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Chinese Developers Look For Foreign Funding

Aug 21, 2008
It is little secret that Beijing has experienced an almost unprecedented property boom in recent years, with a growing middle class, a newly wealthy nation and greater levels of urbanization than have been seen in decades creating a red-hot property market in China.

The government had restricted property investment in recent years, in their fear of speculative inflows, and foreign investors have not been able to enjoy the benefits of China's boom. However the situation is now seen as becoming difficult to handle, and in an effort to cool down property prices in city areas, foreign investors are being given a rare opportunity to invest in the country.

Some efforts by the government to reign in soaring real estate prices in cities have made life tough for property managers in China. The government has restricted bank lending to developers and also homebuyers - local property companies are feeling the pinch. One of the other factors in the government's change of heart on the subject is the stock markets in Shanghai and Hong Kong. In partnership with the effects of the global credit crunch, these factors have left developers with few financing alternatives.

Now, private equity and foreign property funds are hoped to fill the financing gap. Joint ventures are increasing in numbers, and developers are also seeking out foreign investors as buyers of equity stakes; a strategy which Chinese property developers and real estate investors would have not considered during the property boom.

Overall, the property markets in China have been strong for a long time, despite odd reports of bumps in the road and firms losing ground here and there. Property prices in the largest urban areas of the country rose by 11.3% in January, which was the largest increase since 2005. This increase was seen across 70 of the country's largest cities, and the effect on China's inflation rate has also been unprecedented. Premier Wen Jiabao promised to stop excessive growth of property prices, so that the government could focus on building inexpensive homes for families on the poverty line, or below it.

However, despite the premier's best efforts, earlier this year property prices in western parts of China rose by 25%, and in the south of China real estate rose by 20%. Wang Tao, head of Greater China Economics and Strategy for the Bank of America Corporation, believes that the rising property prices mean financial risks for real estate lenders as well as social problems for the country.

One of the most notable new foreign investments in China comes from Morgan Stanley, who recently bought a 30% stake in a resort project in Hainan. The project was valued by China's Agile Property, the developer, at almost $3 billion. Another of the large transactions was seen last October, when Aetos Capital, based in New York, invested $100 million in a China property development in Chengdu, in partnership with KWG Property. It is believed that investments like these are only the tip of the iceberg, as developers look to emerging markets for higher returns than can be had in their homes countries.

Adding to the trend will be a government move to hand over responsibility for development approvals to municipal governments, which are more likely to be in favour of development for its microeconomic benefits, such as increased jobs on the market and regional economic growth.
About the Author
Gregory Smyth is an independent author providing assessment and comments on leading International Property Consultants in Asia and Greater China , especially CB Richard Ellis.
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