Foreign investment funds scrambling for slice of China’s property pie

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Foreign investment in China’s property market reached RMB22.2 billion in the first five months of this year (up 89.9 percent from the same period last year) according to the latest figures from the National Bureau of Statistics.

As the Shanghai Daily reports:

Global property funds have remained very active tapping the increased demand for properties in Asia and other emerging markets.

Morgan Stanley, the biggest real estate investor among all Wall Street banks, announced last week that it has raised US$8 billion to create the world’s largest global property fund.

The New York-based company said it will invest almost half of the money in Japan, where the longest expansion since World War II is pushing up rents and fueling a building boom in Tokyo, and about 25 percent in countries including China and India, where apartment and office construction is booming as businesses grow.

“The record size of this fund, both for Morgan Stanley Real Estate and among real estate investment managers, is indicative of strong capital flows into real estate,” said John Carrafiell, global co-head of Morgan Stanley Real Estate Investing.

Even though Beijing has sought to restrict overseas capital in the sector, it continues to pour into a white hot market. In October of 2006, China Briefing interviewed Nicholas N.K. Cho, the director of the investment department at Debenham Tie Leung (DTZ) about investing in China’s property market. He commented on the key issues an investor should be aware of when investing in and divesting from Chinese property. Here is what he had to say:

This really depends on the organization or individual’s investment strategy and appetite for risk. Every investor will have their own investment philosophy and mandate. But one would be well advised not to be greedy. It would be helpful to determine your own bottom-line on the yields that you are seeking, and also to stay focused to your investment objectives.

In general, DTZ is encouraging our investors to invest in China as a whole. Those investing in first tier cities such as Beijing, Shanghai and Guangzhou would typically do so to capitalize on the well-developed city structure and presence of professionals in the field. We would note that returns are fairly stable or even low when compared to investments made in second tier cities.

A typical gross yield for investment in a first tier city typically ranges between 8-10 percent, compared to that of second tier city investments, which might achieve 12 percent. Indeed, the differential in gross yields between first and second tier cities is in the range of 2-4 percent.

We would repeat that due diligence is critical – do your homework and be ready to dig deep into the history of the real estate that you are about to buy.

With regard to divesting, the investor should pay attention to structuring a proper exit procedure. It would be best to leave this to professionals in the field who are well informed of market conditions.

1 thought on “Foreign investment funds scrambling for slice of China’s property pie

    offpeak808 says:

    “A typical gross yield for investment in a first tier city typically ranges between 8-10 percent…” Vague.

    I think this all depends on how “yield” is calculated. Some property brokers like to base it on the maximum rental rate at 100% occupancy, a sort of maximum potential cash flow forecast (how much gas you can put in the car.) Some investment funds calculate it as (Net Operating Income/Price) – taxes, more like a cap rate (the gas mileage, depending on the price of gas). And a lot of people come up with something in between.

    I’m interested to know what China Briefing defines as “Yield” on a property investment.

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