Property investment

Cash-rich real estate funds in Beijing want to spend, but opportunities are few

Beijing’s en bloc transactions in 2017 is only a third of the volume in Shanghai

PUBLISHED : Tuesday, 16 January, 2018, 12:01pm
UPDATED : Tuesday, 16 January, 2018, 7:37pm

Real estate private equity funds in Beijing flushed with cash are finding themselves in a bind, as there is too much capital chasing too few viable investment opportunities.

The capital city’s massive ageing and prime-located commercial properties would, in theory, promise vast opportunities for domestic and international funds to execute the classic “buy it, fix it, and sell it” strategy. In reality, the options are far and few as most outdated buildings rarely change hands, according to real estate PE funds and brokerages.

In Beijing, even if a firm has a bunch of cash on hand, it is often difficult to acquire any commercial properties due to the lack of available projects in market
Wang Yutao, ZRiver Capital

In Beijing, 24 en bloc transactions worth 39.7 billion yuan (US$6.15 billion) were completed in the past year, up 11 per cent from that of 2016, according to global real estate service firm CBRE. But the volume – by number and value – was dwarfed by the transactions in Shanghai, which saw 82 deals worth 116.9 billion yuan completed, representing an 18 per cent increase from a year earlier.

PE funds and brokerages pointed to the different ownership structures in the two markets as the fundamental reason.

“In Shanghai, a considerable share of the properties are held by domestic and overseas funds. They have fixed maturities and would have to sell the assets before maturity, leading to a predictable amount of sales each year. Not here in Beijing,” said Wang Gang, head of capital market, JLL North China.

There is no data on the breakdown of ownership in Beijing and Shanghai. But of all transactions made in 2017, real estate PE funds took up 44 per cent of the deals in Beijing, against a slightly higher 49 per cent in Shanghai. Conversely, developers made up 32 per cent in Beijing, versus 29 per cent in Shanghai. The rest were enterprises who buy properties mainly for self-use.

Chinese developers renovate run-down buildings to gain foothold in Beijing, Shanghai

“In Beijing, even if a firm has a bunch of cash on hand, it is often difficult to acquire any commercial properties due to the lack of available projects in the market,” said Wang Yutao, president of PE firm ZRiver Capital. “In addition, majority of the hotels and malls in Beijing aren’t conducive for office conversions, further reducing the number of viable projects.”

ZRiver Capital in 2016 acquired two properties: a hotel bordering Beijing’s nearly fully occupied Financial Street, which tops rental levels among major Chinese cities, and a retail departmental store on the northern part of the third ring road. The fund took nearly a year to renovate and transform the two properties into premier offices before they could be put on the market.

“I have to admit that 2016 is a year of fortune for the fund, that it would surely invite envy from peers ... But there is no guarantee that we can find another project this year,” Wang said.

State-owned enterprises which own a large swathe of ageing stock in downtown Beijing are less willing to sell properties compared with market-oriented institutions, which experts said worked against market forces and efforts to renew the city.

Among the few conversion projects undertaken by state-owned developers was the revamp of Cofco Plaza on Changan Avenue. The property was converted from a luxury furniture mall into an office building, with rents quadrupling after that. The renovation was done by owner and developer Joy City Property, a property unit under Chinese conglomerate Cofco.

“We are one of the very few developers doing the conversion, and as a long-term holder we are willing to invest more than funds”, said Sun Tianli, general manager of Cofco Plaza.

“Many developers and enterprises want to do the same, but they are not sure if the improvement in rent can justify the investment. Also, very few of them have a clear idea of what the revamped building should be.”

Joy City Property also sold the W Hotel along Changan Avenue to a Sichuan-based fund, which would convert the property into an office block. With office rents at two times more than those for malls and hotels, 40 per cent of last year’s transactions were in the office sector, according to CBRE.