Foreign real estate investors return to China

Foreign real estate investors are returning to the Chinese market buying shares in cash strapped developers and distressed assets despite attempts by the Chinese government to cool the property markets.

An analysis by global real estate consultant Jones Lang LaSalle indicates that after leaving China's real estate market during the global financial crisis to take profits and raise much needed cash, foreign investors are piling into the sector once more, with demand today surpassing that of three years ago.

Beijing's clampdown on the China's buoyant house market has left many domestic developers strapped for money, so some foreign investors want to jump in to get a foothold in the world's fastest-growing major economy, it said.

'They are back. They are looking in China to invest, speaking to guys like us to identify, on the residential side, those who are facing this liquidity constriction,’ said David Hand, JLL's head of investment in China.

Foreign investors are not handing over their money on the cheap, however. They now demand returns of 10 to 12%, from 6 to 7% before the global financial crisis, Hand said.
On top of that, they also want to work more closely with company management to ensure they can get their money back smoothly and quickly, he explained.

To tame record high home prices and control inflation, China has tightened bank lending to developers, while virtually barring them from raising funds in the stock market. That has pushed many Hong Kong-listed Chinese developers such as Evergrande and Glorious Property to sell bonds abroad instead.

Other tightening moves that target home buyers are also adding to the squeeze on real estate developers by hitting property sales. That has led many industry observers to predict some regional developers may go bankrupt this year.

The prospect of firms falling onto hard times have attracted another group of international investors such as Morgan Stanley, Blackstone, Carlyle and JP Morgan, who want to buy attractively priced distressed assets, Hand said.

‘The competition now for prime commercial assets is really hot again, which is pushing up pricing again. They are probably a little bit more humble than they were the first time, recognizing that last time they had cheap capital and they could just come in to woo everyone with big brands and cheap capital. The market has matured a little bit in that respect,’ he added.

Foreign investors outside Asia accounted for a record 33% of China property investment in 2007. That more than halved in 2008 to 12%, before falling to a mere 2% in 2009. The ratio has recovered slightly since, rising to 7% last year, JLL said.

Not all property consultants are confident foreign investors would be flocking back in droves to China, however. Savills said it saw commercial real estate owned by foreign investors to fall in China in the next five years.