China property core to US investors: Forum Partners

Easing financing conditions are tempting institutions to raise allocations to Shanghai and Beijing amid forecasts of resilient sales growth, says Forum Partners’ CEO Russell Platt.
China property core to US investors: Forum Partners

US investors have come to view Shanghai and Beijing as core property markets on the understanding they will no longer get a premium for investing in developed Asia, says Forum Partners’ chief executive officer Russell Platt.

The firm, the majority of whose investors are based in the US, manages more than $5 billion in AUM, with approximately 20% of that invested in Asia.

Its $374 million third Asia fund reached the end of its three-year investment period – out of a 10-year fund life – at the end of 2014. “We are just finishing up fund three. I imagine that a fund four will follow,” said Platt.

“We continue to invest in China, but on a more targeted basis. We are still doing some development in the Yangtze River Delta, in the industrial and distribution space where we think there are good returns.”

China’s property market is being propped up by what the manager of the Marco Polo Pure China Fund described as the “fastest and deepest monetary stimulus the country has ever seen”.

The hedge fund manager noted that mortgage rates had been cut strongly this year, with data showing the rate for five-year-plus loans stood at 5.15% following five interest-rate cuts between November last year and this August.

Platt pointed to increasing liquidity for property developers in China in the wake of easier financing conditions for home-buyers. Still, he cautioned that China’s rebalancing would be a multi-year effort and that markets would remain unsettled in the near term.

Ratings and research firm Moody’s Investors Service has forecast that property sales growth in China will remain resilient, underpinned by accommodative monetary policy.

The People’s Bank of China cut the minimum downpayment for first-time home-buyers on September 30. The reduction from 30% to 25% was the first change in the minimum since it was raised from 20% to 30% five years ago.

Residential accounts for the largest part of Forum Partners’ Asian exposure. “The market [in Asia] is quite different [from the US],” Platt explained, noting the typical US pension fund had little exposure to residential development. “Residential is a key need and opportunity,” he said.

“Restrictions of various sorts have kept returns fairly high [in China], as has growth. We’ve seen a lot of that arbitrage go away in tier one, both for residential and particularly for commercial,” noted Platt, who attributed that to the emergence of an institutional investor base for Chinese commercial property.

US public pension fund California Public Employees’ Retirement System (Calpers) nearly doubled its commitment to core-plus office and retail focused ARA China Investment Partners (CIP) in July this year, allocating a further $300 million to the strategy.

A spokeswoman for ARA Asset Management noted Calpers had been investing in China since 2007 through various funds managed by ARA. CIP was established in 2012, with Calpers its primary investor.

Guangzhou joined Beijing, Shanghai and Shenzhen recording positive year-on-year property price growth in August. That marked first time in 12 months that all four first-tier cities had seen positive price growth. Year-to-date growth in property sales has been driven by volume rather than price increases.

Platt argued the nature of real estate changed during economic cycles, acting like a bond during the early stages of recovery but more like an equity as recovery becomes more advanced.

“In the second stage things that have short lease terms – hotels, serviced apartments and suburban or multi-tenant office assets – become more attractive,” he said. “We are pivoting our portfolios towards those asset types and markets more likely to perform well in that equity environment.”

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