are most popular with foreign real estate funds.

"Industrial properties are also attractive, but for logistics and warehouses, investors favor new, high-quality developments," he added.

Real estate funds are mostly looking for opportunities in China's first-tier cities. This represents a shift from 2006 and 2007, when many investors had broadened their search to include second-tier cities because prices in Beijing and Shanghai were rising so fast.

"Interest does remain in some key second-tier cities, such as Tianjin and Hongzhou, but at a rarified rate," Hand said.

Currently, the major foreign players that are active include specialist property funds, retailer groups, and private equity firms. Real estate funds under major investment banks are taking a more cautious approach, due to the cash strain.

"China's own private equity companies will, in fact, play a more important role in the market going forward. They have great growth potential, as they understand the market very well and are quick to make decisions," said Hand.

(China Daily 03/16/2009 page6)