In a further sign of the irresistible attraction China seems to have on foreign investors, a subsidiary of Singapore's CapitaLand is plunging into the real estate fund management business. At a session of the China-Singapore Investment Forum held in Shanghai yesterday (Thursday), deputy CEO Pua Seck Guan unveiled terms.

The $100 million fund, or $200 million if demands warrants, will be aimed at institutional investors with a minimum investment $10 million for a five-year term. Fees will be 3% to 5% and the fund hopes to provide investors with an internal rate of return of 20% excluding fees, says Pua.

The fund's marketing period will close in September, but Pua did not reveal how much money had already been raised, only that " progress was good."

He believes running such a fund offers many advantages compared to the traditional approach of parent CapitaLand, which involves getting together with a few partners and investing directly into a project.

"This kind of fund management permits us to raise far more capital than we could do ourselves, and also enables us to raise fee income," he comments.

The fund would also be investing in assets held by the parent, especially residential flats priced at between Rmb 8,000 and 12,000.

"We're not so interested in the higher end properties where many foreign investors like to make acquisitions. We like the kinds of properties favoured by China's growing middle class. They tend to buy to live," he notes.

Much of the investment, possibly a majority, will flow into Shanghai, one of the richest and fastest developing cities in China. It is also governed by regulations that are far in advance of the rest of the country, even Beijing.

Beijing, for example, has an almost non-existent second hand market, and the difference between a new flat and second hand flat is almost 50%. But the difference is negligible in Shanghai, despite being around 20% a few years ago.

Pua adds that China's closed capital account would not be an issue.

"Just like a normal trading company, we'll be able to immediately repatriate our profits to Singapore," he says.

The real estate fund arm of South East Asia's largest property developer manages $1.7 billion of assets, spread across six funds and trusts.

Parent CapitaLand is mounting a big push in China in the face of a weak domestic market. It has already invested Rmb 5 billion ($602 million) in cities across China, and has a further Rmb 12 billion in the pipeline. The total could rise to Rmb 25 billion in three to five years, the company has announced. .

Given its strong performance in recent years, there is much debate concerning whether Shanghai's real estate market is a bubble, or poised to become a bubble.

"I recently sold a house after 12 months and made a profit of 40%," says Shanghai-based property consultant Sam Crispin.

Although anecdotes like this are common, Crispin doesn't believe a bubble has formed, although he thinks the market has the potential to grow into a bubble.

"Still, at the moment supply and demand in seem well-balanced," he says.

And although new projects get snapped up, prices are still below their historical peaks, reached in the early 1990s, he points out.

Chris Cuff, executive director of Cushman & Wakefield, China, says that long term it is impossible not to view China as a growth opportunity.

"The market will go through some fluctuations, but all the macro indicators say the market is moving up," he says.

However, he agrees there definitely signs of speculation in the market.

"People buying multiple properties for cash, and lots of apartments standing empty is a sure sign of speculation. And in certain asset classes, more than 50% of the buyers are from outside Shanghai," he states.

The government has given a huge fillip to the housing market in a bid to increase the home ownership rate of the population and real estate has become an increasingly important component of Shanghai's GDP. Home ownership currently stands at 60% in the city. Two-thirds of that number purchased housing at heavily subsidized rates from the government.

In contrast, points out Nelson Wong, Head of Research for Greater China at property company Jones Lang Lasalle, Hong Kong home ownership is only 40%, despite government efforts after the handover to boost that.

The market has developed at great speed. It was only in 1988 that transferable land use rights were introduced and it was only in 1996 that banks were permitted to offer mortgage loans, although it is still not possible to buy freehold titles. In 1998, the housing distribution system, whereby the government allocated housing to employees was reformed, while in 2001, the separate markets for foreign and domestic buyers were merged.

Highlighting the regulatory risk that such a rapidly-changing environment entails, one buyer said that his property was worth only half of what he had paid for it before the merger.

"I was told there would be no merger so I thought it was reasonable to pay a premium. But with the merger, that premium, and more, has disappeared," he says.

Banks have also been instructed by the central bank, the People's Bank of China, in the past to increase the number of loans they make to homebuyers. Outstanding mortgage loans stood at Rmb 750 billion in 2001, but Jones Lang Lassalle's Wong believe that could easily become Rmb 3-4 trillion in a few years time.

However, there are concerns the housing market is overheating. That perception has been strengthened by revelations concerning the murky nexus between developers and banks. A recent example was the scandal afflicting property magnate Zhou Zhengyi and the Shanghai branch of the Bank of China. Another was the Wan Tai case, which involved a company receiving real estate loans that were never used for real estate projects, again from the Shanghai branch of the Bank of China. Consequently, the central bank has been cracking down on the amount of credit property companies can raise.

Many observers say that the government intervention could prevent the housing market from overheating, as it cuts credit to the market.

For example, developers must now put down 30% of the value of the property they are buying, and banks will no longer advance non-secured working capital loans to developers. Nor will banks be allowed to finance the land transfer fee, which amounts to 30% of the total price. Also, the price of a land rights transfer negotiated privately must be announced publicly within seven days.

In addition, in 2001 an open tender system was adopted, although it is still by no means the only way for developers to buy land.

"We buy land partly through the negotiations with the individual districts and partly through the open tender system," says Lim Mingyan, CEO of China CapitaLand, without elaborating as to the ratio between the two.

"In fact, we would welcome a more transparent, organized system for buying land, since it would enable the government to control the supply of land onto the market and thereby help stabilize prices," says Pua.

One observer points out that developers often had to negotiate with districts within Shanghai, rather than with the central city government.

"If there was a centralized and open tender system, the district cadres would forfeit their chance of making backroom deals. At the district level, they are certainly against the reforms," he estimates.