China property

Private equity group Warburg Pincus follows this golden rule when investing in China’s property market

Private equity fund Warburg Pincus has pursued a strategy of investing in specialised retail, logistics and data centres, while avoiding the residential sector

PUBLISHED : Monday, 18 June, 2018, 6:00am
UPDATED : Monday, 18 June, 2018, 10:39pm

There is an old saying that “if you cannot beat your opponent, join them.”

But Joseph Gagnon, managing director and head of Asia real estate at US private equity fund Warburg Pincus, opts for another alternative when investing in China: avoid direct competition with well established competitors.

And when it comes to China’s property market, that means steering clear of the residential sector, where nine of the 10 biggest listed real estate companies are focused, including Country Garden Holdings, China Vanke, and China Evergrande.

Gagnon said that it is too hard for foreign players to challenge these giants which, in some instances, have annual revenue of over 200 billion yuan (US$31.13 billion).

“Why fight the elephants?” said Gagnon, who joined Warburg Pincus in 2005 to head the firm’s real estate business in China and Asia.

“The traditional for-sale residential segment is a business that is hard for us to compete nowadays, though we did invest in some leading players such as R&F Properties and Greentown China Holdings more than 10 years ago. In recent years we have focused on subsectors which are out of residential, such as specialised retail, logistics and data centres.”

Warburg Pincus, which has invested more than US$60 billion around the world, is an aggressive player in the mainland’s real estate industry, with total equity investment of more than US$3 billion in nearly 30 companies. Today, none of the firm’s current real estate portfolio involves residential projects built for sale.

China will become the largest recipient of Asia-Pacific real estate private equity capital by 2020, taking more than a fourth of the total investment in the region, or US$14 billion, according to a report by international property consultant CBRE in February.

Offices will still be considered the top choice for most investors, while commercial assets such as shopping centres and logistics facilities will also remain in favour thanks to the growing middle-class and booming economic growth.

Among notable trends, robust growth in online retail sales is fuelling demand for logistics facilities from e-commerce retailers. China’s logistics industry grew 6.7 per cent in the first 11 months of 2017 to 229.9 trillion yuan in turnover. Online commerce, measured by gross merchandise volume (GMV), or the value of products transacted, could increase 7 per cent this year to 7.7 trillion yuan, according to Credit Suisse. In 2010 e-commerce GMV was a mere 461 billion yuan.

With eye on Asia’s growing online retail sector, buys US$306 million stake in logistics company ESR

In 2011, Warburg teamed up with entrepreneurs Sun Dongping and Jeffrey Shen to launch e-Shang, or what would become the logistic property investment platform for Warburg.

Two years ago e-Shang merged with Japan-focused Redwood Group to form ESR, which now manages about 10 million square metres gross floor area of projects owned and under development across China, Japan, Singapore,South Korea and India. Currently, assets under management amount to more than US$11 billion, of which, US$4 billion are from China.

“In logistics, we try to help ESR to grow. The logistics market is fragmented and has a lot of potential to grow,” said Gagnon.

After these two platforms were combined, the group expanded at an accelerated rate. In early 2017, ESR acquired an 80 per cent stake in the Reit manager of Singapore-listed Cambridge Industrial Trust.

Shen, who was in charge of GLP’s Eastern China business before establishing ESR, said the company has been expanding at a rapid pace in both China and other Asian countries. Within the next three years, the firm will double its assets under management on the Chinese mainland to more than US$10 billion, said the co-chief executive of ESR.

Last month, ESR secured a US$306 million investment from, China’s second-largest e-commerce player.

Gagnon said taking the company public through an initial public offering is part of Warburg’s exit strategy.

“We will look at the IPO opportunity for ESR seriously over the next 12 to 18 months,” he said. “But going public is not an ultimate goal. We never run a company assuming an IPO will happen.”

Apart from ESR, in 2015 Warburg also teamed up with Chinese entrepreneur Wang Qian to establish Nova. The Shanghai-headquartered company focuses on the acquisition of properties for conversion into rental flats and creative office spaces.

Warburg Pincus also teamed up with China’s Avic Trust last year to invest nearly US$300 million in Shanghai-based Mofang Apartment, which operates 150 rental apartment complexes in key cities.