China property

China’s private equity fund founder casts a vote of confidence in mainland property market

PUBLISHED : Tuesday, 04 October, 2016, 6:12pm
UPDATED : Tuesday, 04 October, 2016, 6:12pm

Tongkong Investment Group chairman Zhang Baoguo is a veteran of China’s private equity and real estate fund industry. During a career that has spanned more than a decade, he has helped more than 30 mainland companies become publically listed. In 2009 he formed Tongkong Investment.

Could you please tell me more about Tongkong Investment?

Tongkong is a private conglomerate with businesses ranging from chemical, biotech, cinema, hospitality, automobile trading, healthcare, and technology.

The group has assets worth 10 billion yuan. Various funds under management by the group will hit 30 billion yuan this year. Among them, the real estate private equity arm mainly serves as a platform to park our assets.

Our fund portfolio is about 50 per cent invested in properties. The remaining funds are invested in equities and other industries. To be frank, there is no single asset in China that can compete with property in terms of withstanding shock and appreciation. Property excels in allocating large sums of capital.

Are you concerned about risk in the property sector?

There was a time when China’s property value just went up and up. At that time you can make money as long as you are in property or related businesses. At that time, private equity just had to make sure the borrowers have land in a city, check the location is good, and grant credit to them. That time is over.

That’s said, compared to other assets, I am very confident about property value in a longer time frame, say five years. There will not be big volatility, especially for selected properties in first and second-tier cities.

History has suggested that each cycle of property price drop is a prelude to a stronger rally later. I stay away from third and fourth-tier cities. I also acquire projects at discounts. Currently, acquiring land plots through public auctions is too expensive. I wouldn’t do that. Instead, I basically get projects through the secondary market. So the risk is contained.

How do you define “stable return”?

Compared to the past, real estate industry profits are lower, but still higher than 10 per cent. Returns for good projects can be over 20 per cent. To be frank, a return below 10 per cent is unacceptable in the property industry.

Developers’ access to financing has improved during the last year. In particular the corporate bond market has enabled developers to access credit from a much wider scope and at lower cost. How can you make your company appealing to these investors?

In the past developers would accept a 15 per cent annual interest rate if they could not raise funds via banks. Almost all small developers’ funds came from non-bank channels.

Despite improved funding channels there are still plenty of opportunities for us. The top developers won’t talk to us but regional leaders, for example those ranked 20 to 100 nationwide, still seek to diversify their funding channels.For example, a local developer in Nanjing may want to expand to other markets but does not have resources. I can then invest a stake in the company at a discount and share my resources in those markets.

Tongkong also has a large industrial park business and ancillary property management company. The management company can offer services to tenants in my parks.

Are you scouting opportunities overseas?

We have invested in a condo project in Sydney, and have taken projects in Melbourne and New York into consideration. For us, these are opportunistic investments.

Do you have any plan to seek a public listing?

We have a plan to list our industrial park sector in Hong Kong. For the whole group, there is no such plan.