No problems for China commercial property, says Treasury Holdings

There is a widespread belief that China's residential real-estate sector is in better health than the commercial side, but not everyone takes that view. "Actually it's probably the opposite," says Richard David, Shanghai-based chief executive of commercial property investment manager Treasury China Trust (TCT).

"It's clear from the Chinese government's response over the last six to nine months that they are looking to deal with the rising concern in markets about increases in residential prices," he tells AsianInvestor. "But I'm not aware of any issue or concern the government has raised about the commercial real-estate industry."

Part of Irish property-asset manager Treasury Holdings, TCT listed on June 21 on the Singapore Exchange. Treasury Holdings already owned more than Rmb9 billion ($1.5 billion) of real-estate assets in China, but wanted to further its regional expansion plans, says David.

"There are now a significant number of listed Chinese property vehicles throughout Asia," he adds, "and it was becoming increasingly difficult to attract Asian capital into China through a UK-listed vehicle."

As a total-return vehicle operating at a lower risk profile than pure development vehicles, TCT says it offers its unitholders 100% exposure to commercial real estate in China. For the financial period 2010, Treasury Holdings has projected a tax-free annualised distribution yield of 5.8%.

Also in June, TCT brought on board Jerry Lee Yang Chiang as chief financial officer in Singapore and Wendy Yao as Shanghai-based chief investment officer.

Lee was previously CFO at Guocoland, a Singapore-based property developer with a strong focus on the China market, while Yao joined from Citigroup Property Investors, where she was the China chief representative and CIO. She has 17 years of experience in real estate across London, Hong Kong and Shanghai.

Treasury Holdings has around 70 staff in China managing TCT's portfolio of office and retail properties, which had a net asset value of S$970 million as at December 31.

TCT is one of the biggest Western holders of commercial property in Shanghai, with 250,000 square metres of commercial, income-producing real estate and a further 150,000 sqm under development and expected to be completed over the next two years. This reflects the fragmented nature of the Chinese real-estate market, says David, as Shanghai has a total of some 15 million sqm of office and retail space.

Moreover, David says a return to allowing the Chinese currency to appreciate -- signalled on June 19 by the Chinese authorities -- will benefit TCT. "Our value proposition is further strengthened by the government restarting the clock on renminbi appreciation," he says. With 100% of our revenue in RMB and being an offshore listed company, we look to take our revenue from onshore to offshore, and that's obviously significantly strengthened by a strengthening RMB."

Another benefit is that TCT's assets are in RMB, but most of the firm's debt portfolio is in dollars, says David, which means its debt becomes cheaper as the Chinese currency strengthens.

And prospects generally for the commercial property sector look positive, he says. The retail sector is growing strongly, buoyed by "any number of positive propositions about the rise of the Chinese consumer", he says.

Although the office market had a tough year in 2009 -- with foreign business users of quality office space "taking a breather to re-assess business plans" -- the clock has started ticking in that space again, says David, with office rents starting to rise.

Again, the logistics sector was badly hit as a consequence of the global slowdown affecting the export/import sector. Hence the logistics sector -- warehouses, supply-chain property and so on -- suffered from a development perspective, says David, but the leasing market is starting to gain strength.

"I'm certainly not saying things have returned to the heady levels of 2006/2007 in terms of tenant interest or the ability to get rent growth," he says, "but we've come a long way from the challenging period we saw through the middle of last year."

But is David concerned about the Chinese government's moves to dampen loan growth, amid concerns that the property market could be in bubble territory?

"[Pressure to reduce the growth of loan books] only seems to be happening in the residential sector now," he says. "For quality operators in the commercial sector, there is still accessibility to funding. We recently announced a refinancing of one of our key assets, being done with a local bank and the total loan size is just over $500 million RMB equivalent."

However, David says he expects the government to reduce liquidity further irrespective of the sector. "My experience is that they get less and less selective over time," he adds.