A new class of liquidity made its mark on China's property market last year as foreign institutional buyers flexed their muscles with a number of benchmark transactions. The long-term financing strategies they have brought with them can only have a positive effect on the development of a healthy and rationally-functioning market.
Add to this signs that China is serious about reforming its currency, and the rumblings of a bull run in the office sector, and investors could be in for some super returns.
The arrival of institutional property funds allows a host of mostly local developers to make their exit, often at surprisingly high profits given the historic price of land and easy financing that has been available.
They can then concentrate on what they do best: navigating land acquisition and securing approvals.
Meanwhile the foreign-dominated institutional buyers are happy to take on buildings for market repositioning or just for the income stream as part of a longer-term strategy. It is worth pointing out that these strategies may take a while to pay off – some foreign funds have struggled to achieve returns of more than 5%.
At the very least, the rise of the institutions means local developers now have an alternative to the strata title sale which tends to reduce the long-term value of what might otherwise be an investment class asset. Shanghai is littered with such buildings that have fallen short of their potential.
The REIT way
In recent months there has been much talk of new exit options opening up for investors, namely lumping various income-producing assets together for listing as a real estate investment trust (REIT). Given that Hong Kong has only just got its head around REITs, it is unlikely the CSRC will move anytime soon – there are no existing regulations that even touch on the subject.
An alternative in the form of listed property funds (LPF), available only to institutional investors, is a more likely first step, but this too requires new regulations. Those that drag their feet on REITs and LPFs are only damaging themselves; property listing is one of the best new markets out there. And China is a country in need of alternative investment options.
It has become clear since summer 2005, when the central government intervened with new taxes, that property is the one bright star in the country's investment environment. Until suitable alternatives become available, investors will continue to put money directly into property and anything else that enables them to avoid the less than stellar returns of the stock market or lousy bank interest rates.
There is a desperate need for regulatory changes in fund management to create a wider range of investment vehicles and proper supervisory bodies to protect investors. Only then will longer-term investment management be able to influence the property market, allowing it to edge closer to maturity and become the pillar of stability that everyone so needs.
