Mainland firms turn to foreign cash

PUBLISHED : Wednesday, 27 February, 2008, 12:00am
UPDATED : Wednesday, 27 February, 2008, 12:00am

Developers led by China Resources are forming private equity funds as credit tightens

Mainland property developers are setting up real estate fund management units to attract overseas capital as the central government tightens lending.

Taking advantage of their expertise in the domestic market, mainland companies have decided to compete with international investment banks such as Morgan Stanley and ING by forming their own private equity fund management arms.

State-owned conglomerate China Resources Holdings is blazing the path for its domestic peers. It has formed a unit, Harvest Capital Partners, to run two private equity real estate funds with a combined size of about US$1 billion, encompassing the Greater China market, including Hong Kong and Macau.

China Overseas Holdings, a unit of the country's construction ministry, also plans to set up a private equity real estate fund management unit by the middle of this year.

Last month, Shenzhen developer Gemdale Corp said it would form a joint venture with Swiss banking giant UBS to develop projects on the mainland, which is also seen as a way of drawing international funding.

Property consultants and analysts believe more mainland companies will follow suit as credit tightens.

'Most of the sizeable companies have put this idea on their agenda,' said Citic Securities director Wang Deyong.

'Developers usually borrow 70 per cent of overall development costs from banks. Developers now have to think of other funding methods as banks are tightening lending.'

Mainland banks tightened property-related loans to cool the overheating market last year and analysts expect banks will continue to face stricter controls from Beijing on approving property lending this year.

'I believe that mainland companies will seek to attract capital from other sources to drive their development programmes, especially if debt remains less available,' said David Watt, the chairman of DTZ's North Asia division.

DTZ is a placement agent for Harvest Capital's real estate fund.

Harvest Capital chief executive Ren Rong said the unit was formed as 'supplementary to the development capacity of China Resources group.'

While saying that the group was not a direct result of the tightening credit environment, Mr Ren said: 'It is a natural way for developers to maximise their development capacity.

'We are a step ahead [among other developers].'

Mr Ren said the company, formed in May 2006, had launched two overseas funds, including one focused on Middle East cash. It has invested in seven projects in Beijing, Chongqing, Guiyang and Hong Kong, involving 70 per cent of the raised fund. It will announce more deals in Tianjin and Wuhan shortly.

Among the projects, only one is related to China Resources Holdings.

Mr Ren expects to see a lot of co-operation with China Resources Land and China Vanke - two real estate arms of China Resources Holdings. 'Provided, of course, that those projects would bring good returns to the funds,' he said.

This private equity fund approach of rasing funds is now being adopted by leading developer China Overseas.

Wu Jianbin, the head of China Overseas Finance Investment, a unit of China Overseas, said the company would form a real estate fund to speed up the group's investments on the mainland.

'It will be the first task of China Overseas Finance Investment,' Mr Wu said, adding that the fund would be launched in the coming months.

China Overseas Finance Investment was formed last year as a vehicle to seek opportunities in the global investment and finance markets for the group - including listed units China Overseas Land & Investment and China State Construction International - according to Mr Wu, who is also the executive director of China Overseas Land & Investment.

He said overseas investors, especially from the Middle East, expressed strong interest in the mainland property market.

Jones Lang LaSalle regional director Lau Chun-kong said the trend of setting up fund management units showed the strong confidence of developers in the mainland market.

'No company would think of such funding method for expansion amid a slowing market,' said Mr Lau.