PE fund investments to energize property sector

The latest approval given to private equity or PE firms to invest in the property sector in China will help funnel more capital into real estate companies and ensure the stability of the entire industry, experts said on Tuesday.

The China Securities Regulatory Commission, the country's top securities watchdog, announced a pilot program on Monday to allow PE funds to invest in residential housing, including projects under construction, affordable homes and rental projects.

PE investment in commercial real estate and infrastructure projects is also allowed under the trial program.

A property-related financial product under the program should raise at least 30 million yuan ($4.4 million) in the first round. Investors in the program, mostly institutional, should offer a minimum 10 million yuan each to participate, according to the CSRC announcement.

Foreign investors are also encouraged to participate in the pilot program via the Qualified Foreign Limited Partnership, an inbound investment scheme, said the CSRC.

Real estate PE investment funds are already important financial products in mature markets overseas, the CSRC explained in the announcement.

The pilot program has been introduced to inject more vitality into existing property projects. The PE sector will thus play a bigger role in serving the real economy, the CSRC said.

Property developers listed in the A-share market reported an average gain of 1.09 percent on Tuesday while the benchmark Shanghai Composite Index climbed 0.49 percent.

Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institution, said cash raised from the real estate PE investment funds is expected to flow mainly into stalled residential projects, rental properties and commercial real estate projects.

The funds will also facilitate property project delivery and mergers and acquisitions in the real estate sector, he said.

The pilot program will also assist some property developers to dispose of nonperforming assets by offering capital support, Yan said.

Analysts from Haitong Securities said the pilot program addresses the CSRC's optimized measures released in late November to support the property industry, which specified that PE firms should be given a role to play. As more social capital enters the market, real estate companies' capital shortages will be better solved.

In the medium to long term, the pilot PE investment funds program, together with the mutual funds' real estate investment trust or REIT scheme that started in 2021, will help lay a development path in the property industry that will connect investment, financing, management and investor exits, said Zhang Quanguo, joint chief analyst for real estate and property management at CITIC Securities.

Chinese property developers went through much difficulties last year. According to National Bureau of Statistics, sales revenue of commercial housing totaled 13.3 trillion yuan in 2022, down 4.9 trillion yuan from that in 2021.

As calculated by Golden Credit Rating, only 75 developers issued onshore bonds last year, down nearly 28 percent from a year earlier. The total issuance value also got slashed by nearly 13 percent year-on-year to about 409 billion yuan.

But recovery signs emerged in January. NBS data on Feb 16 showed that 36 out of the 70 monitored cities reported month-on-month growth in new home prices, while 33 cities reported declines under the same gauge.

It was the first time since September 2021 that cities reporting monthly price increases outnumbered those showing price declines.