Property asset disposals to see US$10b shortfall in China as funds expire

The property industry in the Asia-Pacific region faces a wave of asset disposals by real estate funds over the next two years that could see about US$10 billion of saleable assets - most of them on the mainland - left on the shelf.

Property consultants doubt that will be much of a blow to the vast mainland property market, where investors have been chasing prime assets in first-tier cities.

But David Hand, international director of capital markets at JLL, said non-prime assets on the mainland would "need to work harder or adjust pricing expectations to attract appropriate buyers".

Between 2005 and 2008, a heady mix of liquidity saw around US$91 billion of capital raised by 184 private real estate funds mainly focused on investing in Australia, China and Japan.

Ninety-one per cent were close-ended funds and international property consultant CBRE estimates that about 84 were scheduled to terminate between last year and 2016.

"There will be a peak in fund termination in 2015 and 2016, when about 50 funds with a gross asset value of about US$40 billion will expire," said Ada Choi, a senior director at CBRE Research. But the Asia-Pacific market would only be able to absorb around 75 per cent or US$30 billion of that - leaving a US$10 billion shortfall.

In a review of the assets available for disposal by funds approaching termination, CBRE said 24 per cent were on the mainland, 26 per cent in Japan and 15 per cent in Australia, with the remaining 35 per cent in other markets such as Hong Kong, Singapore and Taiwan.

Choi said the problem would be bigger on the mainland than in Australia or Japan, where positive real estate market performance was expected.

"A bigger portion of the US$10 billion shortfall will be in China," she said. "Investment interest in mainland China has weakened and economic growth has slowed. Buyers become more selective, with preference for first-tier cities such as Beijing and Shanghai.

"Assets in second- and third-tier cities could therefore face difficulty in finding buyers or in being disposed of at desirable terms."

Choi said they also faced competition from local developers who had been disposing of their non-core assets amid tightened liquidity.

JLL agrees that non-prime assets will face bigger pressure to find buyers but said the level of funds terminating was small compared with the overall size of the commercial real estate investment market on the mainland.

"At the macro level, funds terminating will have little direct effect on overall asset pricing," Hand said, while adding "market pricing is now more sophisticated than ever before in China, meaning assets need to be appropriately priced to attract buyers".

Annual transaction volumes of commercial real estate on the mainland were roughly US$20 billion, Hand said, with the size of funds terminating assets on the mainland representing just a fraction of that amount.

Consultants said some funds had been prolonging their existence by extending exit deadlines, with other options being secondary trading, initial public offering and restructuring.