Forum Partners to drop Japan for China realty
Despite growing fears that a bubble is forming in China’s property market, Forum Partners, a $6 billion London-based real estate investment firm, is looking to allocate up to 60% of its $375 million Asian Realty Income Fund III in the segment.
The firm plans to divest all its assets from Japan for the allocation. The fund has $100 million in cash, the majority of which is destined for the mainland property market. And the group is looking to launch a fourth fund, investing across Asia, in 2014.
“The common view would be that China is heading for a bubble, and … that the safe haven for Asian real estate investors is Japan,” said Forum Partners CEO Russell Platt during a recent visit to Hong Kong. “The common view is wrong, and we’re actually quite constructive on China.”
Against a backdrop of declining prices – Nomura Global Markets Research reports that property transaction volume in 56 Chinese cities dropped 11.6% in the first quarter – Platt thinks that “long-term fundamentals are quite good and price increases are starting to moderate".
China’s government has moved in to soften surging property price growth. Potential homeowners are now subject to higher down payments and mortgages are more difficult to obtain. This, along with pilot programmes, such as Shanghai’s property holding tax, introduced in 2011, have led to average home prices declining by as much as 15% from February 2011 to early 2012, reports Nomura. The average price for first homes rose nearly 13% in 2010, according to property agent Savills.
“We see signs that the government is beginning to loosen policies,” says Platt. “We’ve seen recent announcements around investment in social housing, and I think that’s an acknowledgement that the housing sector is vital to the long-term success of China’s economy.”
Onshore liquidity is drying up with the country’s four big banks and trust banks no longer willing to lend to risky property developers, which presents opportunities for offshore investors, he adds.
Platt says Forum Partners is taking a selective approach by focusing on property developers that target first homebuyers as opposed to speculative demand in the high-end market.
“There is rising divergence as property prices in first-tier cities soared on low inventory and high demand, while prices in some third- and fourth-tier cities dropped on rising inventory,” Nomura said in a March client note.
Forum Partners is seeking deals with property developers in second-tier cities, including Zhengzhou, over first-tier cities, where speculative demand has driven prices.
And with the government continuing to tame property prices while incomes rise, affordability will increase, says Platt.
“All the government needs to do to enhance affordability is to stop prices from rising for a year or two,” he notes. “If you think of a country that has no nominal wage growth like Japan, then they don’t have that policy lever available to them.”
House prices expanded at an annualised rate of 7% from 2011 to 2013, while household income grew by an annualised 11.9% during the same period, Nomura reports, based on government data, which it deems unreliable. The Japanese bank estimates that property price growth in fact topped 14%.
As to how the firm sells China’s property story to its US and European clients, Platt says international buyers in the mainland tend to view the market in black-and-white terms, without differentiating between cities, for example.
Investors can expect returns in the high teens with a three- to five-year horizon, adds Platt, who considers such performance competitive on a global level.
“While the headlines in China may cause me some occasional sleepless nights, I am very happy to have the common perception to be one of chaos and potential crisis in China because right now it is the kind of market where it is the best time to put fresh money to work,” he says.