By Federica Bianchi –
BEIJING (Dow Jones)–Beijing Tianhong Real Estate Development and Management Corp., a subsidiary of Tianhong Group, Beijing’s largest real estate developer, is starting to cooperate with foreign investors on individual residential housing projects after the government tightened credit resources for construction.
“We are teaming up with several investors that don’t necessarily have real estate as their core business,” Chai Zhikun, Beijing Tianhong Real Estate Development and Management Chairman told Dow Jones Newswires in a recent interview.
Chai declined to name the investors as contracts are yet to be finalized.
Teaming up with foreign investors eager to tap into the higher returns associated with China’s developing property market is one way for Chinese real estate companies to adapt to the new business environment.
“The amount of foreign investment has increased dramatically in the first half of the year and it now accounts for 20% of the total real estate investment in Beijing,” said Anna Kalifa, the head of research at Jones Lang LaSalle in Beijing.
Among major investors in China’s property market are Singapore-based CapitaLand Ltd (C31.SG), which recently invested $200 million in the Central International Trade Center, Morgan Stanley (MWD), which invested in the Beijing building of Guangzhou R&F Properties Ltd. (2777.HK), Guangzhou’s largest developer, and Merrill Lynch & Co. Inc (MER), which is investing $30 million in the Yantai project in the CBD area, the new business district of the capital, together with PICC Property & Casualty Co. Ltd (2328.HK).
Investment funds are also sizing up the market for inclusion in potential real estate investment trusts. CapitaLand is setting up an offshore China Retail Fund while Macquarie Bank Ltd. (MBL.AU) recently announced it will set up a China Industrial Fund.
In the past, foreign investments in China’s real estate market mainly came from rich expatriates buying into luxury apartments in the major cities. But drawn by the good performance of local Chinese projects in 2004, foreign institutional investors decided this year to invest more actively in China’s real estate market, either alone or in partnership with Chinese developers, Kalifa said. The move coincided with the decision of local developers to tap into both foreign expertise in commercial building and foreign funds after domestic banks tightened access to credit.
“The market has been cooled down by the government and the developers have good opportunities to buy at a cheap price, facing less local competition,” Peter So, a real estate analyst with Macquarie research in Hong Kong said.
Beijing has taken various measures since the middle of 2003 to cool its booming real estate market. But the government’s most recent measures aimed at curbing real estate speculation were particularly effective.
According to the Beijing Statistics Bureau, real estate investment in the first half of the year was about 52.98 billion yuan (US$6.5 billion), down 16.1% from the same period last year.
Last April, China’s central bank abolished preferential mortgage rates and gave banks more leeway to increase the advance payment required for certain property purchases.
“Banks now want a downpayment of 35% while before a 20% downpayment was enough,” Tianhong’s Chai said.
He added that banks now require that the net assets of the borrowing company be as high as about 35% of the real estate investment it intends to make.
The measures have also shortened the pay back time for the purchased building site to six months to a year at the very most from two to three years, forcing real estate builders to concentrate on smaller properties.
“Before we were building 600,000 square meters per year, now we build half of that,” Chai said.
Tianhong Group, the third largest developer in China with expected 2005 revenue of CNY7 billion, is also starting to seek opportunities outside China’s major cities.
The real estate group is teaming up with foreign partners to invest in China’s second tier cities like Hainan, Shenzhen, Suzhou, Chongqing, Tianjing, Lanzhou and Yantai.
“In China, provincial capital cities are also suitable for investments in high level residential areas,” Chai said.
But he added that developers should be cautious when investing outside the largest cities because most of China’s second and third-tier cities are still too poor to insure a proper return on good quality housing.
-By Federica Bianchi, Dow Jones Newswires; 8610 6588-5848; federica.bianchi@dowjones.com
(Ronald Chan contributed to this story.)
-Edited by Jenny Paris
Source: Yahoo Finance Australia
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