Cash-rich overseas funds and large mainland developers have the resources to buy as austerity measures hit small players Consolidation in the mainland's real estate market has sparked an investment frenzy among cash-rich overseas real estate funds and mainland developers. While smaller developers are likely to run into financial difficulties at a time when the central government has raised the capital requirement for development projects coupled with a credit crunch, big players see tremendous opportunities. Unaffected by the austerity measures, ING Real Estate Investment Management (Asia) said its proposed China Opportunity Fund, which aims to raise US$350 million to invest in the residential market, had generated strong response among international investors. British property giant Grosvenor also jumped on the bandwagon, making its first investment in the mainland despite the new measures restricting property purchases by foreigners. To cool the overheating property market, the central government has not only ordered banks to tighten lending and raised interest rates but also announced guidelines to restrict foreign investment in property last month. Foreign entities that intend to purchase properties other than for its own use must do so through a wholly foreign owned mainland company or joint venture with a mainland firm. These investors must also pay a minimum 50 per cent equity for projects worth more than US$10 million. Richard van den Berg, managing director and country manager for China at ING, said the regulations were aimed at stabilising the market and would mainly affect ill funded developers and speculators. 'Companies with financial difficulties will find it much more problematic to attract money, which in turn will provide opportunities for strong and well funded companies like ING Real Estate and our joint ventures to undertake projects or even take over projects that are stalling,' he said. A week ago, ING signed an agreement with Shenzhen-based developer Gemdale Corp to acquire a 51 per cent stake in a residential development in Tianjin for 188 million yuan. He said Gemdale was a financially solid company, adding that the stake sale would allow the developer to undertake more projects at the same time. 'Our main focus currently is opportunistic investments, mostly residential development projects aimed at the mid-tier segment of the market in joint ventures with local partners,' he said. ING has also engaged in a joint venture with Shanghai Forte Land to develop a project in Shanghai, and another with Raycom, the property investment arm of Legend Holdings to develop two residential projects in Changsha. Excluding the ING Real Estate China Opportunity Fund, the Dutch financial services firm has assets worth US$300 million in the mainland. Grosvenor has teamed up with Asia Standard International to acquire a 105-unit serviced apartment tower in Puxi, Shanghai. The privately run firm has a 15 per cent stake in Asia Standard, a property development and investment firm. 'It is our first deal in Shanghai and in the mainland,' said Grosvenor Asia managing director Nick Loup. Total investment for the tower will be less than HK$500 million. 'Whenever you enter a new market, you will always have more risk in the early stages,' he said, citing that Grosvenor will step up investments in China gradually. Mr Loup said it was the right time to invest in China because the economy was growing and the legal system was improving. Apart from the residential market, Grosvenor is also interested in the high-end retail property market in China. Mr Loup said the company did not have an investment budget in China but indicated that investment in Asia - including the mainland, Hong Kong and Tokyo - would be more than US$2.5 billion by 2010, from US$2 billion now. He also said the recent rules that required foreign investors to put 50 per cent in a project valued at US$10 million or above did not have any impact on the company's strategy. 'We prefer to put more equity into a project,' said Mr Loup, explaining that investment returns would not be affected by interest rate fluctuations. He said a loan to equity ratio of 50 per cent was a fair investment rule for the company. But the ratio will be up to 60 or 70 per cent in some economies such as Tokyo where the interest rates are low. Recently, Citigroup had reportedly said it would invest US$20 million in a condominium project in Shanghai with a local developer. Besides foreign funds, domestic developer China Vanke paid 728 million yuan for two residential plots of land in Ningbo and acquired a 60 per cent stake in Narada's subsidiary Narada Real Estate Development for 1.76 billion yuan, and Narada's business interest in Shanghai and Jiangsu, according to mainland newspaper Oriental Morning Post. Green Land Group was reported by mainland media to be considering investing 3.2 billion yuan to develop three projects in Taiyuan, Shanxi. Macquarie Research said the China property market was very fragmented, with the top 20 players controlling only 15 per cent of the total market. 'The developers will become more aggressive in land-bank acquisitions given the emergence of merger and acquisitions opportunities,' said Macquarie. China Everbright Financial analyst Matthew Chow said major developers preferred to buy stakes in projects held by small companies rather than bid for land through public auction or tender due to lower investment costs. 'Buying sites through auction means competing with other developers and the land will go to the highest bid,' he said.