Distress call

Real estate is turning into something of a bright spot in an otherwise dull distressed-asset market. With a government credit squeeze pricking a bubbling property sector, deals are picking up.

Some analysts think property is riding for a nasty fall, but others are more sanguine, pointing to China's steady 8-9% growth. Worried about over-heating, Beijing ordered banks to sharply curtail lending last year.

That left quite a few developers high-and dry. Some are hoping to hold on for better times. Others are scouring the backstreets for hush-hush loans or looking to bail out. Some need to sell outright, and fast with banks breathing down their necks. Lenders are also trying to sell property that has been falling into their hands as collateral.

It's a fractured market, where the line between refinancing and distressed is fuzzy at best. Still, opportunities are on the increase. "Nowadays there are more of these things going on; developers are running out of cash because the banks are not lending to them. They are scrambling to get cash from wherever they can," says Yen Wei, an analyst with Moody's Investors Service in Hong Kong.

Investors are showing interest across the board. Hotels anecdotally appear to be very active. The one thing that's not so hot is pure office – unless the price is right, in which case "there isn't a problem," says Gregory Wells, managing partner with lawyers Paul, Hastings, Janofsky & Walker in Shanghai.

Singapore's CapitaLand, whose developments litter Shanghai, is one of the more high profile players. In early January it bought two Beijing malls for RMB1.746bn (US$211m) from retailer Beijing Hualian Group Investment Holding Co. Ltd., with options on many more.

That followed its RMB983m (US$119m) plunge into a joint-venture with Shenzhen International Trust & Investment Co, a Chinese state-owned investment firm – buying six Wal-Mart-anchored malls across southern China with 14 more to come.

Any major investment bank you care to mention is interested. Lawyer Wells reports one serious enquiry a week, a sharp turnaround from a few years ago.

"The interest [in real estate] from institutional investors we typically represent has just taken off like wildfire," Wells says. "We see a lot of new people coming to Asia for the first time to invest in real estate."

Those new to China stick with what they know: Beijing, Guangzhou and Shanghai. For those with well-worn boots the country is wide open. "Investors who have been here for a few years are more 'Where's the deal at? We'll take a look at it,'" he says.

David Yu, a partner with Shanghai law firm Llinks (no typo – it is spelled like Lloyds), sees smaller investors from the US, UK, Israel and the Middle East generally, but also from Hong Kong. They are making deals in the RMB100m-RMB3bn range (US$12m- US$363m). "[But] they are selective," he says.

Sellers have been slow to take that thought on board. "A lot of the time Chinese developers think there is a whole truckload of foreign investors waiting at their door to invest, Yen says. "But a lot of these foreign guys are very shrewd."

Equally, he says, buyers are in for a rude awakening if they think sellers are on their hands and knees.

"Some [developers] think if they sit through this they will do well. This is the mentality of a lot of bankers and developers. The bankers often view themselves as investors rather than financiers."

But buyers and sellers increasingly find themselves on common ground. "There appears to be a less of a pricing gap," Well notes. "People are able to reach agreement – there seems to be more of a willingness by Chinese sellers to look to Westerners to sell assets or team up."

But deals take time. Due diligence cannot be done overnight. A lack of regulations in some areas is a potential Pandora's Box that only artful lawyers can keep shut. In other fields, reams of regulations ensure a glacial pace. And, like everything in China, regulations can change thick and fast with little warning.

Even officials are left spinning trying to keep up, with government lawyers working overtime drafting volumes of new laws and regulations needed for an orderly market economy.

Example: buildings designed to comply with regulations when work started a few years ago can now get the thumbs down from inspectors, especially over fire and safety issues. That adds to the work, time and costs of completing the building.

At best a simple deal wraps up in six months. A year is not unusual for more complex deals. "It still takes a long time to get things done," Well cautions.