RRJ eyes US$1b for China real estate fund

Private equity firm's second major fund-raising effort of the year comes as Beijing repeatedly clamps down on speculation in property sector

PUBLISHED : Monday, 18 November, 2013, 5:25am
UPDATED : Monday, 18 November, 2013, 5:57am

Private equity firm RRJ Capital has begun marketing a potential US$1 billion Asian real estate fund focused on China in its second major capital-raising effort of the year after securing US$3.6 billion from investors in a record-setting six months earlier this year.

"We're aiming for a US$500 million fund with a focus on China. If the demand is there, we may raise the size of the fund to US$1 billion," RRJ chairman and chief executive Richard Ong told the South China Morning Post in his first interview since setting up the company in 2011.

The timing for a China property fund could hardly be trickier, with Beijing repeatedly clamping down on speculation to curb soaring home prices.

Government officials fear that a decade of almost uninterrupted annual double-digit gains in prices has pushed housing costs far beyond the reach of the country's emerging urban middle class, raising the risk of social tension, which the Communist Party is anxious to avoid.

Ong said there were risks, but not for residential developers that were building to sell property to the world's fastest-growing middle-class consumer sector, and rather for firms acquiring land banks to speculate on price appreciation.

RRJ wants companies that are manufacturing housing inventory and selling it - a classic cash-flow business that relies on good management, good cost control and good products.

Analysts reckon at least 10 million mainlanders move to cities from the countryside every year, creating an urbanisation effect that is reshaping China's economy towards one underpinned by domestic consumption and services, away from export-driven manufacturing.

"The whole growth of the middle class in China will continue. There is no stopping it for the next 10 to 20 years," Ong said, explaining the rationale for an investment focus on health care, consumer, energy, financial services and real estate.

"We are focused on residential [development]. We don't mind investing as well in shopping malls, but not office space. Shopping malls fit in with the growth of the middle class."

So, too, does domestic tourism, which is seeing rapid growth as personal incomes rise. Ong said RRJ was poised to announce a big investment in a three to four-star mainland hotel chain.

RRJ has been tapping into this consumer-driven trend since Ong founded the firm in March 2011 after leaving the Beijing-based Hopu Fund, a private equity venture he set up in 2008 after a 15-year career with Goldman Sachs.

Joined last year by his brother, Charles - who had spent the previous 10 years at Singapore sovereign wealth fund Temasek after stints at Deutsche Bank and Lazard Freres & Co - the pair currently manage about US$6 billion in two funds.

They sank US$50 million into Hong Kong-listed mainland property developer CIFI last month, paying HK$1.52 a share for a 4.4 per cent stake in the firm.

Investment bank sources say Henderson Land Development chairman Lee Shau-kee followed their lead last week - and paid about 10 per cent more for a similar stake.

But the brothers stress that short-term gain is not their objective.

"We are value investors looking for great management with great, sustainable business models," said Charles Ong.

Long-term perspective enables RRJ to take positions that go against prevailing trends.

"In many ways, if you look at how we invest, we have been contrarian. We were contrarian three years ago when we sold most of our Asian assets and invested significantly in the United States," Richard Ong said.

RRJ bought into US-based liquefied natural gas firm Cheniere Energy during that period, taking a stake in a gas exporter that is tapping rising demand in fast-growing developing economies in Asia and elsewhere.

"We look at things globally, though we focus on Asia. Occasionally we find Asian-focused companies outside Asia but which sell substantially to Asia. Sometimes people miss that," Charles Ong said.

That combination of value and global perspective puts a crisis-battered Europe firmly on the RRJ radar, but only deals that allow steady, profitable exits.

RRJ's first fund, raised in 2011, invested US$2.3 billion. By the end of September, it had sold US$1.4 billion of its holdings.

"You've got to be very disciplined. That's one of the reasons why the big pension funds have invested in us, because we have been disciplined in exiting and delivering cash back to our investors," Richard Ong said.