Foreign money makes mainland property market go round

PUBLISHED : Wednesday, 19 October, 2005, 12:00am
UPDATED : Wednesday, 19 October, 2005, 12:00am

When the Chinese authorities slapped restrictions on bank lending to property developers last year, they were hoping to cool the market by squeezing the supply of investment capital. The strategy worked, but only up to a point.

Bank funding for property projects did taper off, but at least some of the cash shortfall has been made up by foreign investors eager for exposure to China's property market despite talk of a bubble.

Abiding offshore enthusiasm for the sector has been reflected in the performance of Chinese property plays listed in Hong Kong. Since their July listing, shares in Guangzhou R&F Properties have more than doubled in price.

Over the same period, stock in Shanghai Forte has risen 30 per cent, while shares in Hopson Development Holdings have more than tripled, helped by high-profile strategic investments from Tiger Global Management and Singapore's Temasek Holdings.

Checking the stock prices of Hong Kong-listed developers is the easiest way to gauge market appetite for Chinese property, but even their stellar performance understates the true level of interest in the sector. Buying shares is fine for punters, but most professional investors prefer to get their real estate exposure by acquiring properties directly or by setting up joint ventures.

According to an April survey of Asia-Pacific property investors by real estate agent DTZ, 40 per cent are planning to increase their cross-border property holdings over the next two years, and China is their favourite destination.

Much of the buying is being driven by portfolio managers' need to diversify their holdings. China has a potentially huge stock of investible properties, but remains relatively under-invested compared with other regional markets (see chart). That means there are plenty of untapped opportunities for buyers.

But the main reason for foreign investor interest is more basic: China offers better returns than other markets. According to David Watt, DTZ executive director, commercial properties in key eastern cities typically offer investors an annual yield of between 6.5 per cent and 7.5 per cent. In contrast, the yield on the Tokyo market is just 3.5 per cent to 4.5 per cent.

The combination of investors eager for diversification and higher returns, with property developers hungry for capital after losing their access to cheap bank loans, is proving a powerful spur to market development. Early next year is likely to see a clutch of mainland real estate investment trusts floating in Hong Kong, allowing the property owners to monetise mature assets to fund new developments.

More sophisticated financial instruments are likely to follow. At least one bank is believed to be working on China's first commercial mortgage-backed securities even though adequate regulations are not yet in place.

Given that the Chinese authorities were concerned about overheating in the property sector as long as 18 months ago, the weight of money continuing to flow into the sector could be worrying. But although some of the foreign capital is undoubtedly speculative, much of the money is being invested by prudent institutions in high-grade commercial properties with solid anchor tenants.

Instead of inflating the property bubble afresh, the new money may even help to raise the standards of property investment in China.