Successful international real estate developers and investors are ploughing billions of dollars into retail properties in China. In the next few months, ordinary savers in Hong Kong will get the opportunity to join them in what could well be an attractive new investment class.
Recent weeks have seen a frenzy of deal-making in China's retail property sector. Yesterday, Macquarie Bank announced it had paid US$93 million for a 24 per cent stake in nine mainland shopping centres. The day before, US shopping mall giant Simon Property said it had teamed up with the real estate arm of Morgan Stanley and Shenzhen International Trust & Investment to develop 12 mainland shopping centres.
Another big US mall owner, Taubman Centers, is expected to announce a similar venture any day now. Meanwhile, Singapore's government-linked property company CapitaLand has plans to develop 28 shopping centres on the mainland.
The reason for all this activity is simple enough. Consumerism is catching on fast in China. Retail sales were up 13 per cent in the first half of the year, as the mainland's burgeoning middle class flocked to vast new out-of-town shopping centres tenanted by the likes of do-it-yourself chain B&Q and hypermarkets Carrefour and Wal-Mart.
Today sees Wal-Mart open its 48th store in China, an 18,000 square metre behemoth in Shanghai employing a staff of 500. By the end of the year, the Arkansas-based firm plans to have cut the ribbons on a further seven stores and by the end of next year, it hopes to have 90 mainland hypermarkets selling everything from fish to furniture. Building all these shops is creating huge demand for capital, hence the spate of deals. But while funding such retail development is a high-risk business, managing finished malls is altogether more pedestrian. So, once complete, many developments are likely to be bundled together and listed on the Hong Kong stock market as real estate investment trusts (reits).
Unlike listed developers, reits are constrained to investing in properties. They must also restrict their gearing and are obliged to pay out 90 per cent of their income to shareholders as dividends.
These regulations limit the risk to investors and mean that reit shares tend to behave like bonds, returning a steady yield to their holders but with the added bonus that they may also deliver capital appreciation.
Take Singapore's A-Reit, for example. Its shares pay a dividend of slightly less than 5 per cent and have appreciated by about 130 per cent over the past two years.
Of course, no one can promise that shares in Chinese property reits will gain by anything like as much, if at all. But they should offer a better yield, if only to reflect the greater perceived risk associated with mainland investment.
Potential investors will need to examine reit managers and their portfolios carefully. But well-managed mainland shopping centres with solid anchor tenants such as Wal-Mart and Carrefour, are currently generating yields of about 8 per cent. In the present interest-rate environment, that sort of return is worth a little homework.