China and foreign investment

Despite China's property market expecting another round of austerity measures, foreign investors believe the sector has undergone consolidation leading to an opportunity to invest, said Aetos Capital Asia managing director Kenny Tse Chiu-ping.
"There has been a lagged effect on the mainland property market resulting from austerity measures since 2003," Tse said.
"Increasing transparency and a more regulated market through mergers and acquisitions during past years have made property a more attractive investment as the risk is lower," he said.

Tse said these merger activities had given rise to new property giants such as Country Gardens (2007), while eliminating unqualified corporations.  This in turn provided more quality investment choices for overseas investors.
"Sustainable profit growth for mainland developers could be as high 20 percent to 30 percent," Tse said. "We expect the total market capital of overseas listed mainland property companies could jump to about US$100 billion (HK$780 billion) from the current US$60 billion by the end of 2008."
The huge potential market, driven by the enormous demand for housing in the mainland, has attracted more foreign funds and private equity investors. Global property consultancy group DTZ earlier said earlier this year it will manage a US$400 million Middle East fund to invest in mainland real estate.
Aetos Capital and JPMorgan are other new participants in the bull run.
Tse, a former property analyst at Morgan Stanley, recently joined Aetos Capital to head its real estate fund team targeting China property sector. JPMorgan also announced it will set up a mainland property fund. "Foreign funds are more committed in the China property market these days by hiring local professionals to explore the market," Tse said. He believes the consolidation process in China has urged property developers to seek funds abroad. "This is one of the reasons why foreign funds are flocking to invest in mainland property."

Aetos Capital Asia, managing US$11 billion assets, is the newly established Asian arm of US Aetos Capital. The firm manages US government funds and large pension funds including the California Public Employees' Retirement System (CalPERS) and the Bill Gates Foundation.
"We are looking to invest in projects rather than in property companies for now," Tse said. With the experience of a more than 60 percent internal rate of return in Japanese property projects, Tse forecasts his fund could attain about 25 percent return in China property projects over the eight-year duration of his fund.