China – an open oyster for property investment despite heavy hand of government

With the opening of the Olympics in Beijing global eyes will be on China, a country transformed beyond any predictions made a decade ago.

However, the 22 new sports venues and the flagship Bird's Nest Olympic stadium which the million plus visitors will see is just a tiny part of a very different kind of revolution that is transforming not just the skyline of Chinese cities but the very foundations of one of the world's fastest growing economy.

The Olympic Games will come and go but the development spree shows no signs of slowing, and despite efforts by the Chinese government to slow the pace down, demand remains high.

There is the internal property market which is fuelled by young middle class people buying their own homes and the massive surge of interest from multinational companies all of whom want to be part of the Chinese boom.

Despite the fact that recent restrictions make the task of getting capital into China even harder, those determined to be part of the expansion just find other ways to invest. The number of international companies partnering with Chinese companies, for example, shows that the regulations are not that restrictive.

The commercial sector is booming both in Beijing, the capital city, and in Shanghai, the financial centre of China. Consumer demand alone is predicted to quadruple GDP over the next 20 years. A massive movement from the countryside will boost the internal residential market and according to figures from Jones Lang LaSalle China is the world's fourth largest travel destination.

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The sheer number of multinational companies now with a presence in China is awesome. Take Beijing's Finance Street, a previously ignored district to the west of the Forbidden City, which now has a glittering array of offices occupied by international companies. Reuters, China CITIC Bank, Sinochem International, Cisco Systems, PricewaterhouseCoopers are just some of the companies within the Central Business District, as it is known.

Offices are not the only market to have expanded rapidly. Around 5,800 four and five star hotel rooms came on the market in 2007 and another 6,589 in 2008. These are global players – Ritz Carlton and Hyatt.

Beijing has the second largest IKEA in the world Beijing now has the second largest IKEA in the world, and then there is Tesco, Carrefour and WalMart. Retail spending grew by 14% last year and a similar, if not more growth is expected this year.

So it is not surprising that everyone seems to want a part of this pot of gold. But according to Lim Beng Chee, the Chief Executive of CapitaLand Retail, which has 70 properties across China including six shopping centres in Beijing, it is not easy for outsiders to establish a foothold. 'China is not an easy environment to make money in. The easy money will be cornered by locals that have historical connections with government officials,' he said.

Indeed government regulations are increasing, mainly due to a desire to cool the residential and commercial markets. Even though only 5% of investment in China is foreign, the government believes that cross border capital is fuelling massive price surges.

Circular 171 put a halt to investing directly in Chinese property from offshore companies. It said a company must have a presence in China and that the government must approve any merger or acquisition with a Chinese company.

Circular 50 then said that even if a company just wanted to buy a building in China it must first establish a locally based foreign invested enterprise and that a foreign investor should acquire land use rights or building ownership before it could apply to set up a company in China.

Circular 130 states that anyone setting up a company in China cannot borrow offshore and sourcing finance inside China is also controlled. Local banks are restricted by quotas and can only lend after the developer has obtained land use and planning certificates.

In addition the Ministry of Commerce must be notified of any real estate company seeking to set up a foreign invested subsidiary. Foreign exchange businesses and banks are not allowed to permit any capital in unless a request has been completed to the ministry.

But these regulations are not slowing interest. CB Richard Ellis, the world's largest commercial real estate services firm, has just announced a joint venture with China's largest residential developer Vanke. With its headquarters in Shanghai, it will provide property management services to high end residential properties including family houses, town houses, serviced apartments and luxury apartments.

'We see this partnership as a major step forward in terms of our growth in China. The joint venture will be well placed to leverage international best practice from within our global network which can then be adapted to the market in China based upon local knowledge,' said Chris Brooke, President and Chief Executive of CB Richard Ellis.

Property consultants Jones Lang La Salle has formed a partnership with Australia's Colonial First State Property Management to create a retail development and management service provider in seven regions in Asia, including China.

Michael Hart, an associate director based in Shanghai said he did not see the regulations as a serious obstacle to foreign investment in the sector. 'I think the government sees a positive influence from foreign investment, because if they didn't, they would've banned it outright,' he said.

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'What they are doing is funneling investment in through structures where the central government can have more clarity on who in fact is investing and how they are investing,' he added.

So for those with the knowledge, expertise, and importantly, the local contacts, China is still an open oyster. Also there are many skills that the Chinese lack. 'There are plenty of Chinese companies that can pour concrete but other skills are soft on the ground,' said Andrew McGinty who is based in legal firm Lovells Shanghai office.

Construction starts in Shanghai for the worlds tallest building Investment companies are increasing their business too. Pacific Alliance Real Estate is looking to inject equity. 'This investment is a testament to our ability to source opportunities at a low entry valuation in fast growing cities where we can unlock potential in China's dynamic real estate sector,' said Patrick Boot, the Company's Investment Manager.

And CapitaLand is putting $16 billion into private equity funds to invest in mixed use properties in China.

The Olympic Games have undoubtedly accelerated growth in the property market but analysts believe it will continue. 'Beijing is in the midst of fundamental change as city planners begin to a take a more realistic and proactive approach to orchestrating future development,' said Ben Christensen, Head of Research for Jones Lang LaSalle. 'Greater connectivity and the creation of decentralized commercial hubs will facilitate continued economic and population growth and create a myriad of opportunities for developers, investors and occupiers.'

For those seeking new opportunities the expansion of Beijing's subway points the way. 'In areas like Daxing and Chaoyang North Road there is a relatively low level of development so the entire spectrum of opportunities will be present in the coming years including residential, retail, manufacturing and business park development,' added Christensen.

The heavy hand of the state isn't suddenly going to disappear. The government is clearly worried about the impact of inflation and has raised interest rates, restricted lending and even banned some projects outright. But after the Olympics, the 21st century revolution that is transforming China will still be going strong.