China property retains its appeal despite the risks

While overall private equity investment in China has fallen from its peak, the real estate sector is bucking the trend. This is driven by growing interest from major global funds readying themselves for acquisitions.

The Chinese government is under increasing pressure to dampen the property price bubble by reducing available credit - and the signs are that any credit reduction will encourage some developers to look towards private equity firms for funding. In addition, mainland funds are taking advantage of the increasingly relaxed regulatory barriers to diversify their portfolios by making investments in Europe and the United States; many believe that this will abate the hitherto frenetic competition for available real estate. And while few investors are naive enough to think that the prices in China for either residential or commercial real estate will continue the meteoric rise seen since 2001, it is generally accepted that 300-400 million people will relocate to the cities in the next 15 years, ensuring some degree of demand.

Private equity investors usually come to the negotiating table with an expectation on standard deal terms and conditions that they can command, only to find themselves in heavy negotiations with a local or even international developer that does not take the same view. With internal pressure to "get the deal", PE investors often find that they are compromising on their standard terms. Once the development is acquired, the challenges do not cease and a successful commercial development requires an effective and experienced property manager. Finding a local partner with sufficient experience and expertise can be challenging, but has a value that shouldn't be underestimated.