Good time for foreign investment in real estate

Checks & balances

The extreme volatility in the property market prompted the government to come out with a series of measures to cool the sector. Prominent among them were the hike in the minimum down-payment rate and the increase in interest rates.

As a result of these curbs, the realty market got off to a relatively sluggish start this year. Housing prices recorded their first year-on-year decline of more than 20 percent during the first three months. Real estate investment growth slowed and stood at 23.5 percent, compared with 27.8 percent in the last quarter of 2011, according to Vigers, an international property consultancy.

The immediate fallout of the housing prices was seen in the GDP as the government was forced to set a lower annual growth target of 7.5 percent in March, the lowest growth target set by the government in over eight years.

The macro shock had its impact on real estate investment. Of the 5.08 trillion yuan invested in the Chinese property market till July this year, only 22.8 billion yuan came from foreign funds, a 54.3 percent year-on-year decrease, according to the NBS.

In August, some foreign developers were reported to have exited their joint ventures in China and also their land holdings. Irish real estate developer Treasury Holdings was said to have sold its stake in two of its Chinese subsidiaries to avoid growing risks in the Chinese market, according to China Times.

Rumors over the biggest American developer Tishman Speyer selling a piece of land in Shanghai worth 4.8 billion yuan was also played up as a sign of foreign companies withdrawing from the Chinese market.

Property markets in the three major Chinese cities sported a bleak look in September this year, as there were very few transactions. More than 10 major land transactions were halted in Beijing, while the curbs on realty continued to be further strengthened in Shanghai. There were hardly any high-end residential property transactions in Guangzhou during the same period.

Growth credentials

Despite the bearish undercurrents, industry experts still feel that the realty market has the best growth credentials among all industries in China, as demand for housing and commercial property is still high.

The lower economic growth and sluggish property volumes are temporary phenomena created by external economic pressure and natural corollaries of China's market economy transformation, experts say.

"Though economic growth is slowing in China, its growth rate is still the best among all major global powers. The growth rate in the US is about 2 percent while in Europe it is nearly zero," says Frank Chen, executive director and head of CBRE Research China.

Most of the global investors have temporarily stalled fresh investment decisions due to the lower growth in China and the global economic crisis. The current value of most of their investments in China "made before 2008 has more than doubled or even tripled. Therefore it's a good time for these foreign investors to repatriate the profits," Chen says, adding that most international investors are less active in China this year due to difficulties in raising funds.

Value power

Though there are fewer foreign investors now, the total amount of money flowing into the Chinese property market has increased during the first six months of this year.

More than 33 local governments were given the green light for their proposed realty fine-tuning measures in the second quarter, including lower down-payment requirements, favorable mortgage rates and lower transaction taxes in second- and third-tier cities to boost home sales, say sources from Vigers.

The total investment in property development from January to July was about 3.68 trillion yuan, up 15.4 percent over the same period in 2011. The strong growth rates offer enough cushion for future aftershocks, says a report from Shanghai Insight Investment Co Ltd, which also operates the first yuan-based real estate private equity fund in China.

The adequate supply of capital also adds more credence to these statements. The series of steps announced by the government to counter the CPI fall and stem the growth decline are all steps that ensure sufficient liquidity in the market.

The bigger social financing spend of 8.82 trillion yuan between January and July, which is 5.14 billion yuan more than the same period of previous year, has also helped ease capital concerns further, says a recent report from Shanghai Insight Investment.

The real estate financing system by itself has become much more diversified in the last three years. According to Zero2IPO Research Center, a leading institute on VC and PE investment in China, 67 new real estate private equity funds were registered in China during 2011, and collectively raised funds of more than $5.86 billion, nearly double the amount raised in 2010.

"After nearly three years of property market regulation, the government policies have become clearer and seek to prevent a real estate bubble and ensure stable development. We believe that the Chinese property industry will move toward a healthier and more rational development path," says Dong Weihai, managing director of Insight Investment Co Ltd, a Chinese real estate financial solutions provider.

"The bubble threat for the Chinese property sector has been the subject of discussion among Western analysts for some time now. When the whole world is facing a difficult economic situation, the idea of a Chinese property bubble becomes even more credible. What these analysts, however, do not understand is that the property in China is also going through a cyclical phase and would naturally have its peaks and troughs," Dong says.

"The Chinese market gives a high return on investment of about 20 percent, compared with mature markets such as the US and Europe."