UBS optimistic on China property
HONG KONG: UBS, the Swiss bank, plans to start a fund that would pour about $1 billion into Chinese property, a further sign of enthusiasm for Asia at a time when investors are nervous about ailing real estate markets in Europe and the United States.
Braving a sector whose growth Beijing is trying to slow, UBS signed a deal last month to build housing with Gemdale, a developer listed on the Shanghai Stock Exchange.
UBS, which has reached a similar deal in Japan with Mitsubishi, is hoping to raise about $300 million in equity to finance the venture. It would include the banks own money, as well as investment from its clients and would be supplemented by debt to help lift returns.
“Were targeting $300 million in capital overseas, with leverage, to give us roughly a billion dollars of buying power,” Lijian Chen, head of China real estate for UBS Global Asset Management, said Sunday in a telephone interview from New York.
UBS is following financial companies like Morgan Stanley, Deutsche Banks property arm Rreef, and ING Real Estate, which has joined Gemdale as a partner on individual projects and raised a $350 million fund for Chinese housing last year.
While European and U.S. property markets are waning in the face of a global credit crunch, Asia still appears strong, with a 26 percent increase in direct property investment to $121 billion in 2007, according to Jones Lang LaSalle, the real estate services and money management firm.
The UBS-Gemdale venture is seeking internal rates of return of 20 percent over an investment period of five years. The move comes at a time when Chinese developers are hungry for finance as government austerity policies, aimed at cooling the property market, start to bite.
But Chen, who is moving back to his native China after 20 years in North America, said Gemdale was not starved for funds. He said the company had raised 4.5 billion yuan, or $630 million, in a secondary share offering last year and had a $2.52 billion share sale pending approval. Analysts, though, say Chinese regulators are reluctant to approve property company listings in Shanghai, for fear of further stoking property prices.
“Its not forced,” Chen said. “Its much more about their senior managers vision. They want to create a diverse source of sound funding.”
With average home prices doubling since 2002, Beijing has told banks to restrict loans to developers, raised interest rates, imposed taxes on capital gains and land appreciation and employed a “use it or lose it” policy to deter land speculation.
The measures affected housing market transactions at the end of last year in some cities, including Guangzhou, Shanghai and Shenzhen. Because many developers are struggling to recycle money from apartment sales to finance new projects, analysts said they believed that thousands could collapse.
Although his initial aim is to work on land bought by Gemdale, Chen said he would also seek to take over companies to obtain their land.
“With the macro control measures implemented by authorities, smaller and less established, capital-starved developers are finding it difficult to obtain funding,” he said. “There are opportunities out there.”
Chen, former head of property research at UBS Global Asset Management, said some prospective home buyers would probably hold back because of the governments cooling measures.
But with about eight million people moving away from the countryside each year, he is eager to invest in Chinas second-tier cities, which are transforming fast.
“I wouldnt recognize the back alleys around my old high school,” Chen said of his home city, Xiamen, in the southeast. “Its been rebuilt three to five times. The pace of change is really fast back home.”
