Asia Pacific's family offices are a nimble bunch and never more so than when it comes to ESG where they're already proving to be ahead of the regulators.
China’s high-net-worth individuals (HNWIs) are still keen to invest into real estate, despite the risks in property both at home and abroad, AsianInvestor learnt from China's biggest private bank.
Onshore, as monetary policy tightens, some large-and-medium-sized property developers need to raise capital through private funds, Wang Jing, general manager of China Merchants Bank Private Bank told AsianInvestor. “We’ve seen increasing deals on this front recently,” she said.
Such private property fund investments normally last for at least three years and offer annual returns of about 6%, Wang said. But this type of investment is high risk, so it is only available for private bank clients, she said.
To mitigate risk, such investments target only the big players and large projects in tier-one and tier-two cities, Wang added. “Medium-to-small-sized developers cannot raise funds through this private channel,” she said.
However, even big developers may have default risk. One recent example is Greenland Holding, the fourth largest developer in China by property sales, which announced in late August that it had overdue loans of Rmb457.5 million ($69.2 million) in some units in the northeast province of Liaoning as at the end of June.
Though that overdue is shared with its partners in the jointly-controlled entity (JCEs) that built the project, the developer may end up paying for more than its share, ratings agency S&P said in a report released on June 20. Chinese property developers are likely to increase the use of JCEs due to rising land costs and increased competition, S&P said.
But this single case should not be overly emphasised. “The benefits of JCEs outweigh risks in most cases,” S&P admitted.
For offshore investing, apart from traditional mutual funds and Asia high-yield bonds, Chinese HNWIs are also interested in overseas alternatives, such as Real Estate Investment Trusts (Reits), Wang said.
Seeing the demand, CMB Private Bank plans to provide customised real estate funds for its overseas clients in the future, with structured products, hedge funds and private equity funds also in the pipeline.
Another Chinese private bank, China Minsheng, has also seen its clients keen on overseas residential properties such as in Australia, Zuo Dan, head of offshore markets in private banking at China Minsheng Bank also said at AsianInvestor’s 4th China Global Investment Forum (CGIF) in Beijing at the end of end last month.
But overseas real estate markets also contain risks. Major urban housing markets in developed economies are still overvalued, and more are at risk of a bubble than in 2016, according to the annual Global Real Estate Bubble Index from UBS Wealth Management's Chief Investment Office, released on September 28.
In Sydney, for example, all sub-indicators point unequivocally to elevated risk in the housing market, UBS said. The dip in prices in 2015-16 proved short-lived.
Matthias Holzhey, real estate economist for UBS WM CIO, says in the report: "Real prices again shot up 12% in the last four quarters and are now 60% higher than in 2012. (In contrast), incomes increased by a meager 2% in inflation-adjusted terms. Tax breaks and interest-only loans are whitewashing the worsening affordability for the time being."
Reduced risk appetite
Despite their keeness for property investments, Chinese HNWIs are actually getting less aggressive in return hunting overall.
As their wealth has grown to a certain level, their investment target is generally no longer on wealth appreciation, but focuses more on “risk management, reasonable returns and wealth inheritance,” Wang said.
Indeed, in a panel discussion at the CGIF, Hou Lin, general manager of wealth management products at CreditEase Wealth Management, Zuo Dan, head of offshore markets in private banking at China Minsheng Bank, and Bruce Kang, managing director at Ping An Trust, all agreed that Chinese HNWIs were increasingly diversifying their investments and becoming more professional in their approach.
Investors are bringing an ESG focus to opportunities, while being aware that this does not mean an automatic boost to returns.
When it comes to scale and diversity, the China market is now second to none. Investors, however, need to take a long view on a sometimes volatile market, experts from the likes of GIC said.
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