Shanghai's overheated property market may seem risky and expensive for local developers and small-time investors but for major foreign institutions with deep pockets, the party is still going on. A property unit of Morgan Stanley on Wednesday completed the purchase of a major office and commercial complex in downtown Shanghai, taking its spending in the city, on three projects, to US$350 million in six months. According to city newspapers, it is close to signing a deal equal to the total for all three for Tomorrow Square, one of the city's newest skyscrapers, where a three-bedroom serviced apartment commands a steep US$5,700 a month. Company officials declined to comment on these investments. Institutional investors continue to be bullish on Shanghai's property market, even while retail investors from Hong Kong and Taiwan have turned more cautious and speculators from Wenzhou have sold out and invested elsewhere. Foreign financial groups, in particular, continue to be able to raise funds from interested investors worldwide to go on a shopping spree while local players have to watch from the sidelines. Morgan Stanley is typical of the foreign institution betting that the tight supply and heavy demand in Shanghai's A-grade office market will continue and believes that commercial space is safer than residential. In February, Macquarie Global Properties Advisers, part of the Macquarie Bank Group, paid US$98 million for the 20-storey downtown Xin Mao Tower, due for completion in 2006, from Capitaland. In April, Goldman Sachs paid Capitaland US$107.6 million for the 24-storey Pidemco Tower in the Huangpu district. Strong demand, especially from multinationals setting up or expanding their offices, pushed up the average office rent by 17 per cent in the first quarter to US$0.81 per square metre and the average vacancy rate down to 6.7 per cent, according to Colliers, the property consultancy firm. Foreign capital has played an increasingly important and controversial role in Shanghai's property boom of the past five years. According to figures published in May by the central bank, in the first 11 months of last year, 22.2 billion yuan in foreign capital entered the Shanghai property market, an increase of 13.5 per cent over the same 2003 period. Of this, about 15 billion yuan went into property development, accounting for 12.76 per cent of the city total, and seven billion into buying properties, the bank said. This money is divided into two main categories - purchases of residential properties, mainly by overseas Chinese and people from Taiwan, Hong Kong and Singapore and institutional investors who buy office buildings, hotels and other commercial real estate. These institutional investors include ING Group, Merrill Lynch, Lehman Brothers, Goldman Sachs, Capitaland of Singapore, Australia's Macquarie Global Property Advisers as well as Japanese, South Korean and Middle East institutions. Chinese officials are ambiguous about such capital flows. In March Guo Shuqing, former director of the State Administration of Foreign Exchange Control, criticised them, saying that foreign speculative funds were fuelling property price increases in major cities. Chen Yongdong, vice-president of Stanley & Partners Investment Management, said that the foreign funds wanted to hold their Shanghai properties for three to five years and receive a stable rental return on their investment. In a research report, his company said that, in 2003, Europe and North America accounted for 70-80 per cent of overseas investment by property fund companies, with only 20-30 per cent in Asia, mostly in Japan. Last year, this capital started to arrive in China, with about 10 projects and US$300-400 million, and will increase this year and in the next two to three years to US$1-2 billion a year, it said. Qing Yun, an analyst at Zhong Rui Property, said that the central bank figures understated the full amount, because the peak of investment came at the end of 2004. 'The government measures have been having a greater impact on residential properties than commercial, which offer a more stable return,' he said. 'China's funds market is not standardised. If property funds were developed, foreign funds could invest in them, which would be cheaper and less risky than physical buildings. Foreign investors do not understand the local market and regulations and buying land and buildings is more expensive.' Credit curbs imposed by Beijing since March to slow the market have also given an opportunity to foreign investors to penetrate the market deeper. They can provide the capital to developers, who have the land and the capacity but cannot find local banks to finance the projects. Morgan Stanley has said that it planned to invest in 20-30 projects in China this year, with an investment amount two to five times higher than last year. Industry estimates put the 2005 figure at more than US$600 million. Tim Grady, head of Morgan Stanley's real estate arm for Asia-Pacific, has said that the rapidly maturing property market in China was creating plenty of opportunities for foreign investors. Ironically, its chief economist, Andy Xie, is one of the best-known bears on Shanghai property. 'High property prices are very detrimental to China's development,' he said in a recent report. Xie estimates that property prices in many Chinese cities average 20 per cent of per capital annual income per square metre, against 3-5 per cent in developed countries and twice that in other Asian cities.